10-K
UNITED STATES SECURITIES AND
EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-14180
LORAL SPACE &
COMMUNICATIONS INC.
(Exact name of registrant
specified in the charter)
Jurisdiction of incorporation: Delaware
IRS identification number:
87-0748324
600 Third
Avenue
New York, New York 10016
(Address of principal executive
offices)
Telephone:
(212) 697-1105
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, $.01 par value
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NASDAQ
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Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the registrant is well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o
No
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Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes o
No
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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 þ No o
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 registrants 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. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, and accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Ruler
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2
of the
Act). Yes o No þ
At March 2, 2009, 20,281,579 shares of the
registrants voting common stock and 9,505,673 shares
of the registrants non-voting common stock were
outstanding.
As of June 30, 2008, the aggregate market value of the
common stock, the only common equity of the registrant currently
issued and outstanding, held by non-affiliates of the
registrant, was approximately $231,062,865
Indicate by a check mark whether the registrant has filed all
documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes þ No o
Documents incorporated by reference are as follows:
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Part and Item Number of
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Document
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Form 10-K into which incorporated
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Loral Notice of Annual Meeting of Stockholders and Proxy
Statement for the Annual Meeting of Stockholders to be held
May 19, 2009
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Part II, Item 5(d)
Part III, Items 11 through 14
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LORAL
SPACE AND COMMUNICATIONS INC.
INDEX TO ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2008
PART I
THE
COMPANY
Overview
Loral Space & Communications Inc. (Loral),
together with its subsidiaries, is a leading satellite
communications company with substantial activities in satellite
manufacturing and investments in satellite-based communications
services. Loral, a Delaware corporation, was formed on
June 24, 2005, to succeed to the business conducted by its
predecessor registrant, Loral Space & Communications
Ltd. (Old Loral), which emerged from chapter 11
of the federal bankruptcy laws on November 21, 2005 (the
Effective Date) pursuant to the terms of the fourth
amended joint plan of reorganization, as modified (the
Plan of Reorganization).
The terms Loral, the Company,
we, our and us when used in
this report with respect to the period prior to the Effective
Date, are references to Old Loral, and when used with respect to
the period commencing on and after the Effective Date, are
references to Loral. These references include the subsidiaries
of Old Loral or Loral, as the case may be, unless otherwise
indicated or the context otherwise requires. The term
Parent Company is a reference to Loral
Space & Communications Inc., excluding its
subsidiaries.
Loral is organized into two segments:
Satellite Manufacturing:
Our subsidiary, Space Systems/Loral, Inc. (SS/L),
designs and manufactures satellites, space systems and space
system components for commercial and government customers whose
applications include fixed satellite services (FSS),
direct-to-home
(DTH) broadcasting, mobile satellite services
(MSS), broadband data distribution, wireless
telephony, digital radio, digital mobile broadcasting, military
communications, weather monitoring and air traffic management.
Satellite Services:
Until October 31, 2007, the operations of our satellite
services segment were conducted through Loral Skynet Corporation
(Loral Skynet), which leased transponder capacity to
commercial and government customers for video distribution and
broadcasting, high-speed data distribution, Internet access and
communications, and provided managed network services to
customers using a hybrid satellite and ground-based system. It
also provided professional services such as fleet operating
services to other satellite operators. At October 31, 2007,
Loral Skynet had four in-orbit satellites and had one satellite
under construction at SS/L.
On October 31, 2007, Loral and its Canadian partner, Public
Sector Pension Investment Board (PSP), through
Telesat Holdings Inc. (Telesat Holdco), a
newly-formed joint venture, completed the acquisition of Telesat
Canada from BCE Inc. (BCE). In connection with this
acquisition, Loral transferred on that same date substantially
all of the assets and related liabilities of Loral Skynet to
Telesat Canada. Loral holds a 64% economic interest and a
331/3%
voting interest in Telesat Holdco, the ultimate parent company
of the resulting new entity (see Note 6 to the Loral
consolidated financial statements). We use the equity method of
accounting for our investment in Telesat Canada.
We refer to the acquisition of Telesat Canada and the related
transfer of Loral Skynet to Telesat Canada as the Telesat Canada
transaction. References to Telesat Canada with respect to
periods prior to the closing of this transaction are references
to the subsidiary of BCE and with respect to the period after
the closing of this transaction are references to Telesat Holdco
and/or its
subsidiaries, as appropriate. Similarly, unless otherwise
indicated, references to Loral Skynet with respect to periods
prior to the closing of this transaction are references to the
operations of Lorals satellite services segment as
conducted through Loral Skynet and with respect to the period
commencing on and after the closing of this transaction are, if
related to the fixed satellite services business, references to
the Loral Skynet operations within Telesat Canada.
1
Segment
Overview
Satellite
Manufacturing
Space Systems/Loral, Inc. (SS/L) has been designing,
manufacturing and integrating satellites and space systems for a
wide variety of commercial and government customers for more
than 50 years. Its products include mid-and high-powered
satellites designed for applications such as fixed satellite
services (FSS),
direct-to-home
(DTH) broadcasting, mobile satellite services
(MSS), broadband data distribution, wireless
telephony, digital radio, digital mobile broadcasting, military
communications, weather monitoring and air traffic management.
SS/L customers have included such satellite service providers
and government organizations as APT Satellite, AsiaSat, DIRECTV,
DISH Networks, EchoStar, Globalstar, Hisdesat, Hispasat, ICO,
Intelsat, Japans Ministry of Transport and Civil Aviation
Bureau, the National Oceanic & Atmospheric
Administration (NOAA), Optus (SingTel), SatMex, SES, Sirius XM
Radio, Telesat Canada, TerreStar Networks, Thaicom, ViaSat,
WildBlue Communications and XTAR. Since its inception, SS/L has
delivered more than 220 satellites, which together have achieved
more than 1,500 years of cumulative on-orbit service; many
of these satellites significantly exceeded design life
expectations. SS/Ls satellite platform provides the
flexibility to meet a broad range of customer requirements for
the worlds most powerful commercial satellites with up to
25 kilowatts of power. The capacity offered on these satellites
ranges from one to as many as 150 transponders. According to
industry research firm, Futron Corporation, global satellite
manufacturing revenue was $11.6 billion in 2007 of which
approximately $3.8 billion was for commercial satellites.
SS/L has a history of technology innovation and currently
provides some of the worlds most powerful commercial
satellites. With 183 U.S. patents, the company has led the
industry with research in advanced composites, antennas,
multiplexers, power conversion, propulsion systems and on-orbit
controls. Its highly flexible satellite platform accommodates a
broad range of applications such as regional and spot-beam
technology, hybrid systems that maximize the value of orbital
slot location, and imagers for precision weather forecasting.
The SS/L platform accommodates some of the worlds highest
power payloads for television, radio and multimedia broadcast.
With increasing demand for mobile devices for video, audio and
data, SS/L is also a leader in providing satellite systems that
include Ground Based Beam Forming (GBBF) capability so that
upgradeable ground equipment can grow with new innovations and
market demands.
Satellite construction contract awards over the last few years
have resulted in backlog at SS/L of $1.4 billion. In order
to complete construction of all the satellites in backlog and to
enable future growth, SS/L has modified and expanded its
manufacturing facilities. SS/L can now accommodate as many as
nine to 13 satellite awards per year, depending on the
complexity and timing of the specific satellites, and can
accommodate the integration and test of 13 to 14 satellites at
any given time in its Palo Alto facility. The expansion has also
reduced the companys reliance on outside suppliers for
certain RF components and
sub-assemblies.
Market
and Competition
SS/L participates in the highly competitive commercial satellite
manufacturing industry principally on the basis of superior
customer relationships, technical excellence, reliability and
pricing. Other competitors for satellite manufacturing contracts
include Boeing, Lockheed Martin and Orbital Sciences in the
U.S., Thales Alenia Space and EADS Astrium in Europe and
Mitsubishi Electric Corporation in Japan. SS/Ls continued
success depends on its ability to provide highly reliable
satellites on a cost-effective and timely basis. SS/L may also
face competition in the future from emerging low-cost
competitors in India, Russia and China. The number of satellite
manufacturing contracts awarded varies annually and is difficult
to predict. For example, based on readily available industry
information, we believe that, while only two contracts for
mid-and high-power (8 kW or higher) commercial satellites were
awarded worldwide in 2002, there were 13 and 12 contracts
awarded in 2008 and 2007, respectively. The current economic
environment may adversely affect the satellite market in the
near-term. While we expect the replacement market to be reliable
over the next year, given the current credit crisis, potential
customers who are highly leveraged or in the development stage
may not be able to obtain the financing necessary to purchase
satellites.
2
Satellite
Manufacturing Performance
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Year ended December 31,
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2008
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2007
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2006
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(In millions)
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Total segment revenues
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$
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881
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$
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814
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$
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697
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Eliminations
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(12
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(53
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(60
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Revenues from satellite manufacturing as reported
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$
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869
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$
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761
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$
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637
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Segment Adjusted EBITDA before
eliminations(1)
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$
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45
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$
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35
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$
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66
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(1) |
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See Consolidated Operating Results
in Managements Discussion and Analysis of Financial
Condition and Results of Operations for significant items that
affect comparability between the periods presented (see
Note 15 to the Loral consolidated financial statements for
the definition of Adjusted EBITDA).
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Total SS/L assets were $799 million and $963 million
as of December 31, 2008 and 2007, respectively. The
decrease is primarily due to the goodwill impairment charge of
$188 million in 2008. Backlog at December 31, 2008 was
$1.4 billion. This included $51.7 million of backlog
for the construction of Nimiq 5 and Telstar 11N for Telesat
Canada. Backlog at December 31, 2007 was $1.0 billion.
This included $138 million of backlog for the construction
of Nimiq 5 and Telstar 11N for Telesat Canada. It is expected
that approximately 67% of the backlog as of December 31,
2008, will be recognized as revenues during 2009. During 2008,
four of SS/Ls customers accounted for approximately 20%,
15%, 14% and 10% of our consolidated revenues.
Satellite
Services
Loral participates in satellite services operations principally
through its investment in Telesat Canada. Telesat Canada is the
worlds fourth largest provider of FSS with industry
leading backlog, and one of only three FSS providers operating
on a global basis. Telesat Canadas satellite fleet
operates in geosynchronous earth orbit approximately
22,000 miles above the equator. In this orbit, satellites
remain in a fixed position relative to points on the
earths surface and provide reliable, high-bandwidth
services anywhere in their coverage areas, serving as the
backbone for many forms of telecommunications.
As of March 10, 2009, Telesat Canada has 12 in-orbit
satellites, one recently launched satellite which is expected to
enter service in the second quarter of 2009, and one satellite
under construction which is 100% leased for at least the design
life of the satellite. One satellite will be decommissioned in
the second quarter of 2009. Telesat Canada provides video
distribution and DTH video, as well as
end-to-end
communications services using both satellite and hybrid
satellite-ground networks. According to industry research firm
Euroconsult, the global FSS industry grew by 9.5% in 2007
generating approximately $8.9 billion in revenues.
Telesat Canada categorizes its satellite services operations
into broadcast, enterprise services, and consulting and other,
as follows:
Broadcast:
DTH. Both Canadian DTH service providers, Bell
TV (formerly Bell ExpressVu) and Star Choice, use Telesat
Canadas satellites as a distribution platform for their
services, delivering a package of television programming, audio
and information channels directly to customers homes. In
addition, EchoStar uses Anik F3, and DIRECTV uses one of Telesat
Canadas orbital locations, for DTH services in the United
States.
Video Distribution. Major broadcasters, cable
networks and DTH service providers use Telesat Canada satellites
for the full-time transmission of television programming.
Additionally, certain broadcasters and DTH service providers
bundle value-added services that include satellite capacity,
digital encoding of video channels and uplinking and downlinking
services to and from Telesat Canada satellites and teleport
facilities. In Asia, Telesat Canada is a leader in the
distribution of video content to cable head ends from which
approximately 80 million households can receive television
programming distributed over Telstar 10, including HBO, Sony,
Disney and Hallmark. In Europe, Telstar 12 provides satellite
services to
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the largest cable distributor in Europe, UPC, and is used to
transmit the television services of NBC and Fox. In both Brazil
and Chile, Telesat Canada provides video distribution services
on Telstar 14.
Occasional Use Services. Occasional use
services consist of satellite transmission services for the
timely broadcast of video news, sports and live event coverage
on a short-term basis enabling broadcasters to conduct
on-the-scene
transmissions using small, portable antennas.
Enterprise Services:
North America Data Networks. Telesat Canada
provides data networks in North America as well as the related
ground segment and maintenance services supporting these
networks. Telesat Canada is one of the largest operators of very
small aperture terminal, or VSAT, systems in North America,
managing over 23,000 VSAT terminals at customer sites in Canada
and the United States. Some of these customers are provided
end-to-end
services including installation and maintenance of the end user
terminal, maintenance of the VSAT hub, and provision of
satellite capacity. Other customers may be provided a subset of
these services, including maintenance of the VSAT terminal,
while using other providers for hub maintenance
and/or space
segment capacity. Telesat Canada also provides networks that
combine both satellite and digital subscriber lines
(DSL). Examples of North American data network
services include point of sale services for customers in Canada
and communications services to remote locations for the oil and
gas industry.
International Enterprise Networks. Telesat
Canada provides Internet Protocol-based terrestrial extension
services that allow enterprises to reach multiple locations
worldwide many of which cannot be connected via
terrestrial means. Leveraging satellites
one-to-many
attributes, these managed services also enable multi-cast and
broadcast functionality. These services are delivered to
enterprises whose headquarters are typically in the United
States or Europe through both terrestrial partners and directly
to corporations.
Ka-band
Internet Services. Telesat Canada provides
Ka-band,
two-way broadband Internet services in Canada through Barrett
Xplore Inc. and other resellers, and
Ka-band
satellite capacity to WildBlue which uses it to provide services
in the United States.
Telecommunication Carrier Services. Telesat
Canada provides satellite capacity and
end-to-end
services for data and voice transmission to telecommunications
carriers located throughout the world. These services include
(i) connectivity and voice circuits to remote locations in
Canada for customers such as Bell Canada and NorthwesTel and
(ii) space segment capacity and terrestrial facilities for
Internet backhaul and access, GSM backhaul, and services such as
rural telephony to carriers around the world.
Government Services. The United States
Government is the largest single consumer of fixed satellite
services in the world and a significant user of Telesat
Canadas international satellites. Over the course of
several years, Telesat Canada has implemented a successful
strategy to sell through government service integrators, rather
than directly to United States Government agencies. Satellite
services are also provided to the Canadian Government, including
a variety of services from a maritime network for a Canadian
Government entity to protected satellite capacity to the
Department of National Defense for the North Warning System.
Consulting &
Other:
Consulting operations allow for increased operating efficiencies
by leveraging Telesat Canadas existing employees and
facility base. With over 35 years of engineering and
technical experience, Telesat Canada is a leading consultant in
establishing, operating and upgrading satellite systems
worldwide, having provided services to businesses and
governments in more than 30 countries across six continents.
Telesat Canada operates 13 satellites for third parties.
Currently, the international consulting business provides
satellite-related services to over 32 customers in approximately
18 countries.
Telesat Canada is the worlds fourth largest provider of
FSS with an international platform supporting (i) strong
video distribution and DTH neighborhoods in North America that
result in long-term contracts with blue chip customers, industry
leading backlog and fully contracted expansion DTH satellites,
(ii) an efficient and
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expanding enterprise services business that provides a wide
range of North American customers with
end-to-end
communications services using satellite and hybrid satellite-DSL
networks, and (iii) a strong international video
distribution and enterprise services business that provides
exposure to high-growth regions and satellite users around the
world.
Through its commitment to customer service and focus on
innovation and technical expertise, Telesat Canada has developed
strong relationships with a diverse range of high-quality
customers, including many of the worlds largest video and
data service providers. Its customers include North American DTH
providers Bell TV, Star Choice and EchoStar, and leading
telecommunications and media firms such as Disney, HBO, NBC,
UPC, Canadian Broadcasting Corporation, Bell Canada, AT&T,
Verizon, BT Group, Global Crossing and Lockheed Martin. Its
North American Broadcast and Enterprise Services customer
service contracts are typically multi-year in duration and, in
the past, Telesat Canada has been successful in contracting all
or a significant portion of a satellites capacity prior to
commencing construction. As a result, Telesat Canada had
approximately $4.2 billion in contracted backlog as of
December 31, 2008, of which approximately 12% will be
recognized as revenues during 2009.
Market
and Competition
The satellite services business sector is highly competitive and
its players must also compete with non-satellite technologies
for the provision of voice, data, video and Internet
connectivity services. Telesat Canada operates in the FSS
sector, providing communications links between fixed points on
the earths surface, referred to as
point-to-point
services, and the provision of satellite connectivity from one
point to multiple points, referred to as
point-to-multipoint
services.
As the worlds fourth largest satellite services company,
Telesat Canada competes with the leading global operators,
Intelsat, Ltd. and SES S.A., as well as with Eutelsat, S.A. in
Europe. Intelsat, SES and Eutelsat are each substantially larger
than Telesat Canada in terms of both the number of satellites
they have in orbit as well as in terms of their revenues. In
addition, Telesat Canada faces competition from regional
players, some of which enjoy competitive advantages in their
local markets. They are Sirius, Arabsat, Hellasat and Turksat in
Europe, the Middle East and Africa; AsiaSat, Measat Satellite
Systems, Shin Satellite Plc, APT Satellite Holdings Ltd.
(APT), PT Telkom and Optus in Asia; Satelites
Mexicanos S.A. de C.V., Star One, NahuelSat S.A., and Hispasat
S.A. in Latin America; and Ciel and EchoStar in North America.
Telesat Canada also competes with terrestrial service providers,
principally on
point-to-point
long distance routes, as well as for certain types of data
networks. While satellites are more efficient than terrestrial
systems for certain applications, such as broadcast or
point-to-multipoint
transmission of video and broadband data, terrestrial networks
are generally less expensive than satellite networks for
point-to-point
services. In developing countries, satellite plays a larger role
in telecommunications networks due to the relatively undeveloped
terrestrial communications networks. As a result of deregulation
and economic growth, these terrestrial communication networks
are expanding in certain countries, increasing competition for
satellite services.
The market for satellite consulting services is generally
comprised of a few service providers qualified to provide
services in specific areas of expertise. Telesat Canadas
competitors are primarily United States and European-based
companies.
Satellite
Fleet & Ground Resources
As of March 10, 2009, Telesat Canada has a global fleet of
12 satellites in-orbit, which includes one satellite leased from
APT under a prepaid lease through the end of its life, for which
the company has risk of loss and the right to replace at the end
of its life and another satellite leased from DIRECTV. In
addition, one satellite was launched in February 2009 and is
expected to enter service in the second quarter of 2009, while
another satellite, which Telesat Canada has contracted to Bell
TV for 15 years or such later date as the customer may
request, is scheduled for launch later in 2009. One satellite
will be decommissioned in the second quarter of 2009. In
addition, the company leases fiber capacity around the world for
use in developing hybrid terrestrial/satellite data networks for
network services customers.
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Telesat Canada also has ground facilities located around the
world, providing both control services to its satellite fleet,
as well as to the satellites of other operators as part of its
consulting services offerings. It has two control centers
located in Ottawa, Ontario and Allan Park, Ontario. In addition,
Telesat Canada leases other technical facilities that provide
customers with a host of teleport and hub services.
Telesat Canadas North American focused fleet is comprised
of three owned FSS satellites, Anik F1-R, Anik F2 and Anik F3,
and three owned direct broadcast services, or DBS, satellites,
Nimiq 1, Nimiq 2 and Nimiq 4. Telesat Canada leases and operates
one North American focused satellite, Nimiq 3, which is owned by
DIRECTV but is located in Telesat Canadas orbital location
and is used by Telesat Canada. Telesat Canadas
international fleet is comprised of four owned FSS satellites,
Anik F1, Telstar 12, Telstar 14/Estrela do Sul, and Telstar 18
and one satellite, Telstar 10, which is leased through
end-of-life.
Telstar 11N was launched in February 2009 and is expected to
enter service in the second quarter.
The table below summarizes selected data relating to Telesat
Canadas owned and leased in-orbit satellites as of
March 10, 2009:
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Expected
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Orbital Location
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Manufacturers
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End-of-
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Regions
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Launch
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End-of-Service-
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Commercial-
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Transponders(1)
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Covered
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Date
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Life
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Service Life(1)
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C-band(2)
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Ku-band(2)
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Ka-band
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L-band(3)
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Model
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Nimiq 1
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91.0 °WL Canada,
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May 1999
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2011
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2024
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32@24MHz
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A2100 AX
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Continental United
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(Lockheed Martin)
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States
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Nimiq
2(4)
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91.0°WL Canada,
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December 2002
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2015
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2023
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20@24MHz
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2@500/100MHz
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A2100 AX
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Continental United
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(Lockheed Martin)
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States
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Nimiq
3(5)
|
|
82 °WL Canada
|
|
|
June 1995
|
|
|
|
2007
|
|
|
|
2009
|
|
|
|
|
16@24MHz
|
|
|
|
|
|
BSS 601
|
|
|
Continental United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Boeing)
|
|
|
States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nimiq 4
|
|
82 ° WL Canada
|
|
|
September 2008
|
|
|
|
2023
|
|
|
|
2027
|
|
|
|
|
32@24 MHz
|
|
8@54 MHz
|
|
|
|
E3000 (EADS Astrium)
|
Anik
F1(6)
|
|
107.3 °WL Canada,
|
|
|
November 2000
|
|
|
|
2016
|
|
|
|
2013
|
|
|
12@36MHz
|
|
16@27MHz
|
|
|
|
|
|
BSS702 (Boeing)
|
|
|
Continental United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(S. America)
|
|
(S. America)
|
|
|
|
|
|
|
|
|
States, South America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anik F2
|
|
111.1 ° WL Canada,
|
|
|
July 2004
|
|
|
|
2019
|
|
|
|
2028
|
|
|
24@36MHz
|
|
32@27MHz
|
|
31@56/112 MHz
|
|
|
|
BSS702
|
|
|
Continental United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6@500MHz
|
|
|
|
(Boeing)
|
|
|
States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1@56/112MHz
|
|
|
|
|
Anik F1-R
(3)
|
|
107.3 ° WL North America
|
|
|
September 2005
|
|
|
|
2020
|
|
|
|
2023
|
|
|
24@36MHz
|
|
32@27MHz
|
|
|
|
2@20MHz
|
|
E3000 (EADS Astrium)
|
Anik
F3(7)
|
|
118.7 °WL Canada,
|
|
|
April 2007
|
|
|
|
2022
|
|
|
|
2026
|
|
|
24@36MHz
|
|
32@27MHz
|
|
2@75MHz
|
|
|
|
E3000
|
|
|
Continental United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500MHz)
|
|
|
|
(EADS Astrium)
|
|
|
States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telstar
10(8)
|
|
76.5°EL Asia and
|
|
|
October 1997
|
|
|
|
2009
|
|
|
|
2012
|
|
|
1@30MHz
|
|
7@54MHz
|
|
|
|
|
|
SS/L 1300
|
|
|
Portions of Europe,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26@36MHz
|
|
|
|
|
|
|
|
|
|
|
Africa and Australia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telstar
12(9)
|
|
15 °WL Eastern United
|
|
|
October 1999
|
|
|
|
2012
|
|
|
|
2016
|
|
|
|
|
37@54MHz
|
|
|
|
|
|
SS/L 1300
|
|
|
States, SE Canada,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Russia, Middle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East, North Africa,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
portions of South and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telstar 14/Estrela
|
|
63 °WL Brazil And
|
|
|
January 2004
|
|
|
|
2019
|
|
|
|
2011
|
|
|
|
|
9@72MHz
|
|
|
|
|
|
SS/L 1300
|
do
Sul(10)
|
|
portions of Latin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10@36MHz
|
|
|
|
|
|
|
|
|
America, North
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2@28MHz
|
|
|
|
|
|
|
|
|
America, Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1@56MHz
|
|
|
|
|
|
|
|
|
Ocean
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telstar
18(11)(12)
|
|
138 ° EL India, South
|
|
|
June 2004
|
|
|
|
2017
|
|
|
|
2018
|
|
|
16@36MHz
|
|
5@54MHz
|
|
|
|
|
|
SS/L 1300
|
|
|
East Asia, China,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1@54MHz
|
|
1@40MHz
|
|
|
|
|
|
|
|
|
Australia And Hawaii
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of available
transponders and expected or nominal end of life shown in this
table reflect Telesat Canadas current estimate of each
satellites capacity and useful life, taking account of
anomalies and malfunctions the satellites have experienced and
other factors such as remaining fuel levels and consumption
rates and other available engineering data. Telesat Canada
periodically reviews and updates these estimates based on a
satellites performance. Accordingly, these estimates are
subject to change and it is possible that the actual commercial
life of any of these satellites will be shorter than we
currently anticipate. See Item 1A Risk
Factors After launch, satellites remain vulnerable
to in-orbit failures which may result in reduced revenues and
profits and other financial consequences.
|
|
(2) |
|
Includes extended C-band and
extended Ku-band in certain cases.
|
|
(3) |
|
Telesat Canada has contracted the
L-band capacity on Anik F1-R to Lockheed Martin for
10 years. This L-band spectrum is not Telesat
Canadas; it is a United States spectrum licensed to
Lockheed Martin.
|
6
|
|
|
(4) |
|
Due to malfunctions affecting
available power on Nimiq 2, not all transponders carried on the
satellite are operational.
|
|
(5) |
|
Nimiq 3 is leased from DIRECTV,
but is in a Telesat Canada orbital position. DIRECTV can
terminate its lease agreement if it experiences two or more
catastrophic failures with its other satellites. In the event of
such termination, Telesat Canada may lose the revenues
associated with this satellite if it cannot redeploy that
capacity to other satellites. This spacecraft will be
decommissioned in the second quarter of 2009.
|
|
(6) |
|
Due to a gradual decrease in power
on Anik Fl, transponders providing North American coverage have
been turned off, and this satellite will experience a premature
end-of-life
estimated to be 2013.
|
|
(7) |
|
Telesat Canada has leased, through
the satellites end-of-life, all of the Ku-band capacity of
Anik F3 to EchoStar.
|
|
(8) |
|
Telstar 10 does not include one
transponder @ 36MHz and eight transponders @ 54MHz which have
been turned off for satellite power management, and does not
include one transponder @ 36MHz owned by APT.
|
|
(9) |
|
Telstar 12 has
38-54MHz
transponders. Four of these transponders were given to Eutelsat
to settle coordination issues, and Telesat Canada leases back
three of these transponders.
|
|
(10) |
|
Telstar 14 has substantially
reduced transponder capacity and a limited expected life due to
the failure of a solar array to fully deploy upon launch.
|
|
(11) |
|
Includes 16.6MHz of C-band
capacity provided to the Government of Tonga in lieu of a cash
payment for the use of the orbital location.
|
|
(12) |
|
Telesat Canada has agreed to
purchase two additional transponders from APT in 2009.
|
In addition, Telesat Canada has the rights to the following
satellite capacity to end of life of those satellites:
|
|
|
|
|
Satmex 5: 3-36MHz Ku transponders;
|
|
|
|
Satmex 6: 2-36MHz C-band transponders; 2-36MHz
Ku transponders; and
|
|
|
|
Agila (Mabuhay): 3-36MHz C-band transponders
|
The table below summarizes selected data relating to Telesat
Canadas satellites under construction as of
December 31, 2008:
|
|
|
|
|
|
|
Nimiq 5
|
|
Telstar 11N
|
|
Orbital Location
|
|
72.7o WL
|
|
37.55o WL
|
Regions Covered
|
|
Canada, Continental United States
|
|
North and Central America, Europe, Africa and the maritime
Atlantic Ocean region
|
Planned In-Service Date
|
|
2009
|
|
2009(1)
|
Manufacturers End-of- Service-Life
|
|
15 Years
|
|
15 Years
|
Customer Committed Capacity
|
|
15 Years/Fixed
|
|
|
Transponders:
|
|
|
|
|
Ku-band
|
|
32@24MHz
|
|
39@54MHz
|
Model
|
|
SS/L 1300
|
|
SS/L 1300
|
|
|
|
(1) |
|
Telstar 11N was launched on
February 26, 2009, is currently undergoing in-orbit testing
and is expected to enter commercial service in the second
quarter of 2009.
|
7
Satellite
Services Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
$
|
685
|
|
|
$
|
241
|
|
|
$
|
164
|
|
Eliminations
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Affiliate
eliminations(2)
|
|
|
(685
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from satellite services as reported
|
|
$
|
|
|
|
$
|
121
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted EBITDA
|
|
$
|
436
|
|
|
$
|
118
|
|
|
$
|
68
|
|
Eliminations
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Affiliate
eliminations(2)
|
|
|
(427
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from satellite services after
eliminations(3)
|
|
$
|
9
|
|
|
$
|
51
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Satellite Services segments
performance includes Loral Skynet through October 30, 2007
and Telesat Canada for the period from October 31, 2007 to
December 31, 2007.
|
|
(2) |
|
Affiliate eliminations represent
the elimination of amounts attributable to Telesat Canada.
|
|
(3) |
|
See Consolidated Operating Results
in Managements Discussion and Analysis of Financial
Condition and Results of Operations for significant items that
affect comparability between the periods presented (see
Note 15 to the consolidated financial statements for the
definition of Adjusted EBITDA).
|
Total Telesat Canada assets were $4.3 billion and
$5.6 billion as of December 31, 2008 and 2007,
respectively. The decrease in asset carrying value is primarily
due to exchange rate changes and impairment charges of
$455 million in 2008, primarily to reduce orbital slot
assets to their fair value. Backlog was $4.2 billion and
$5.3 billion as of December 31, 2008 and 2007,
respectively. The decline in backlog is primarily due to
exchange rate changes. It is expected that approximately 12% of
the backlog at December 31, 2008 will be recognized as
revenue in 2009.
We use the equity method of accounting for our investment in
Telesat Canada, and its results are not consolidated in our
financial statements. Our investment in this company is included
in equity in net losses of affiliates in our consolidated
statements of operations and investments in affiliates in our
consolidated balance sheet.
The following chart summarizes operating revenues and Adjusted
EBITDA for Telesat Canada before the closing of the Telesat
Canada transaction. Telesat Canadas Adjusted EBITDA as
shown below is calculated in the same manner as Adjusted EBITDA
in the segment chart above. The amounts presented below are in
Canadian dollars (CAD) and are presented in
accordance with Canadian generally accepted accounting
principles.
|
|
|
|
|
|
|
|
|
|
|
Telesat Canada
|
|
|
|
For the Period from
|
|
|
|
|
|
|
January 1,
|
|
|
For The Year
|
|
|
|
2007 to
|
|
|
Ended
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total operating revenues
|
|
|
CAD 457.8
|
|
|
|
CAD 479.0
|
|
Adjusted EBITDA
|
|
|
CAD 263.2
|
|
|
|
CAD 261.0
|
|
8
Other
We also own 56% of XTAR, LLC (XTAR), a joint venture
between us and Hisdesat Servicios Estrategicos, S.A.
(Hisdesat). XTAR owns and operates an X-band
satellite, XTAR-EUR located at
29o E.L.,
which entered service in March 2005. The satellite is designed
to provide X-band communications services exclusively to United
States, Spanish and allied government users throughout the
satellites coverage area, including Europe, the Middle
East and Asia. The government of Spain granted XTAR rights to an
X-band license, normally reserved for government and military
use, to develop a commercial business model for supplying X-band
capacity in support of military, diplomatic and security
communications requirements. XTAR also leases 7.2 72 MHz
X-band transponders on the Spainsat satellite located at
30o W.L.
owned by Hisdesat, which entered commercial service in April
2006. These transponders, designated as
XTAR-LANT,
allow XTAR to provide its customers in the U.S. and abroad
with additional X-band services and greater flexibility. XTAR
currently has contracts to provide X-band services to the
U.S. Department of State, the Spanish Ministry of Defense,
the Belgium Ministry of Defense and the Danish armed forces, but
the take-up
rate in its service continues to be slower than anticipated. For
more information on XTAR see Note 6 to the Loral
consolidated financial statements.
9
REGULATION
Satellite
Manufacturing
Export
Regulation and Economic Sanctions Compliance
Commercial communication satellites and certain related items,
technical data and services, are subject to United States export
controls. These laws and regulations affect the export of
products and services to foreign launch providers,
subcontractors, insurers, customers, potential customers, and
business partners, as well as to foreign Loral employees,
foreign regulatory bodies, foreign national telecommunications
authorities and to foreign persons generally. Commercial
communications satellites and certain related items, technical
data and services are on the United States Munitions List and
are subject to the Arms Export Control Act and the International
Traffic in Arms Regulations. Export jurisdiction over these
products and services resides in the U.S. Department of
State. Other Loral exports are subject to the jurisdiction of
the U.S. Department of Commerce, pursuant to the Export
Administration Act and the Export Administration Regulations.
U.S. Government licenses or other approvals generally must
be obtained before satellites and related items, technical data
and services are exported and may be required before they are
re-exported or transferred from one foreign person to another
foreign person. For example, U.S. Government licenses or
approvals generally will have to be obtained for the transfer of
technical data and defense services between Loral and Telesat
Canada, and between Telesat Canada and its
U.S. subsidiaries. There can be no assurance that such
licenses or approvals will be granted. Also, licenses or
approvals may be granted with limitations, provisos or other
requirements imposed by the U.S. Government as a condition
of approval, which may affect the scope of permissible activity
under the license or approval.
In addition, if a satellite project involves countries,
individuals or entities that are the subject of
U.S. economic sanctions (Sanctions Targets) or,
in certain situations, is intended to provide services to
Sanctions Targets, SS/Ls participation in the project may
be prohibited altogether or licenses or other approvals from the
U.S. Treasury Departments Office of Foreign Assets
Control (OFAC) may also be required. See
Item 1A Segment Risk Factors
We are subject to export control and economic sanctions laws,
which may result in delays, lost business and additional
costs.
Satellite
Services
Telecommunications
Regulation
As an operator of a global satellite system, Telesat Canada is
regulated by government authorities in Canada, the United States
and other countries in which it operates and is subject to the
frequency and orbital slot coordination process of the
International Telecommunication Union (ITU). Telesat
Canadas ability to provide satellite services in a
particular country or region is subject also to the technical
constraints of its satellites, international coordination, local
regulation and licensing requirements.
Canadian
Regulatory Environment
Telesat Canadas operations are subject to regulation and
licensing by Industry Canada pursuant to the Radiocommunication
Act (Canada) and by the Canadian Radio-Television and
Telecommunications Commission (CRTC), under the
Telecommunications Act (Canada). Industry Canada has the
authority to issue licenses, establish standards, assign
Canadian orbital locations, and plan the allocation and use of
the radio frequency spectrum, including the radio frequencies
upon which Telesat Canadas satellites and earth stations
depend. The Minister responsible for Industry Canada has broad
discretion in exercising this authority to issue licenses, fix
and amend conditions of licenses, and to suspend or even revoke
them. Telesat Canadas licenses to operate the Anik F and
Nimiq satellites require it to comply with research and
development and other industrial and public benefit commitments,
to pay annual radio authorization fees, to provide all-Canada
satellite coverage and to comply with foreign ownership
restrictions.
The Canadian foreign ownership and control restrictions, with
which Telesat must comply as a condition of its Industry Canada
licenses, are set out in regulations under the
Radiocommunication Act and in Industry Canada
10
policies. These require Telesat Canada to be Canadian owned and
controlled within the meaning of those regulations and various
other provisions of Canadian telecommunications law and policy.
Industry Canada traditionally licensed satellite radio spectrum
and associated orbital locations on a first-come, first-served
basis. Currently, however, a competitive licensing process is
employed for certain spectrum resources where it is anticipated
that demand will likely exceed supply, including the licensing
of certain fixed-satellite service (FSS) and
broadcasting satellite service (BSS) orbital
locations and associated spectrum resources. Authorizations are
granted for the life of a satellite, although radio licenses
(e.g., FSS licenses) are renewed annually. As a result of policy
concerns about the continuity of service and other factors,
there is generally a strong presumption of renewal provided
license conditions are met.
The Canadian Government opened Canadian satellite markets to
foreign-licensed satellite operators as part of its 1998 World
Trade Organization (WTO) commitments to liberalize
trade in basic telecommunications services, with the exception
of
direct-to-home
(DTH) television services that are provided through
FSS or DBS facilities. In September 2005, the Canadian
Government revised its satellite-use policy to permit the use of
foreign-licensed satellites for digital audio radio services in
Canada. Further liberalization of the policy may occur and could
result in increased competition in Canadian satellite markets.
On June 13, 2007, Industry Canada announced that Telesat
Canada would be awarded five new licenses for Canadian satellite
spectrum and rights to the related orbital positions. At that
time, Industry Canada also announced that another
Canadian-licensed satellite operator, Ciel, would be awarded
seven new spectrum licenses. Ciel subsequently declined one of
its licenses, which was subsequently awarded to Telesat Canada.
The Telecommunications Act authorizes the CRTC to regulate
various aspects of the provision of telecommunications services
by Telesat Canada and other telecommunications service
providers. Since the passage of the Act in 1993, the CRTC has
gradually forborne from regulating an increasing number of
services provided by regulated companies. As of March 1,
2000, coincident with the end of Telesat Canadas FSS
monopoly in Canada, the CRTC abandoned
rate-of-return
regulation of Telesat Canadas FSS services and no longer
requires it to file tariffs in respect of these services. Under
the current regulatory regime, Telesat Canada has pricing
flexibility subject to a price ceiling of CAD 170,000 per
transponder per month on certain full period FSS services
offered in Canada under minimum five-year arrangements. Telesat
Canadas DBS services offered within Canada are also
subject to CRTC regulation, but have been treated as distinct
from its fixed satellite services and facilities. To date,
Telesat Canada has sought and received CRTC approval of customer
agreements relating to the sale of capacity on all Nimiq DBS
satellites, including the rates, terms and conditions of service
set out therein. Section 28(2) of the Telecommunications
Act provides that the CRTC may allocate satellite capacity to
particular broadcasting undertakings if it is satisfied that the
allocation will further the implementation of the broadcasting
policy for Canada.
Telesat Canada was originally established by the Government of
Canada in 1969, under the Telesat Act. As part of the Canadian
governments divestiture of its shares in Telesat Canada,
pursuant to the Telesat Canada Reorganization and Divestiture
Act (1991), or the Telesat Divestiture Act, Telesat Canada was
continued on March 27, 1992 as a business corporation under
the Canada Business Corporations Act, the Telesat Act was
repealed and the Government sold its shares in Telesat Canada.
Under the Telesat Divestiture Act, Telesat Canada remains
subject to certain special conditions and restrictions. The
Telesat Divestiture Act provides that no legislation relating to
the solvency or
winding-up
of a corporation applies to Telesat Canada and that its affairs
cannot be wound up unless authorized by an Act of Parliament. In
addition, Telesat Canada and its shareholders and directors
cannot apply for Telesat Canadas continuation in another
jurisdiction or dissolution unless authorized by an Act of
Parliament.
United
States Regulatory Environment
The Federal Communications Commission, or FCC, regulates the
provision of satellite services to, from or within the United
States. Certain of Telesat Canadas satellites are owned
and operated through a US subsidiary and are regulated by the
FCC.
Telesat has chosen to operate its US-authorized satellites on a
non-common carrier basis, and it is not subject to rate
regulation or other common carrier regulations enacted under the
US Communications Act of 1934. Telesat
11
Canada pays FCC filing fees in connection with its space station
and earth station applications and annual fees to defray the
FCCs regulatory expenses. Annual and quarterly status
reports must be filed with the FCC for interstate/international
telecommunications, and Telesat Canada must contribute funds
supporting the FCCs Universal Service Fund, or USF, with
respect to eligible United States telecom revenues on a
quarterly and annual basis. The USF contribution rate is
adjusted quarterly and is currently set at 9.5% of eligible
revenue for the first quarter of 2009. At the present time, the
eligible revenue to determine USF contributions excludes revenue
from bare transponder capacity (space segment only agreements).
The FCC currently grants satellite authorizations on a
first-come, first-served basis to applicants who demonstrate
that they are legally, technically and financially qualified,
and where the public interest will be served by the grant. There
are no assurances that applications will be granted. Under
licensing rules, a bond must be posted for up to $3 million
when an FSS satellite authorization is granted. Some or the
entire amount of the bond may be forfeited if there is failure
to meet any of the milestones imposed under the authorization
(including milestones for satellite construction, launch and
commencement of operations). Under current licensing rules, the
FCC will issue new satellite licenses for an initial
15-year term
and will provide a licensee with an expectancy that
a subsequent license will be granted for the replacement of an
authorized satellite using the same frequencies. At the end of
the 15 year term, a satellite that has not been replaced,
or that has been relocated to another orbital location following
its replacement, may be allowed to continue operations for a
limited period of time subject to certain restrictions.
Telesat Canada, through its U.S. subsidiary, Skynet
Satellite Corporation, has FCC authorization for one existing
US-licensed satellite which operates in the Ku-band: Telstar 12
at 15° WL. In addition, Skynet Satellite Corporation has
FCC authorization for Telstar 11N which will operate as a
US-licensed satellite in the Ku-band at 37.55° WL.
To facilitate the provision of FSS satellite services in C- and
Ku-band frequencies in the United States market, foreign
licensed operators can apply to have their satellites placed on
the FCCs Permitted Space Station List. Telesat
Canadas Anik Fl, Anik Fl-R,
Anik F2, and Anik F3 satellites are currently on this list. The
FCC Order placing Anik F2 on the list also approved Telesat
Canadas application to use
Ka-band
capacity on this satellite to provide two-way broadband
communications services in the United States.
The United States made no WTO commitment to open its DTH, DBS or
digital audio radio services to foreign competition, and instead
indicated that provision of these services by foreign operators
would be considered on a
case-by-case
basis, based on an evaluation of the effective competitive
opportunities open to United States operators in the country in
which the foreign satellite was licensed (i.e., an ECO-sat test)
as well as other public interest criteria. While Canada
currently does not satisfy the ECO-sat test in the case of DTH
and DBS service, the FCC has found, in a number of cases, that
provision of these services into the United States using
Canadian-licensed satellites would provide significant public
interest benefits and would therefore be allowed. United States
service providers, Digital Broadband Applications Corp., DIRECTV
and EchoStar, have all received FCC approval to access
Canadian-authorized satellites under Telesat Canadas
direction and control in Canadian-licensed orbital locations to
provide DTH-FSS or DBS service into the United States.
The approval of the FCC for the Telesat Canada transaction was
conditioned upon compliance by Telesat Canada with commitments
made to the Department of Justice, the Federal Bureau of
Investigation, and the Department of Homeland Security relating
to the availability of certain records and communications in the
United States in response to lawful United States law
enforcement requests for such access.
Regulation Outside
Canada and the United States
Telesat Canada also operates satellites through licenses granted
by countries other than Canada and the United States.
The Brazilian national telecommunications agency, ANATEL, has
authorized Telesat Canada, through its subsidiary, Telesat
Brasil Capacidade de Satelites Ltda. (TBCS), to operate a
Ku-band FSS satellite. The satellite, known as Telstar 14 or as
Estrela do Sul 1, is operating at 63° WL pursuant to a
Concession Agreement with ANATEL. The Concession was initially
issued for a fifteen (15) year term that began on
May 5, 1999, and is
12
renewable for a second fifteen (15) year term. The
Concession Agreement obligates TBCS to operate the satellite in
accordance with Brazilian telecommunications law and contains
provisions to enable ANATEL to levy fines for failure to perform
according to the Concession terms. On December 19, 2008,
TBCS entered into a new
15-year
Concession Agreement with ANATEL. This agreement allows TBCS to
operate a Ku-band satellite at
63o WL,
after May 2014, without the requirement to dedicate half of the
prime power of the spacecraft to serve only Brazil. Because a
concessionaire cannot have in effect two Concession Agreements
for the same orbital slot at the same time, TBCS was required to
surrender the May 1999 Concession. Brazil also has a Universal
Service Fund (FUST) to subsidize the cost of telecommunications
service in Brazil. The sale of bare transponder
capacity in Brazil, however, which is TBCSs primary
business, is not considered a telecommunications service and
revenues from such sales are not assessable for contributions to
the fund. TBCS is also our legal representative for sale of
capacity on Telstar 12 in Brazil. Any Brazilian entity that
wishes to lease Telstar 12 capacity must lease it from TBCS and
remit payment in Brazil.
Pursuant to agreements with APT Satellite Holdings Limited
(APT), Telesat Canada, through its subsidiary Telesat Asia
Pacific Satellite (HK) Limited, has the fully-paid right to use
and sublease the capacity of Telstar 10 (except for one C-band
transponder). Telstar 10 is operated by APT which has been
granted the right to use the 76.5° EL orbital location by
the Government of Hong Kong, Peoples Republic of China.
Telesat Canada, through its subsidiary Telesat Satellite LP,
owns Telstar 18, which operates at the 138° EL orbital
location under an agreement with APT, which has been granted the
right to use the 138° EL orbital location by The Kingdom of
Tonga. APT is the direct interface with these regulatory bodies.
Because Telesat Canada gained access to these orbital locations
through a third party (APT), there is uncertainty with respect
to its ability to maintain access to these orbital locations for
replacement satellites.
In addition to regulatory requirements governing the use of
orbital locations, most countries regulate transmission of
signals to and from their territory. Telesat Canada has landing
rights in more than 140 countries worldwide.
International
Regulatory Environment International
Telecommunication Union
The ITU is responsible for allocating the use by different
countries of a finite number of orbital locations and radio
frequency spectrum available for use by commercial
communications satellites. The ITU Radio Regulations set forth
the processes that governments must follow to apply for and
secure rights to use orbital locations and the obligations and
restrictions that govern such use. The ITU Radiocommunication
Bureau (ITU-BR) is responsible for receiving, examining,
tracking and otherwise managing the applications in the context
of the rules set forth in the Radio Regulations. The process
includes, for example, a first in time, first in
right system for assigning rights to orbital locations and
time limits for bringing orbital locations into use.
In accordance with the ITU Radio Regulations, as noted above,
the Canadian and other governments have rights to use certain
orbital locations and frequencies. These governments have in
turn authorized Telesat Canada to use several orbital locations
and radio frequencies in addition to those used by its current
satellites. Under the ITU Radio Regulations, Telesat Canada must
begin using these orbital locations and frequencies within a
fixed period of time, or the governments in question would lose
their priority rights and the orbital location and frequencies
likely would become available for use by another satellite
operator.
The ITU Radio Regulations also govern the process used by
satellite operators to coordinate their operations with other
nearby satellites, so as to avoid harmful interference. Under
current international practice, satellite systems are entitled
to protection from harmful radio frequency interference from all
other satellite systems and other transmitters in the same
frequency band only if the operators authorizing
government registers the orbital location, frequency and use of
the satellite system in the ITUs Master International
Frequency Register, or MIFR. Each member state is required to
give notice of, coordinate and register its proposed use of
radio frequency assignments and associated orbital locations
with the ITU-BR. This ensures that there is an orderly process
to accommodate each countrys orbital location needs.
Once a member state has advised the ITU-BR that it desires to
use a given frequency at a given orbital location, other member
states notify that state and the ITU-BR of any use or intended
use that would conflict with the original proposal. These
nations are then obligated to negotiate with each other in an
effort to coordinate the
13
proposed uses and resolve interference concerns. If all
outstanding issues are resolved, the member state governments so
notify the ITU-BR, and the frequency use is registered in the
MIFR. Following this notification, the registered satellite
networks are entitled under international law to interference
protection from subsequent or nonconforming uses. A state is not
entitled to invoke the protections in the ITU Radio Regulations
against harmful interference if that state decided to operate a
satellite at the relevant orbital location without completing
the coordination and notification process.
In the event disputes arise during the coordination process or
thereafter, the ITU Radio Regulations do not contain a mandatory
dispute resolution mechanism or an enforcement mechanism.
Rather, the rules invite a consensual dispute resolution process
for parties to reach a mutually acceptable agreement. Neither
the rules nor international law provide a clear remedy for a
party where this voluntary process fails. Some of Telesat
Canadas satellites have been coordinated and registered in
the MIFR and therefore enjoy priority over all later-filed
requests for coordination and any non-conforming uses. In other
cases, entry into the MIFR is still pending. While the ITU Radio
Regulations, however, set forth procedures for resolving
disputes, as a practical matter, there is no mandatory dispute
resolution and no mechanism by which to enforce an agreement or
entitlement under the rules.
Although non-governmental entities, including Telesat Canada,
participate at the ITU, only national administrations have full
standing as ITU members. Consequently, Telesat Canada must rely
on the government administrations of Canada, the United States,
Brazil, Tonga, the United Kingdom and China (respectively,
Industry Canada, the FCC, ANATEL, the Tonga administration,
OFCOM and MII through APT) to represent its interests in those
jurisdictions, including filing and coordinating orbital
locations within the ITU process with the national
administrations of other countries, obtaining new orbital
locations and resolving disputes through the consensual process
provided for in the ITUs rules.
PATENTS
AND PROPRIETARY RIGHTS
Satellite
Manufacturing
SS/L relies, in part, on patents, trade secrets and know-how to
develop and maintain its competitive position. It holds 183
patents in the United States and has applications for eight
patents pending in the United States. SS/L patents include those
relating to communications, station keeping, power control
systems, antennae, filters and oscillators, phased arrays and
thermal control as well as assembly and inspection technology.
The SS/L patents that are currently in force expire between 2009
and 2025.
Satellite
Services
Telesat Canada has 11 patents, all in the United States. These
patents expire between 2016 and 2021. Telesat Canada also has
three patents pending.
There can be no assurance that any of the foregoing pending
patent applications will be issued. Moreover, there can be no
assurance that infringement of existing third party patents has
not occurred or will not occur. Additionally, because the
U.S. and Canadian patent application process is
confidential, there can be no assurance that third parties,
including competitors, do not have patents pending that could
result in issued patents which we or Telesat Canada would
infringe. In such event, to obtain a license from a patent
holder, royalties would have to be paid, which would increase
the cost of doing business. Moreover, in the case of SS/L, it
would be required to refund money to customers for components
that are not useable as a result of such infringement or
redesign its products in a manner to avoid infringement. SS/L
may also be required under the terms of its customer contracts
to indemnify its customers for related damages.
14
RESEARCH
AND DEVELOPMENT
Satellite
Manufacturing
SS/Ls research and development expenditures involve the
design, experimentation and the development of space and
satellite products. Research and development costs are expensed
as incurred. SS/Ls research and development costs were
$35 million for 2008, $37 million for 2007 and
$20 million for 2006, respectively, and are included in
selling, general and administrative expenses.
Satellite
Services
Telesat Canadas research and development expenditures are
incurred for the studies associated with advanced satellite
system designs, and experimentation and development of space,
satellite and ground communications products. This also includes
the development of innovative and cost effective satellite
applications for sovereignty, defense, broadcast, broadband, and
enterprise services segments. Telesat Canada has undertaken
proof-of-concept
interactive broadband technologies trials to provide much needed
health, education, government and other applications to remote
and under-served areas. It continues to research advanced
compression and transmission technology to support HDTV and
other advanced television services and evaluate technology on
behalf of the World Broadcast Union and European Space Agency.
As a result of this work, Telesat Canada continues to maintain
an international reputation as a leader in the investigation and
development of both broadband and broadcast technologies and
applications. Telesat Canadas research and development
expenditures were approximately $2.7 million for 2008 and
$0.5 million for the two month period ended
December 31, 2007.
FOREIGN
OPERATIONS
Lorals sales to foreign customers, primarily in Asia,
Europe, Canada and Mexico represented 30%, 20% and 13% of our
consolidated revenues for the years ended December 31,
2008, 2007 and 2006, respectively.
Satellite
Manufacturing
SS/Ls sales to foreign customers, primarily in Asia,
Europe, Canada and Mexico, represented 29%, 16% and 6% of SS/L
revenues for the years ended December 31, 2008, 2007 and
2006, respectively. As of December 31, 2008 and 2007,
substantially all of our long-lived assets were located in the
United States. See Item 1A Risk Factors below
for a discussion of the risks related to operating
internationally. See Note 15 to the Loral consolidated
financial statements for detail on our domestic and foreign
sales.
Satellite
Services
Telesat Canadas sales to
non-U.S. customers,
primarily in Canada, Asia, Europe and Latin America represented
66% of its consolidated revenues for the year ended
December 31, 2008. At December 31, 2008, substantially
all of its long-lived assets were located outside of the United
States, primarily in Canada, with the exception of in-orbit
satellites.
EMPLOYEES
As of December 31, 2008, Loral had approximately
2,300 full-time employees and approximately 200 contract
employees, none of whom are subject to collective bargaining
agreements. Almost all of the foregoing employees are employed
in the satellite manufacturing segment. We consider our employee
relations to be good.
As of December 31, 2008, Telesat Canada, including
subsidiaries, had 455 full-time employees, approximately 2%
of whom are subject to collective bargaining agreements. Telesat
Canada considers its employee relations to be good.
15
AVAILABLE
INFORMATION
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports are available without charge on
our web site, www.loral.com, as soon as reasonably practicable
after they are electronically filed with or furnished to the
Securities and Exchange Commission. Copies of these documents
also are available in print, without charge, from Lorals
Investor Relations Department, 600 Third Avenue, New York, NY
10016. Lorals web site is an inactive textual reference
only, meaning that the information contained on the web site is
not part of this report and is not incorporated in this report
by reference.
|
|
I.
|
Financial
and Telesat Canada Investment Risk Factors
|
Our
revenues and profitability may be adversely affected by the
current global financial downturn, and negative global economic
conditions may have a material adverse effect on our customers
and suppliers.
Worldwide economic conditions have recently deteriorated
significantly affecting the global financial markets and have
caused significant reductions in available capital and liquidity
from banks and other providers of credit, substantial reductions
in equity and currency values in financial markets and extreme
volatility in credit, equity and fixed income markets and
general economic uncertainty. Continuing adverse global economic
conditions may have a materially adverse effect on us due to
potential insolvency of suppliers and customers, inability of
customers to obtain financing for their satellites and
transponder leases, decreased or delayed customer demand, delays
in supplier performance and contract terminations. Our customers
may not have access to capital or a willingness to spend capital
on satellites and transponder leases,
and/or their
levels of cash liquidity with which to pay for satellites and
transponder leases may be adversely affected. Further, the
economic downturn may adversely affect our suppliers
access to capital and liquidity with which to maintain their
inventories, production levels
and/or
product quality, could cause them to raise prices or result in
their ceasing operations. If global economic conditions remain
uncertain or deteriorate further, we may experience a material
adverse affect on our business, operating results and financial
condition. These potential effects of the current financial
situation are difficult to forecast and mitigate.
We have
had a history of losses.
We have had a history of losses and expect such losses to
continue in the near term. We incurred net losses of
approximately $693 million, $87 million (not including
the gain on the contribution of Loral Skynet to Telesat Canada
and related derivative gains of $194 million, and the tax
effect of $78 million), and $23 million for the years
ended December 31, 2008, 2007 and 2006, respectively. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations. There can be no
assurance that Loral will achieve profitability in the near
future.
The Space
Systems/Loral credit agreement is subject to financial and other
covenants that must be met for SS/L to utilize the Revolving
Facility.
On October 16, 2008, SS/L entered into a credit agreement
with several banks and other financial institutions. The SS/L
credit agreement provides for a $100 million senior secured
revolving credit facility. The revolver is for a term of three
years, maturing on October 16, 2011. This credit agreement
contains certain covenants, both financial and non-financial,
which SS/L must be able to meet to draw on the revolver. The
covenants include, among other things, a consolidated leverage
ratio test, a consolidated interest coverage ratio test and
restrictions on the incurrence of additional indebtedness,
capital expenditures, investments, dividends or stock
repurchases, asset sales, mergers and consolidations, liens,
changes to the line of business and other matters customarily
restricted in such agreements. There can be no assurances that
SS/L will be able to meet its covenant requirements and maintain
the availability to use the revolver. SS/Ls liquidity
would be materially and adversely affected if it is unable to do
so.
16
During
2008, we used significant cash in our operations. For 2009,
though we are projecting positive operating cash flow, there can
be no assurances that we will achieve this and have sufficient
funds to meet our cash requirements.
During 2008, the Company used cash of approximately
$252 million before borrowings. Though our projections for
2009 reflect positive operating cash flows , there can be no
assurances that we will be able to do so. We may be required to
obtain new financing, either in the form of debt or equity, to
increase our cash availability. In light of current market
conditions, there can be no assurance that we will be able to
obtain such financing on favorable terms, if at all. If we are
not successful in obtaining such financing, our ability to
manage unforeseen cash requirements, to meet contingencies and
to fund growth opportunities will be materially and adversely
affected.
Loral
Space & Communications Inc., the parent company, is a
holding company with no operations; we are dependent on cash
flow from our operating subsidiaries and affiliates to meet our
financial obligations.
The parent company is a holding company with three primary
assets, its equity interests in its wholly-owned subsidiary,
SS/L, and its affiliates, Telesat Canada and XTAR. The parent
company has no independent operations or operating assets. The
ability of SS/L, Telesat Canada and XTAR to make payments or
distributions to the parent company, whether as dividends or as
payments under applicable management agreements or otherwise,
will depend on their operating results, including their ability
to satisfy their own cash flow requirements and obligations
including, without limitation, their debt service obligations.
Moreover, covenants contained in the debt agreements of SS/L and
Telesat Canada impose substantial limitations on their ability
to remit funds to the parent company. Even if the applicable
debt covenants would permit Telesat Canada to pay dividends, the
parent company will not have the ability to cause Telesat Canada
to do so. See below While we own 64% of Telesat Canada on
an economic basis, we own only
331/3%
of its voting stock and therefore do not have the right to elect
or appoint a majority of its Board of Directors. Likewise,
any dividend payments by XTAR would require the prior consent of
our Spanish partner in the joint venture.
The parent company earns a management fee of $5 million a
year from Telesat Canada. Telesat Canadas loan documents
permit this management fee from Telesat Canada to be paid to the
parent company only in the form of notes, with such fee becoming
payable in cash only at such time that Telesat Canada meets
certain financial performance criteria set forth in the loan
documents. We do not expect Telesat Canada to be able to meet
this criteria in the next year.
SS/L pays the parent company a management fee of
$1.5 million in cash each year. The parent company also
allocates a portion of its annual overhead expenses to SS/L. The
parent company did not require SS/L to make any overhead expense
allocation payments to it in 2008. The SS/L credit agreement
restricts payment to the parent company to an amount not to
exceed $15 million in any fiscal year and imposes a
liquidity restriction that must be met for SS/L to make such
payment. There can be no assurance that SS/L will be permitted
to make these payments in the future.
While we
own 64% of Telesat Canada on an economic basis, we own only
331/3%
of its voting stock and therefore do not have the right to elect
or appoint a majority of its Board of Directors.
Because of Canadian foreign ownership restrictions, while we own
64% of the economic interests of Telesat Canada, we hold only
331/3%
of its voting interests and cannot hold additional voting power
in Telesat Canada absent a change in law. The governance and
management of Telesat Canada is vested in its ten-member Board
of Directors, comprised of three Loral appointed directors,
three PSP appointed directors and four independent directors,
two of whom also own Telesat Canada shares with nominal economic
value and 30% and
62/3%
of the voting interests for Telesat Canada directors,
respectively. While we own a greater voting interest in Telesat
Canada than any other single stockholder with respect to
election of directors and we and PSP, which owns 30% of the
voting interests for directors and
662/3%
of the voting interests for all other matters, together own a
majority of Telesat Canadas voting power, circumstances
may occur where our interests and those of PSP diverge or are in
conflict. In that case, PSP, with the agreement of at least
three of the four independent directors may, subject to veto
rights that we have under Telesat Canadas shareholders
agreement, cause Telesat Canada to take actions contrary to
17
our wishes. These veto rights are however, limited to certain
extraordinary actions for example, the incurrence of
more than $100 million of indebtedness or the purchase of
assets at a cost in excess of $100 million. Moreover, our
right to block these actions under the shareholders agreement
falls away if either (i) ownership or control, directly or
indirectly by Dr. Mark H. Rachesky (President of MHR
Fund Management LLC, or MHR, which, through its affiliated
funds is our largest stockholder) of our voting stock falls
below certain levels or (ii) there is a change in the
composition of a majority of the members of Lorals board
of directors over a consecutive two-year period.
Our
equity investment in Telesat Canada may be at risk because
Telesat Canada is highly leveraged.
At December 31, 2008, Telesat Canada had outstanding
indebtedness of CAD 3.5 billion and additional borrowing
capacity of CAD 153 million under its revolving facility,
based on a U.S. dollar/Canadian dollar exchange rate of
$1.00/CAD 1.2188. Approximately CAD 2.5 billion of this
total borrowing capacity is secured debt that is secured by
substantially all of the assets of Telesat Canada. This
indebtedness represents a significant amount of indebtedness for
a company the size of Telesat Canada. The agreements governing
this indebtedness impose operating and financial restrictions on
Telesat Canadas activities. These restrictions on Telesat
Canadas ability to operate its business could seriously
harm its business by, among other things, limiting its ability
to take advantage of financing, merger and acquisition and other
corporate opportunities, which could in time adversely affect
the value of our investment in Telesat Canada.
As of December 31, 2008, Telesat Canada has indebtedness of
$2.0 billion which bears interest at variable rates. If
market interest rates were to rise, this would result in higher
debt service requirements. To alleviate a portion of this risk,
in 2007 Telesat Canada entered into interest rate swaps that
converts $600 million of its outstanding floating
U.S. dollar debt and CAD 630 million of its
outstanding Canadian dollar debt into fixed rate debt for
periods extending into 2010 and 2011. In 2008, Telesat Canada
converted its bridge loan facilities into fixed rate securities.
Telesat Canadas indebtedness includes $1.7 billion
that is denominated in U.S. dollars and is unhedged with
respect to foreign exchange rates. Unfavorable exchange rate
changes could impact Telesat Canadas ability to repay or
refinance this debt.
A breach of the covenants contained in any of Telesat
Canadas loan agreements, including without limitation, a
failure to maintain the financial ratios required under such
agreements, could result in an event of default. If an event of
default were to occur, the lenders would be able to accelerate
repayment of the related indebtedness, and it may also trigger a
cross default under other Telesat Canada indebtedness. If
Telesat Canada is unable to repay its secured indebtedness when
due (whether at the maturity date or upon acceleration as a
result of a default), the lenders will have the right to proceed
against the collateral granted to them to secure such
indebtedness, which consists of substantially all of the assets
of Telesat Canada and its subsidiaries. Telesat Canadas
ability to make payments on, or repay or refinance its debt,
will depend largely upon its future operating performance. In
the event that Telesat Canada is not able to service its
indebtedness, there would be a material adverse effect on the
value of our equity investment in Telesat Canada.
Telesat Canada also has CAD 141 million of 7% senior
preferred stock that may be redeemed by the holders thereof
commencing October 31, 2019, which preferred stock enjoys
rights of priority over the Telesat Canada equity securities
held by us.
Certain
asset sales by Telesat Canada may trigger material adverse tax
consequences for us.
Upon completion of the Telesat Canada transaction, we deferred a
tax gain of approximately $308 million arising from the
contribution by Loral Skynet to Telesat Canada of substantially
all of its assets and related liabilities. However, if Telesat
Canada were to sell or otherwise dispose of substantially all of
such contributed assets in a taxable transaction prior to
November 1, 2012, we would be required to recognize this
deferred gain with retroactive effect to 2007, resulting in
additional tax liability to us of approximately
$119 million plus interest. Telesat Canada has agreed that
prior to November 1, 2012, without our prior consent, it
will not dispose of assets having a value, whether individually
or in the aggregate, in excess of $50 million if such
disposition would, in our reasonable determination, result in an
adverse tax consequence to us. If we were to exercise this veto
right and
18
prevent Telesat Canada from consummating such an asset sale, it
may, however, adversely affect the value of our investment in
Telesat Canada.
The
Telesat Canada information in this report is based solely on
information provided to us by Telesat Canada.
Because we do not control Telesat Canada, we do not have the
same control and certification processes with respect to the
information contained in this report on our satellite services
segment that we have for the reporting on our satellite
manufacturing segment. We are also not involved in managing
Telesat Canadas day to day operations. Accordingly, the
Telesat Canada information contained in this report is based
solely on information provided to us by Telesat Canada and has
not been separately verified by us.
Telesat
Canadas financial results and our U.S. dollar
reporting of Telesat Canadas financial results will be
affected by volatility in the Canadian/U.S. dollar exchange
rate.
Portions of Telesat Canadas revenue, expenses and debt are
denominated in U.S. dollars and changes in the
U.S. dollar/Canadian dollar exchange rate can have a
negative impact on Telesat Canadas financial results and
impact the ability of Telesat Canada to repay or refinance its
borrowings.
Loral reports its investment in Telesat Canada in
U.S. dollars while Telesat Canada reports its financial
results in Canadian dollars. Loral reports its investment in
Telesat Canada using the equity method of accounting. As a
result, Telesat Canadas results of operations will be
subject to conversion from Canadian dollars to
U.S. dollars. Changes in the U.S. dollar relationship
to the Canadian dollar will affect how the financial results as
they relate to Telesat Canada are reported in our financial
statements. There was a significant movement in USD/CAD exchange
rates during 2008; the exchange rate moved from US$1.00/CAD
.9984 at December 31, 2007 to US$1.00/CAD 1.2188 at
December 31, 2008.
Our
indebtedness makes us vulnerable to adverse
developments.
On October 16, 2008, SS/L entered into a $100 million
secured credit agreement that contains financial and
non-financial covenants which SS/L must operate under if it is
to maintain the availability of the facility. There are
currently no restrictions on the parent company to incur
additional indebtedness. Restrictions that had existed under the
terms of the February 2007 Loral preferred stock financing have
been removed with the Implementing Order issued by the Court of
Chancery of the State of Delaware in the In re: Loral
Space & Communications Consolidated Litigation. If
new debt is added, such indebtedness could impose additional
restrictive covenants. The incurrence of the SS/L debt and any
additional significant debt that we may incur, makes us
vulnerable to, among other things, adverse changes in general
economic, industry and competitive conditions.
XTAR has
not generated sufficient revenues to meet all of its contractual
obligations, which are substantial.
XTARs
take-up rate
in its service has been slower than anticipated. As a result, it
has deferred certain payments owed to us, Hisdesat and Telesat
Canada, including payments due under an agreement with Hisdesat
to lease certain transponders on the Spainsat satellite. These
lease obligations were $13.2 million in 2007 and
$23 million in 2008 with increases thereafter to a maximum
of $28 million per year through the end of the useful life
of the satellite. As of December 31, 2008, XTARs
lease payables to Hisdesat were $32.3 million. While
Hisdesat has agreed to defer amounts owed to it under this lease
agreement, XTARs lease obligations to Hisdesat, which will
aggregate in excess of $356 million over the life of the
satellite, are substantial, especially in light of XTARs
limited revenues to date. XTAR has agreed that most of its
excess cash balance would be applied towards making limited
payments on these lease obligations, as well as payments of
other amounts owed to Hisdesat and Telesat Canada in respect of
services provided by them to XTAR. Unless XTAR is able to
generate a substantial increase in its revenues, these lease
obligations will continue to accrue and grow, which may have a
material and adverse effect on our equity interests in XTAR. As
of December 31, 2008, $1.3 million was due to Loral
from XTAR.
19
Significant
changes in discount rates, actual investment return on pension
assets and other factors could affect our statement of
operations, equity and pension contributions in future
periods.
Our statement of operations may be positively or negatively
affected by the amount of expense we record for our pension and
other postretirement benefit plans. Generally accepted
accounting principles in the United States (GAAP) require that
we calculate expense for the plans using actuarial valuations.
These valuations reflect assumptions that we make relating to
financial market and other economic conditions. Changes in key
economic indicators can result in changes in the assumptions we
use. The most significant year-end assumptions used to estimate
pension or other postretirement expense for the following year
are the discount rate, the expected long-term rate of return on
plan assets and expected future medical inflation. In addition,
we are required to make an annual measurement of plan assets and
liabilities and, at the time of the measurement, we may be
required to take a significant charge to equity through a
reduction to other comprehensive income. For a discussion
regarding how our financial statements can be affected by
pension and other postretirement plan accounting policies, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Matters Pensions and other employee
benefits. During 2008, we recorded expense of
$9.5 million related to pension and other postretirement
benefit plans and made $31 million in employer
contributions. During 2009, based upon current estimates, we
expect to expense approximately $21.5 million related to
pension and other postretirement benefit plans and make
approximately $28 million in employer contributions. Our
expense and contributions in the future will depend, among other
things, on the key economic factors underlying these assumptions.
The increase in expense from 2008 to 2009 is the result of the
reduction in the value of our plan assets caused by significant
declines in the financial markets. This expense increase is
comprised of the lower expected return on plan assets and
amortization of actuarial losses. Although cash contributions in
2009 are not projected to exceed 2008 contributions, we expect
significant increases in funding requirements subsequent to
2009. Additional asset decreases like those experienced during
2008 could further increase future expenses recognized in our
statement of operations and increase, typically over seven
years, the requirement for future cash contributions by us.
Risk
Factors Associated With Satellite Manufacturing
The
satellite manufacturing market is highly competitive and fixed
costs are high.
SS/L competes with several large, well-capitalized companies
such as Lockheed Martin, Boeing and Orbital Sciences in the
United States, Thales Alenia Space and EADS Astrium in Europe
and Mitsubishi Electric Corp. in Japan, nearly all of which are
larger and better capitalized than we are. SS/L may also face
competition in the future from emerging low-cost competitors in
India, Russia and China. The number of annual satellite
manufacturing awards varies and is difficult to predict. In
addition, U.S. satellite manufacturers must comply with
U.S. export control and other federal regulations that put
them at a disadvantage when competing for foreign customers.
Moreover, as a result of our acquisition of Telesat Canada, SS/L
may experience difficulty in obtaining orders from certain
customers engaged in the satellite services business who compete
with Telesat Canada. Our financial performance is dependent on
SS/Ls ability to generate a sustainable order rate and to
continue to increase its backlog. The satellite manufacturing
industry has suffered from substantial overcapacity worldwide
for a number of years, resulting in extreme competitive pressure
on pricing terms and other material contractual terms, such as
those allocating risk between the manufacturer and its
customers. Buyers, as a result, have had the advantage over
suppliers in negotiating prices, terms and conditions resulting
in reduced margins and increased assumption of risk by SS/L.
SS/L is a large-scale systems integrator, requiring a large
staff of highly-skilled and specialized workforce, as well as
specialized manufacturing and test facilities in order to
perform under its satellite construction contracts. In order to
maintain its ability to compete as one of the leading prime
contractors for technologically advanced space satellites, SS/L
must continuously retain the services of a core group of
specialists in a wide variety of disciplines for each phase of
the design, development, manufacture and testing of its
products, thus reducing SS/Ls flexibility to take action
to reduce workforce costs in the event of a slowdown or downturn
in its business. Further,
20
SS/Ls ability to compete is dependent upon its maintaining
specialized manufacturing and test facilities with fixed costs
that cannot be adjusted to account for significant variance in
production requirements or economic conditions.
SS/Ls
contracts are subject to adjustments, cost overruns and
termination.
SS/Ls major contracts are firm fixed-price contracts under
which work performed and products shipped are paid for at a
fixed price without adjustment for actual costs incurred. While
cost savings under these fixed-price contracts result in gains
to SS/L, cost increases result in reduction of margins or
losses, borne solely by SS/L. Under such contracts, SS/L may
receive progress payments, or it may receive partial payments
upon the attainment of certain program milestones. If
performance on these milestones is delayed, SS/Ls receipt
of the corresponding payments will also be delayed. As the prime
contractor, SS/L is generally liable to its customer for
schedule delays and other non-performance by SS/Ls
suppliers, which may be largely outside of its control.
Non-performance can increase costs and subject SS/L to damage
claims from customers and termination of the contract for
SS/Ls default. A failure by SS/L to deliver a satellite to
its customer by the specified delivery date, which may result
from factors beyond SS/Ls control, such as delayed
performance or non-performance by its subcontractors or failure
to obtain necessary governmental licenses for delivery, would
also be harmful to SS/L unless mitigated by applicable contract
terms, such as excusable delay. As a general matter, SS/Ls
failure to deliver beyond any contractually provided grace
period would result in the incurrence of liquidated damages by
SS/L, which may be substantial, and if SS/L is still unable
deliver the satellite upon the end of the liquidated damages
period, the customer will generally have the right to terminate
the contract for default. If a contract is terminated for
default, SS/L would be liable for a refund of customer payments
made to date, and could also have additional liability for
excess re-procurement costs and other damages incurred by its
customer, although SS/L would own the satellite under
construction and attempt to recoup any losses through resale to
another customer. A contract termination for default could have
a material adverse effect on SS/L and us.
In addition, many of SS/Ls contracts may be terminated for
convenience by the customer or the prime contractor. In the
event of such a termination, SS/L is normally entitled to
recover the purchase price for delivered items, reimbursement
for allowable costs for work in process and an allowance for
profit or an adjustment for loss, depending on whether
completion of the project would have resulted in a profit or
loss.
SS/Ls accounting for long-term contracts requires
adjustments to profit and loss based on estimates revised during
the execution of the contract. These adjustments may have a
material effect on our consolidated financial position and our
results of operations in the period in which they are made. The
estimates giving rise to these risks, which are inherent in
long-term, fixed-price contracts, include the forecasting of
costs and schedules, contract revenues related to contract
performance and the potential for component obsolescence due to
procurement long before assembly.
Certain
of SS/Ls customers are not creditworthy and may not
fulfill their contractual payment obligations to SS/L.
Historically, SS/Ls customers have been primarily large
multinational corporations and U.S. and foreign governments
for which the creditworthiness was generally substantial. In
recent years, however, SS/L has added commercial customers that
are highly leveraged, as well as those in the development stage
that are only partially funded. There is a risk that these
customers will be unable to meet their payment obligations to
SS/L under their construction contracts. This risk is increased
due to the current economic conditions. A customers
inability to fulfill its payment obligations to SS/L may
materially and adversely affect SS/Ls revenues.
Moreover, some of SS/Ls contracts require SS/L to provide
vendor financing to its customers or, more customarily, for
customers to pay a portion of the purchase price for the
satellite over time subject to performance of the satellite,
i.e., orbital payments, or a combination of these terms. To the
extent that SS/L provides vendor financing to customers, its
financial exposure is further increased. In some cases, these
arrangements are provided to customers that are
start-up
companies, companies in the early stages of building their
businesses or highly leveraged companies, in some cases, with
near-term debt maturities. As of December 31, 2008, SS/L
had recorded orbital receivables of $181 million, of which
$74 million was from these companies. There can be no
assurance that
21
these companies or their businesses will be successful and,
accordingly, that they will be able to fulfill their payment
obligations under their contracts with SS/L.
SS/L may
forfeit payments from customers as a result of satellite
failures or losses after launch or may be liable for penalty
payments under certain circumstances, and these losses may be
uninsured.
Most of SS/Ls satellite manufacturing contracts provide
that some of the total price is contingently payable as
incentive payments earned over the life of the
satellite, subject to satellite performance. SS/L generally does
not insure for these incentive payments (also known as orbital
payments) and in some cases agrees with its customers not to
insure them.
SS/L records the present value of orbital payments as revenue
during the construction of the satellite. SS/L generally
receives the present value of these incentive payments if there
is a launch failure or a failure caused by customer error. SS/L
forfeits some or all of these payments, however, if the loss is
caused by satellite failure or as a result of its own error. As
of December 31, 2008, SS/L had orbital receivables of
$181 million to be received over 15 years from launch.
Since these orbital receivables could be affected by future
satellite performance, there can be no assurance that SS/L will
be able to collect all or a portion of these receivables. See
above SS/Ls contracts are subject to adjustments,
cost overruns and termination.
Some of SS/Ls contracts call for in-orbit delivery,
transferring the launch risk to SS/L. SS/L generally insures
against that exposure. In addition, some of SS/Ls
contracts provide that SS/L may be liable to a customer for
penalty payments under certain circumstances, including late
delivery or that a portion of the price paid by the customer is
subject to warranty payback in the event satellite
anomalies were to develop (see Note 14 to the Loral
consolidated financial statements). These contingent liabilities
are not insured by SS/L. We have recorded reserves in our
financial statements based on our current estimates of
SS/Ls warranty liabilities. There is no assurance that
SS/Ls actual liabilities to its customers in respect of
these warranty liabilities will not be greater than the amount
reserved for.
Some
satellites built by SS/L, including three satellites operated by
Telesat Canada, have experienced minor losses of power from
their solar arrays.
Twenty-seven satellites built by SS/L have experienced partial
losses of power from their solar arrays. There can be no
assurance that one or more will not experience an additional
power loss that could lead to a loss of transponder capacity and
performance degradation. A partial or complete loss of a
satellite could result in an incurrence of warranty payments by,
or a loss of orbital incentive payments to, SS/L. SS/L has
implemented remediation measures that SS/L believes will prevent
satellites launched after June 2001 from experiencing similar
anomalies. For further details see Note 14 to the Loral
consolidated financial statements.
Some
satellites built by SS/L have the same design as another
SS/L-built satellite that has experienced a partial
failure.
In November 2004, Galaxy 27 (formerly Telstar
7) experienced an anomaly which caused it to completely
cease operations for several days before it was partially
recovered. In June 2008, Galaxy 26 (formerly Telstar
6) experienced a similar anomaly which caused the loss of
power to one of the satellites solar arrays. Three other
satellites manufactured by SS/L for other customers have designs
similar to Galaxy 27 and Galaxy 26 and, therefore, could be
susceptible to similar anomalies in the future. A partial or
complete loss of these satellites could result in the incurrence
of warranty payments by SS/L of up to $4.6 million, of
which $0.9 million has been accrued as of December 31,
2008.
We are
subject to export control and economic sanctions laws, which may
result in delays, lost business and additional costs.
SS/L is required by the U.S. State Department to obtain
licenses and enter into technical assistance agreements to
export satellites and related equipment and to disclose
technical data or provide defense services to foreign persons.
In addition, if a satellite project involves countries,
individuals or entities that are the subject of
U.S. economic sanctions, which we refer to here as
Sanctions Targets, or is intended to provide services to
Sanctions
22
Targets, SS/Ls participation in the project may be
prohibited altogether or licenses or other approvals from the
U.S. Treasury Departments Office of Foreign Assets
Control (OFAC) may be required. The delayed receipt
of or the failure to obtain the necessary U.S. Government
licenses, approvals and agreements may prohibit entry into or
interrupt the completion of a satellite contract by SS/L and
could lead to a customers termination of a contract for
SS/L default, monetary penalties
and/or the
loss of incentive payments. We have in the past failed to obtain
the export licenses necessary to deliver satellites to our
Chinese customers.
Some of our customers and potential customers, along with
insurance underwriters and brokers, have asserted that
U.S. export control laws and regulations governing
disclosures to foreign persons excessively restrict their access
to information about the satellite during construction and
on-orbit. OFAC sanctions and requirements may also limit certain
business opportunities or also delay or restrict our ability to
contract with potential foreign customers or operators. To the
extent that our
non-U.S. competitors
are not subject to these export control or economic sanctions
laws and regulations, they may enjoy a competitive advantage
with foreign customers, and, to the extent that our foreign
competitors continue to gain market share, it could become
increasingly difficult for the U.S. satellite manufacturing
industry, including SS/L, to recapture this lost market share.
For example, one of our European competitors, Thales Alenia
Space, is offering ITAR-free telecommunications
satellites, that purport to contain no components obtained from
United States sources who are subject to the export and
re-export limitations imposed by the U.S. International
Traffic in Arms Regulations or ITAR. Customers concerned over
the possibility that the U.S. government may deny the
export license necessary for SS/L to deliver to them their
purchased satellite, or the restrictions or delays imposed by
the U.S. government licensing requirements even where an
export license is granted, may elect to choose a purportedly
ITAR-free satellite over an SS/L satellite. We are
further disadvantaged by the fact that an ITAR-free
satellite can be launched in China on the substantially cheaper
Chinese Long March rocket, a launch vehicle that, because of
ITAR restrictions, is not available to SS/L or other suppliers
subject to ITAR restrictions.
The
recent trend toward industry consolidation in the satellite
services industry may adversely affect us; we do not control
satellite procurement decisions at Telesat Canada.
The recent industry consolidation trend has resulted in the
formation of satellite operators with greater satellite
resources and increased coverage. This consolidation may reduce
demand for new satellite construction as operators may need
fewer satellites in orbit to provide
back-up
coverage or to rationalize the amount of capacity available in
certain geographic regions. It may also result in concentrating
additional bargaining power in the hands of large customers,
which could increase pressure on pricing and other contractual
terms.
In the past, Loral Skynet has purchased all of its satellites
from SS/L. We do not, however, control satellite procurement
decisions at Telesat Canada, and there can be no assurance that
Telesat Canada will purchase additional satellites from SS/L.
Moreover, any decision relating to the enforcement of existing
or future satellite contracts between Telesat Canada and SS/L
will be made on arms length terms and, in certain cases, subject
to approval by the disinterested directors of Telesat Canada.
The
availability of facility space and qualified personnel may
affect SS/Ls ability to perform its contracts in a timely
and efficient manner.
SS/L has won a number of satellite construction awards over the
last few years and, as a result, its backlog has expanded
significantly. In order to complete construction of all the
satellites in backlog and to enable future growth, SS/L has
modified and expanded its manufacturing facilities. SS/L can now
accommodate as many as nine to 13 satellite awards per year,
depending on the complexity and timing of the specific
satellites, and can accommodate the integration and test of 13
to 14 satellites at any given time in its Palo Alto facility.
Nevertheless, due to scheduling requirements, SS/L is reliant on
availability of outside suppliers for certain production and
testing activities, and there can be no assurance that such
outside suppliers will be able to accommodate SS/Ls
schedule requirements. Further, there can be no assurance that
SS/L will be able to hire or retain enough employees with the
requisite skills and training and, accordingly, SS/L may not be
able to perform its contracts as efficiently as planned or grow
its business to the planned level.
23
Our
ability to obtain certain satellite contract awards depends, in
part, on our ability to provide the customer with
financing.
During its history, SS/L has provided financing to customers to
enable it to win certain contracts. The financing has been in
the form of orbital receivables, vendor financing, loans and
direct investments in our customer. The SS/L Credit Agreement
limits SS/Ls ability to provide the customer with
financing. If SS/L is unable to provide financing to the
customer, it could lose the construction contract to a
competitor who could provide financing.
SS/L
relies on certain key suppliers whose failure or delay in
performance would adversely affect us.
To build its satellites, SS/L relies on suppliers, some of whom
are competitors of SS/L, to provide it with certain component
parts. The number of suppliers capable of providing these
components are limited, and in some cases, the supplier is in a
sole source position based upon the unique nature of its product
or customer requirement to procure components with proven flight
heritage whenever possible. These suppliers are not all large,
well-capitalized companies, and to the extent they were to
experience financial difficulties, their ability to timely
deliver to SS/L components that satisfy SS/Ls customer
contractual specifications could be impaired. In the past,
SS/Ls performance under its construction contracts with
its customers has been adversely affected because of a
suppliers failure or delay in performance. As discussed
above under SS/Ls contracts are subject
to adjustments, cost overruns and termination, a failure
by SS/L to meet its contractual delivery requirements could well
give rise to liquidated damage payments by SS/L
and/or a
customers termination of its construction contract with
SS/L for default.
We face
risks in conducting business internationally.
For the year ended December 31, 2008, approximately 29% of
SS/Ls revenue was generated from customers outside of the
United States. SS/L could be harmed financially and
operationally by changes in foreign regulations and
telecommunications standards, tariffs or taxes and other trade
barriers that may be imposed on its services or by political and
economic instability in the countries in which it conducts
business. Almost all of SS/Ls contracts with foreign
customers require payment in U.S. dollars, and customers in
developing countries could have difficulty obtaining
U.S. dollars to pay SS/L due to currency exchange controls
and other factors. Exchange rate fluctuations may adversely
affect the ability of SS/L customers to pay in
U.S. dollars. If SS/L needs to pursue legal remedies
against its foreign business partners or customers, it may have
to sue them abroad where it could be difficult for SS/L to
enforce its rights.
We rely
on patents, trade secrets and know-how.
SS/L relies, in part, on patents, trade secrets and know-how to
develop and maintain its competitive position. It holds 183
patents in the United States and has applications for eight
patents pending in the United States. SS/L patents include those
relating to communications, station keeping, power control
systems, antennae, filters and oscillators, phased arrays and
thermal control as well as assembly and inspection technology.
The SS/L patents that are currently in force expire between 2009
and 2025. Further, there is a risk that competitors could
challenge or infringe SS/Ls patents.
Risk
Factors Associated With Satellite Services
Telesat
Canada derives a substantial amount of its revenues from only a
few of its customers. A loss of one or more of these major
customers, or a material adverse change in any of such
customers business, could materially reduce its revenues
and backlog.
Telesat Canadas top five customers, which include Bell TV
(formerly Bell ExpressVu) and Star Choice, account for 42% of
its revenues for the year ending December 31, 2008, and 80%
of its backlog at December 31, 2008. Any of these major
customers could refuse to renew their contracts or could seek to
negotiate concessions. If its customers experience a downturn in
their business, these customers may find themselves in financial
difficulties or consolidate, which could result in their ceasing
or reducing their use of Telesat Canadas services or
becoming unable to pay for services which they had contracted to
buy. Additionally, Bell TV is a part of BCE. Since Telesat
24
Canada is no longer affiliated with BCE, there can be no
assurance that Bell TV will continue using Telesat Canadas
services after the expiration of its current contracts or
continue to increase its use of Telesat Canadas services
consistent with its past practice. A loss of a major customer
would have a material adverse effect on Telesat Canadas
results of operations, business prospects and financial
condition, which would in turn adversely affect us.
Launch
delays or failures may result in delays in operations.
Delays in launching satellites are not uncommon and result from
construction delays, the unavailability of appropriate launch
vehicles, launch failures and other factors. Delays in satellite
launches would result in delays in Telesat Canadas
revenues, could affect plans to replace an in-orbit satellite
prior to the end of its useful life, could result in the
expiration or cancellation of launch insurance, could result in
the loss of orbital slot rights and may result in termination of
its customer contracts. Upon such termination, Telesat Canada
would be required to refund any prepayments made to it by its
terminating customers, which in the case of its major customers,
may be substantial.
Satellite launches are risky, and some launch attempts have
ended in complete or partial failure. A significant delay or
launch failure of a Telesat Canada satellite may have a material
adverse effect on Telesat Canadas results of operations,
business prospects and financial condition, which in turn would
have a material adverse effect on our results and condition.
For example, the March 15, 2008 failure of a Proton rocket
to lift its satellite payload to the appropriate orbit caused a
delay in the planned launch of the Nimiq 4 satellite, originally
scheduled to be launched on a Proton rocket in mid-2008.
Although Nimiq 4 successfully launched in September, 2008, the
launch delay adversely affected Telesat Canadas financial
performance for 2008 and deferred the backlog run-off previously
anticipated. The launch of Nimiq 5, which is planned for the
second half of 2009, may likewise also be delayed if the launch
vehicle on which it is scheduled to be launched suffers a
failure prior to the launch of Nimiq 5.
After
launch, satellites remain vulnerable to in-orbit failures which
may result in reduced revenues and profits and other financial
consequences.
Satellites utilize highly complex technology and operate in the
harsh environment of space and therefore are subject to
significant operational risks while in orbit. In-orbit damage to
or loss of a satellite before the end of its expected life
results from various causes, some random, including component
failure, degradation of solar panels, loss of power or fuel,
inability to maintain the satellites position, solar and
other astronomical events and space debris.
Some of Telesat Canadas satellites have had malfunctions
and other anomalies, and in certain cases are currently
operating using
back-up
components because of the failure of their primary components.
If the
back-up
components fail, however, and Telesat Canada is unable to
restore redundancy, these satellites could lose capacity or be
total losses. Any single anomaly or series of anomalies or other
failure could cause Telesat Canadas revenues, cash flows
and backlog to decline materially, could require it to recognize
an impairment loss and could require Telesat Canada to expedite
its satellite replacement program, affecting its profitability
and increasing its financing needs. It could also require
Telesat Canada to repay prepayments made by customers of the
affected satellite. It could also result in a customer
terminating its contract for service on the affected satellite.
If the affected satellite involves one of Telesat Canadas
major customers, there could be a material adverse effect on
Telesat Canadas operations, prospects, results and
financial condition, which in turn would adversely affect us.
It may be
difficult to obtain full insurance coverage for satellites that
have, or are part of a family of satellites that has,
experienced problems in the past; moreover, not all
satellite-related losses will be covered by insurance.
Telesat Canadas satellite insurance does not protect it
against all satellite-related losses. For example, satellite
insurance will not protect it against business interruption,
lost revenues or delay of revenues. Telesat Canada also does not
have in-orbit insurance coverage for all of the satellites in
its fleet. Telesat Canadas existing launch and in-orbit
insurance policies include, and future policies are expected to
include, specified exclusions, deductibles and material change
limitations. Typically, these insurance policies exclude
coverage for damage
25
arising from acts of war and other exclusions then customary in
the industry. In addition, they typically exclude coverage for
health-related problems affecting satellites that are known at
the time the policy is written. To the extent Telesat Canada
experiences a launch or in-orbit failure that is not fully
insured, or for which insurance proceeds are delayed or
disputed, it may not have sufficient resources to replace the
affected satellite.
Launch and in-orbit policies on satellites may not continue to
be available on commercially reasonable terms or at all. The
loss of a satellite may have a material adverse effect on
Telesat Canadas results of operations, business prospects
and financial condition, which may not be adequately mitigated
by insurance coverage.
Telesat
Canada competes for market share, customers and orbital
slots.
A trend toward consolidation of major FSS providers has resulted
in the creation of global competitors which are substantially
larger than Telesat Canada in terms of both the number of
satellites they have in orbit as well as in terms of their
revenues. Due to their larger sizes, these operators are able to
take advantage of greater economies of scale, may be more
attractive to customers, and may have greater flexibility to
restore service to their customers in the event of a partial or
total failure. Telesat Canada also faces competition from
regional operators, which may enjoy competitive advantages in
their local markets. Telesat Canadas affiliation with us
may also adversely affect its ability to compete for certain
contracts, especially in its consulting services business. In
addition, Telesat Canada competes for local regulatory approval
in places where more than one provider may want to operate and
for scarce frequency assignments and fixed orbital positions.
Telesat Canadas business is also subject to competition
from ground based forms of communications technology. For many
point-to-point
and other services, the offerings provided by terrestrial
companies can be more competitive than the services offered via
satellite. New technology could also render satellite-based
services less competitive by satisfying consumer demand in other
ways. Telesat Canadas failure to compete effectively would
result in, among other things, a loss of revenue and a decline
in profitability, and a decrease in the value of its business.
Changes
in the Canadian competitive environment could adversely affect
Telesat Canada.
A substantial portion of Telesat Canadas business is
expected to continue in the Canadian domestic market. This
market is characterized by increasing competition and rapid
technological development among satellite providers. The
Canadian regulatory framework has always required the use of
Canadian-licensed satellites for the delivery of DTH programming
in Canada. It is possible that this framework could change and
allow non-Canadian satellite operators to compete for future
business from DTH customers, which constitute some of Telesat
Canadas major customers.
Industry Canada, the Canadian telecommunications authority, has
authorized Telesat Canada to operate at a number of orbital
locations. Industry Canada has also awarded a significant number
of licenses to a new Canadian satellite provider, Ciel Satellite
Group, including licenses to spectrum suitable for providing a
variety of satellite services to Canadian customers. Increased
competition in Canada may adversely affect Telesat Canadas
access rights to certain Canadian orbital locations, which in
turn could adversely affect Telesat Canadas results of
operations, business prospects and financial condition.
Telesat
Canada operates in a highly regulated industry and government
regulations may adversely affect its business.
Telesat Canada is subject to the laws of Canada and the United
States and the telecommunications regulatory authorities of the
Canadian government, primarily the Canadian Radio-Television and
Telecommunications Commission, or CRTC, and Industry Canada, as
well as those of the United States government, primarily the
Federal Communications Commission, or FCC, the International
Telecommunications Union, or the ITU, the European Union,
Brazil, China and Isle of Man. It is also subject to the laws
and regulations of other countries to, from or within which it
provides services. Regulatory authorities can modify, withdraw
or impose charges or conditions upon, or deny or delay action on
applications for, the licenses Telesat Canada needs for its
business, including its access rights to orbital positions.
Countries or regulatory authorities may adopt new laws, policies
or
26
regulations, change their interpretation of existing laws,
policies or regulations or otherwise take actions in a manner
that could adversely affect Telesat Canadas operations or
revenues.
To prevent frequency interference, the regulatory process
requires potentially lengthy and costly negotiations with third
parties who operate or intend to operate satellites at or near
the locations of Telesat Canada satellites. These negotiations
have resulted in financial concessions in the past and there can
be no assurance that such concessions may not be required in the
future. The failure to reach an appropriate arrangement with a
third party having priority rights at or near one of its orbital
slots may result in substantial restrictions on the use and
operation of its satellite at that location. In addition, while
the ITU rules require
later-in-time
systems to coordinate with it, there can be no assurance that
other operators will conduct their operations so as to avoid
transmitting any signals that would cause harmful interference
to the operation of Telesat Canadas satellites.
Failure to successfully coordinate Telesat Canadas
satellites frequencies or to resolve other required
regulatory approvals could have an adverse effect on its
financial condition, as well as on the value of its business,
which would in turn adversely affect us.
Telesat
Canadas ability to replace two of its satellites is
subject to additional risk and cannot be assured.
In addition to the risks with respect to Telesat Canadas
ability to renew its licenses to orbital locations discussed
above, there are also specific risks with respect to it being
able to replace Telstar 10 and Telstar 18. Telesat Canada
operates Telstar 10 and Telstar 18 pursuant to agreements with a
third party that has licenses to use orbital locations
controlled by China and Tonga, respectively. Although its
agreements with this third party provide it with renewal rights
with respect to replacement satellites, there can be no
assurance that renewal rights will be granted. Should Telesat
Canada be unsuccessful in obtaining renewal rights for either or
both of the orbital locations, because of the control over the
orbital locations exercised by foreign governments, or Telesat
Canada otherwise fails to enter into agreements with the third
party with respect to such replacement satellites, all revenue
obtained from the affected satellite or satellites would cease.
This could result in a material adverse effect on Telesat
Canadas results and financial condition, which would in
turn adversely affect us.
III.
Other Risks
We had a
material weakness in our internal control over financial
reporting as of December 31, 2007 related to income tax
accounting; we corrected such material weakness in 2008, but our
ability to continue to timely file our future financial reports
depends on maintenance of the corrective measures that we
implemented, as well as the timely delivery by Telesat Canada of
its financial statements.
We were unable to file our Annual Report on
Form 10-K
for the year ended December 31, 2007 under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, by the
required date, even after giving effect to the
15-day
extension period granted under
Rule 12b-25.
This failure was due to a material weakness in our internal
control over financial reporting as of December 31, 2007
related to income tax accounting. Specifically, we did not
maintain adequate processes and a sufficient number of
technically qualified personnel to facilitate the timely
resolution of issues associated with our income tax closing
process primarily relating to the Telesat Canada transaction.
During 2008, we implemented several remedial steps to improve
controls surrounding our income tax closing process, including
enhancing the technical resources in the income tax accounting
function and conducting an evaluation of organizational
processes and structure to identify and implement the
appropriate solutions regarding our income tax closing process
including retaining additional internal and external resources.
If we are unable to maintain the corrective measures taken to
remedy this material weakness for example, if we
were, for any reason, to lose the additional resources that we
have retained the material weakness could recur and
could result in late filings of future financial reports. Timely
filings of our future Exchange Act reports are also dependent on
Telesat Canadas ability to complete its financial
statements sufficiently in advance of our SEC reporting
deadlines in order for us to incorporate Telesat Canadas
results in our financial statements. There can be no assurance
that it will be able to do so.
27
Late filings of Exchange Act reports could cause our common
stock to be delisted from NASDAQ, which would have a material
adverse effect on its liquidity and value. Also, as a result of
the late filing of our
Form 10-K
last year, we are not currently eligible to use SEC
Form S-3
for new registrations of securities. Use of that Form requires,
among other things, that an issuer be current in its reports
under the Exchange Act for at least twelve months. If we timely
file our Quarterly Report on
Form 10-Q
for the first quarter of 2009, we will regain eligibility for
use of
Form S-3.
If, however, we are late in filing any Exchange Act reports in
the future, we would again lose our eligibility to use
Form S-3
for registration of our securities with the SEC. We will have to
meet more demanding requirements to register our securities
during the time when we are not eligible to use
Form S-3,
so it will be more difficult for us to effect public offering
transactions, and our range of available financing alternatives
could be narrowed.
Third
parties have significant rights with respect to our
affiliates.
Third parties have significant rights with respect to, and we do
not have control over management of, our affiliates. For
example, Hisdesat enjoys substantial approval rights in regard
to XTAR, our X-band joint venture. Also, while we own 64% of the
participating shares of Telesat Canada, we own only
331/3%
of the voting power. The rights of these third parties and
fiduciary duties under applicable law could result in others
acting or failing to act in ways that are not in our best
interest. While these entities are or have been customers of
SS/L, due to these third party rights and the fiduciary duties
of the boards of these entities, there can be no assurance that
these entities will continue to be customers of SS/L, and SS/L
does not expect to do business with these entities on other than
fair and competitive terms.
We rely
on key personnel.
We need highly qualified personnel. Michael Targoff, our chief
executive officer, has an employment contract expiring in
December 2010. We do not maintain key man life
insurance. The departure of any of our key executives could have
an adverse effect on our business.
MHR may
be viewed as our controlling stockholder and may have conflicts
of interest with us in the future.
As of December 31, 2008, various funds affiliated with MHR
held approximately 39.3% of the outstanding voting common stock
of Loral as well as all issued and outstanding shares of Loral
non-voting common stock, which, when taken together, represent
approximately 58.7% of the common equity of Loral as of
December 31, 2008. As of March 2009, representatives of MHR
occupy three of the nine seats on our board of directors (seven
of which are currently occupied). In addition, one of our other
directors was selected by the creditors committee in Old
Lorals chapter 11 cases, in which MHR served as the
chairman. Conflicts of interests may arise in the future between
us and MHR. For example, MHR and its affiliated funds are in the
business of making investments in companies and may acquire and
hold interests in businesses that compete directly or indirectly
with us. Under our agreement with PSP, in the event that either
(i) ownership or control, directly or indirectly, by
Dr. Mark H. Rachesky, President of MHR, of our voting stock
falls below certain levels or (ii) there is a change in the
composition of a majority of the members of the Loral board of
directors over a consecutive two-year period, we will lose our
veto rights relating to certain actions by Telesat Canada. In
addition, after either of these events, PSP will have certain
rights to enable it to exit from its investment in Telesat
Canada, including a right to cause Telesat Canada to conduct an
initial public offering in which PSPs shares would be the
first shares offered or, if no such offering has occurred within
one year due to a lack of cooperation from Loral or Telesat
Canada, to cause the sale of Telesat Canada and to drag along
the other shareholders in such sale, subject to our right to
call PSPs shares at fair market value.
Compliance
with the Sarbanes-Oxley Act increases our operating
expenses.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC, have required changes to some of our
corporate governance practices. These changes include developing
financial and disclosure processes that satisfy Section 404
of the Sarbanes-Oxley Act. We expect that these rules and
regulations will continue to make some activities more
difficult, time-consuming and costly. We also expect that these
rules and regulations could make it more difficult for us to
attract and retain qualified members of our Board of Directors,
28
particularly to serve on our audit committee and to attract and
retain qualified executive officers. If we are unable to comply
with the Sarbanes-Oxley Act and related rules and regulations,
our business could be materially adversely affected.
The
future use of tax attributes is limited upon emergence from
bankruptcy.
As of December 31, 2008, we had federal net operating loss
carryforwards, or NOLs, and excess capital losses of
approximately $525 million and state NOLs of various
amounts that are available to offset future taxable income (see
Notes 2 and 9 to the Loral consolidated financial
statements for a description of the accounting treatment of such
NOLs). As our reorganization on November 21, 2005
constituted an ownership change under
Section 382 of the Internal Revenue Code, our ability to
use these NOLs, as well as certain other tax attributes existing
at such effective date, is subject to an annual limitation of
approximately $32.6 million, subject to increase or
decrease based on certain factors. If Loral experiences an
additional ownership change during any three-year
period after November 21, 2005, future use of these tax
attributes may become further limited. An ownership change may
be triggered by sales or acquisitions of Loral equity interests
in excess of 50% by shareholders owning five percent or more of
our total equity value, i.e., the total market value of our
equity interests (whether common or preferred), as determined on
any applicable testing date. We would be adversely affected by
an additional ownership change if at the time of
such change, our total equity value multiplied by the federal
applicable long-term tax exempt rate which at December 31,
2008 was 5.4%, was less than $32.6 million.
There is
a thin trading market for our common stock.
Our common stock was first issued and listed on the NASDAQ
National Market in December 2005. Trading activity in our stock
has generally been light, averaging approximately
58,000 shares per day for the year ended December 31,
2008. Moreover, over 50% of our common stock is effectively held
by MHR and several other stockholders. If any of our significant
stockholders should sell some or all of their holdings, it will
likely have an adverse effect on our share price. Although the
funds affiliated with MHR have restrictions on their ability to
sell our shares under U.S. securities laws, they have
registration rights in respect of the common stock and
non-voting common stock they hold in Loral that would, if
exercised, eliminate such restrictions.
The
market for our stock could be adversely affected by future
issuance of significant amounts of our common stock.
As of December 31, 2008, 20,286,992 shares of our
voting common stock and 9,505,673 shares of our non-voting
common stock were outstanding. On that date, there were
outstanding options to purchase 2,034,202 shares of our
common stock, of which 1,806,077 were vested and exercisable and
of which 228,125 will become vested and exercisable over the
next year. In addition, as of December 31, 2008,
651,258 shares of our common stock were available for
future grants under our 2005 Stock Incentive Plan. On
March 5, 2009, restricted stock units totaling
110,000 shares were granted to two of our executive
officers, and we agreed to grant an additional 90,000 restricted
stock units to one of those officers over the next two years..
Moreover, we may further amend our stock option plan in the
future to provide for additional increases in the number of
shares available for grant thereunder.
In connection with a stipulation entered into with certain
directors and officers of Old Loral, certain claims aggregating
$30 million may result in the distribution of our common
stock in addition to the 20 million shares distributed
under the Plan of Reorganization. For more detail about these
stipulations, see Note 14 to the Loral consolidated
financial statements.
We intend to seek approval at our 2009 stockholders meeting to
increase the number of our authorized shares of common stock
from 40,000,000 shares to 70,000,000 shares, of which
50,000,000 will be voting common stock and 20,000,000 will be
non-voting common stock.
Sales of significant amounts of our common stock to the public,
or the perception that those sales could happen, could adversely
affect the market for, and the trading price of, our common
stock.
29
Litigation
and Disputes
We are
involved in a number of ongoing lawsuits.
We are involved in a number of lawsuits, details of which can be
found in Note 14 to the Loral consolidated financial
statements. In addition, we are involved in a number of disputes
which might result in litigation. A decision against us in any
of these lawsuits or disputes could have a material adverse
affect on our financial condition and our results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Corporate
We lease approximately 16,000 square feet of space for our
corporate offices in New York.
Satellite
Manufacturing
SS/Ls research, production and testing are conducted in
SS/L-owned facilities covering approximately 564,000 square
feet on 28 acres in Palo Alto, California. In addition,
SS/L leases approximately 616,000 square feet of space on
38 acres from various third parties primarily in Palo Alto,
Menlo Park and Mountain View, California. Management believes
that the facilities for satellite manufacturing, including the
recently completed modification and expansion are sufficient for
current operations.
Satellite
Services
Telesat Canadas primary satellite control center is
located at its headquarters building in Ottawa, Ontario which
consists of approximately 207,000 rentable square feet on
10 acres. The headquarters building is co-owned by Telesat
Canada and a pension fund, each having a fifty percent (50%)
interest as
tenants-in-common.
Telesat has entered into a fifteen year lease (terminable by
Telesat Canada at any time after ten years on two years
notice), commencing February 1, 2009, for an area in the
headquarters building of approximately 112,000 rentable
square feet. The balance of the area in the headquarters
building is occupied by third parties.
The Allan Park earth station, located northeast of Toronto,
Ontario on 70 acres of land, houses a customer support
center and a technical control center. This facility is also the
back-up
satellite control center and the main earth station complex.
Allan Parks role in Telesat Canadas operations has
expanded as a result of the closure and subsequent sale in 2008
of Loral Skynets satellite control center in Hawley,
Pennsylvania and the closure of its VSAT and Internet services
management center in Rockville, Maryland.
In addition to these facilities, Telesat Canada leases
approximately 175,000 square feet of office space for
teleport facilities, satellite control operations and for
administrative and sales offices.
|
|
Item 3.
|
Legal
Proceedings
|
We discuss certain legal proceedings pending against the Company
in the notes to the Loral consolidated financial statements and
refer you to that discussion for important information
concerning those legal proceedings, including the basis for such
actions and relief sought. See Note 14 to the Loral
consolidated financial statements for this discussion.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
30
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
|
|
(a)
|
Market
Price and Dividend Information
|
Lorals amended and restated certificate of incorporation
provides that the total authorized capital stock of the Company
is fifty million (50,000,000) shares consisting of two classes:
(i) forty million (40,000,000) shares of common stock,
$0.01 par value per share (Common Stock),
divided into two series, of which 30,494,327 shares are
voting common stock (Voting Common Stock) and
9,505,673 shares are non-voting common stock
(Non-Voting Common Stock) and (ii) ten million
(10,000,000) shares of preferred stock, $0.01 par value per
share. Each share of Voting Common Stock and each share of
Non-Voting Common Stock are identical and are treated equally in
all respects, except that the Non-Voting Common Stock does not
have voting rights except as set forth in Article IV(a)(iv)
of the amended and restated certificate of incorporation and as
otherwise provided by law. Article IV(a)(iv) of
Lorals amended and restated certificate of incorporation
provides that Article IV(a) of the amended and restated
certificate of incorporation, which provides for, among other
things, the equal treatment of the Non-Voting Common Stock with
the Voting Common Stock, may not be amended, altered or repealed
without the affirmative vote of holders of a majority of the
outstanding shares of the Non-Voting Common Stock, voting as a
separate class. Except as otherwise provided in the amended and
restated certificate of incorporation or bylaws of Loral, each
holder of Loral Voting Common Stock is entitled to one vote in
respect of each share of Loral Voting Common Stock held of
record on all matters submitted to a vote of stockholders.
Holders of shares of Loral Common Stock are entitled to share
equally, share for share in dividends when and as declared by
the Board of Directors out of funds legally available for such
dividends. Upon a liquidation, dissolution or winding up of
Loral, the assets of Loral available to stockholders will be
distributed equally per share to the holders of Loral Common
Stock. The holders of Loral Common Stock do not have any
cumulative voting rights. Loral Common Stock has no preemptive
or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to Loral Common
Stock. All outstanding shares of Loral Common Stock are fully
paid and non-assessable.
Our Voting Common Stock trades on the NASDAQ National Market
under the ticker symbol LORL. The table below sets
forth the high and low sales prices of Loral Voting Common Stock
as reported on the NASDAQ National Market from January 1,
2007 through December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2008
|
|
$
|
15.86
|
|
|
$
|
6.04
|
|
Quarter ended September 30, 2008
|
|
|
18.81
|
|
|
|
13.29
|
|
Quarter ended June 30, 2008
|
|
|
25.42
|
|
|
|
15.02
|
|
Quarter ended March 31, 2008
|
|
|
34.20
|
|
|
|
21.78
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2007
|
|
$
|
45.27
|
|
|
$
|
31.67
|
|
Quarter ended September 30, 2007
|
|
|
50.42
|
|
|
|
34.83
|
|
Quarter ended June 30, 2007
|
|
|
51.82
|
|
|
|
44.50
|
|
Quarter ended March 31, 2007
|
|
|
53.10
|
|
|
|
39.00
|
|
|
|
(b)
|
Approximate
Number of Holders of Common Stock
|
At March 2, 2009, there were 409 holders of record of our
voting common stock and five holders of record of our non-voting
common stock.
31
Lorals ability to pay dividends or distributions on its
common stock will depend upon its earnings, financial condition
and capital needs and other factors deemed pertinent by the
Board of Directors. To date, Loral has not paid any dividends on
its common stock.
|
|
(d)
|
Securities
Authorized for Issuance under Equity Compensation
Plans
|
See Note 10 to the Loral consolidated financial statements
for information regarding the Companys stock compensation
plan. Compensation information required by Item 11 will be
presented in the Companys 2009 definitive proxy statement
which is incorporated herein by reference.
|
|
(e)
|
Comparison
of Cumulative Total Returns
|
Set forth below is a graph comparing the cumulative performance
of our common stock with the NASDAQ Composite Index, and the
NASDAQ Telecommunications Index from November 21, 2005, the
initial issue date of our common stock upon emergence from
bankruptcy, to December 31, 2008. The graph assumes that
$100 was invested on November 21, 2005 in each of our
common stock, the NASDAQ Composite Index and the NASDAQ
Telecommunications Index and that all dividends were reinvested.
The NASDAQ Telecommunications Index is a capitalization weighted
index designed to measure the performance of all NASDAQ-traded
stocks in the telecommunications sector, including satellite
technology companies.
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth our selected historical financial
and operating data for the years ended December 31, 2008,
2007 and 2006, the period October 2, 2005 to
December 31, 2005, the period January 1, 2005 to
October 1, 2005 and for the year ended December 31,
2004.
For all periods presented in the statement of operations data,
income from continuing operations excludes the results of the
North American satellites and related assets sold on
March 17, 2004 to Intelsat, which have been accounted for
as a discontinued operation and accordingly are presented
separately in the consolidated selected financial data.
On August 1, 2005, the Bankruptcy Court entered its
Confirmation Order confirming the Plan of Reorganization. On
September 30, 2005, the FCC approved the transfer of FCC
licenses from Old Loral to Loral, which represented the
satisfaction of the last material condition precedent to
emergence from bankruptcy. We emerged
32
from bankruptcy on November 21, 2005 and pursuant to
SOP 90-7
we adopted fresh-start accounting as of October 1, 2005.
Upon emergence, our reorganization enterprise value as
determined by the Bankruptcy Court was approximately
$970 million, which after reduction for the fair value of
Loral Skynets 14% senior secured notes and the Loral
Skynet preferred stock, resulted in a reorganization equity
value of approximately $642 million. This reorganization
equity value was allocated to our assets and liabilities. Our
assets and liabilities were stated at fair value in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations
(SFAS 141). In addition, our accumulated
deficit was eliminated, and our new debt and equity were
recorded in accordance with distributions pursuant to the Plan
of Reorganization. Our consolidated financial statements as of
October 1, 2005 and for dates subsequent are not comparable
in certain material respects to the historical consolidated
financial statements for periods prior to that date.
References to the Predecessor Registrant refer to the period
prior to October 2, 2005. References to the Successor
Registrant refer to the period on and after October 2,
2005, after giving effect to the adoption of fresh-start
accounting.
In connection with the Telesat Canada transaction, Loral, on
October 31, 2007, transferred substantially all of the
assets and related liabilities of Loral Skynet to Telesat
Canada. Therefore, Loral Skynet has been excluded from the
selected financial data subsequent to October 31, 2007.
33
The information set forth in the following table should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
thereto included elsewhere in this Annual Report on
Form 10-K.
LORAL
SPACE & COMMUNICATIONS INC.
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Registrant
|
|
|
|
Predecessor Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2,
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 to
|
|
|
|
2005 to
|
|
|
Year Ended
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
October 1,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Manufacturing
|
|
$
|
869,398
|
|
|
$
|
761,363
|
|
|
$
|
636,632
|
|
|
$
|
161,069
|
|
|
|
$
|
318,587
|
|
|
$
|
299,608
|
|
Satellite Services
|
|
|
|
|
|
|
121,091
|
|
|
|
160,701
|
|
|
|
36,096
|
|
|
|
|
110,596
|
|
|
|
222,519
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
869,398
|
|
|
|
882,454
|
|
|
|
797,333
|
|
|
|
197,165
|
|
|
|
|
429,183
|
|
|
|
522,127
|
|
Operating (loss) income from continuing
operations(2)
|
|
|
(193,977
|
)
|
|
|
45,256
|
|
|
|
29,818
|
|
|
|
(4,945
|
)
|
|
|
|
(67,095
|
)
|
|
|
(214,345
|
)
|
Gain on discharge of pre-petition obligations and fresh-start
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,101,453
|
(3)
|
|
|
|
|
(Loss) income from continuing operations before income taxes,
equity in net losses of affiliates and minority
interest(4)(5)
|
|
|
(151,523
|
)
|
|
|
157,786
|
|
|
|
30,117
|
|
|
|
(5,395
|
)
|
|
|
|
1,022,651
|
|
|
|
(207,852
|
)
|
Income tax (provision) benefit
|
|
|
(45,744
|
)
|
|
|
(83,457
|
)
|
|
|
(20,880
|
)
|
|
|
(1,752
|
)
|
|
|
|
10,901
|
|
|
|
(13,284
|
)(6)
|
(Loss) income from continuing operations before equity in net
losses of affiliates and minority interest
|
|
|
(197,267
|
)
|
|
|
74,329
|
|
|
|
9,237
|
|
|
|
(7,147
|
)
|
|
|
|
1,033,552
|
|
|
|
(221,136
|
)
|
Equity in net (losses) income of
affiliates(7)
|
|
|
(495,649
|
)
|
|
|
(21,430
|
)
|
|
|
(7,163
|
)
|
|
|
(5,447
|
)
|
|
|
|
(2,796
|
)
|
|
|
46,654
|
|
Minority interest
|
|
|
|
|
|
|
(23,240
|
)
|
|
|
(24,794
|
)
|
|
|
(2,667
|
)
|
|
|
|
126
|
|
|
|
135
|
|
(Loss) income from continuing operations
|
|
|
(692,916
|
)
|
|
|
29,659
|
|
|
|
(22,720
|
)
|
|
|
(15,261
|
)
|
|
|
|
1,030,882
|
|
|
|
(174,347
|
)
|
Loss from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,348
|
)
|
Gain on sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,967
|
|
|
|
|
|
Net (loss) income
|
|
|
(692,916
|
)
|
|
|
29,659
|
|
|
|
(22,720
|
)
|
|
|
(15,261
|
)
|
|
|
|
1,044,849
|
|
|
|
(176,695
|
)
|
Preferred dividends
|
|
|
(24,067
|
)
|
|
|
(19,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature related to the issuance of Loral
Series A-1
Preferred
Stock(8)
|
|
|
|
|
|
|
(25,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shareholders
|
|
|
(716,983
|
)
|
|
|
(15,405
|
)
|
|
|
(22,720
|
)
|
|
|
(15,261
|
)
|
|
|
|
1,044,849
|
|
|
|
(176,695
|
)
|
Basic and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(35.13
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.14
|
)
|
|
$
|
(0.76
|
)
|
|
|
$
|
23.37
|
|
|
$
|
(3.96
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.32
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share
|
|
$
|
(35.13
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.14
|
)
|
|
$
|
(0.76
|
)
|
|
|
$
|
23.69
|
|
|
$
|
(4.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Used in) provided by operating
activities(9)
|
|
|
(202,210
|
)
|
|
|
27,123
|
|
|
|
88,002
|
|
|
|
(38,531
|
)
|
|
|
|
(143,827
|
)
|
|
|
66,129
|
|
(Used in) provided by investing
activities(10)
|
|
|
(47,308
|
)
|
|
|
61,519
|
|
|
|
(175,978
|
)
|
|
|
(5,089
|
)
|
|
|
|
194,707
|
|
|
|
906,887
|
|
Provided by (used in) financing activities
|
|
|
52,372
|
|
|
|
39,510
|
|
|
|
(1,278
|
)
|
|
|
120,763
|
|
|
|
|
|
|
|
|
(966,887
|
)
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor Registrant
|
|
|
Registrant
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
117,548
|
|
|
$
|
314,694
|
|
|
$
|
186,542
|
|
|
$
|
275,796
|
|
|
$
|
147,773
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
106,588
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
995,867
|
|
|
|
1,702,939
|
|
|
|
1,729,911
|
|
|
|
1,678,977
|
|
|
|
1,218,733
|
|
Debt, including current portion
|
|
|
55,000
|
|
|
|
|
|
|
|
128,084
|
|
|
|
128,191
|
|
|
|
|
|
Non-current liabilities and minority interest
|
|
|
381,836
|
|
|
|
289,602
|
|
|
|
535,271
|
|
|
|
603,374
|
|
|
|
84,677
|
|
Liabilities subject to
compromise(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,916,000
|
|
Shareholders equity (deficit)
|
|
|
209,657
|
|
|
|
973,558
|
|
|
|
647,002
|
|
|
|
627,164
|
|
|
|
(1,044,101
|
)
|
|
|
|
(1) |
|
Satellite Services revenues for
2004 include $87.2 million relating to a sales-type lease.
|
(2) |
|
During 2008, we recorded a goodwill
impairment charge of $187.9 million. In connection with the
Telesat Canada transaction, which closed on October 31,
2007, we recognized a gain of $104.9 million in 2007 on the
contribution of substantially all of the assets and related
liabilities of Loral Skynet to Telesat Canada. See Note 6
to the Loral consolidated financial statements.
|
(3) |
|
In connection with our emergence
from Chapter 11 and our adoption of fresh-start accounting
on October 1, 2005, we recognized a gain on discharge of
pre-petition obligations and fresh-start adjustments of
$1.101 billion, related interest expense of
$13.2 million related to the holders of claims to be paid
in cash and a tax benefit of $15.4 million, each of which
is reflected separately in our statement of operations.
|
(4) |
|
In connection with the Telesat
Canada transaction during 2007, we recognized a gain on foreign
exchange contracts of $89.4 million (see Note 13 to
the Loral consolidated financial statements).
|
(5) |
|
During 2008, we recorded income of
$58.3 million related to a gain on litigation recovery from
Rainbow DBS and a loss of $19.5 million related to the
award of attorneys fees and expenses to the plaintiffs for
shareholder litigation concluded during 2008.
|
(6) |
|
2004 includes an $11 million
increase to the deferred tax valuation allowance relating to the
reversal of deferred tax liabilities arising from the write-off
of our investment in Globalstar, L.P.s $500 million
credit facility, upon Globalstar, L.P.s dissolution in
June 2004.
|
(7) |
|
Beginning October 31, 2007,
our principal affiliate is Telesat Canada. Loral also has
investments in XTAR and joint ventures providing Globalstar
service, which are accounted for under the equity method. On
December 21, 2007 Loral agreed to sell its interest in
Globalstar do Brazil S.A. which resulted in Loral recording a
charge of $11.3 million in 2007 (see Note 6 to the
Loral consolidated financial statements). During 2004, we
recorded $47 million of equity income on the reversal of
vendor financing liabilities that were non-recourse to SS/L in
the event of non-payment by Globalstar, L.P.
|
(8) |
|
As of December 23, 2008, in
accordance with a court ordered restated certificate of
incorporation, the previously issued Loral Series-1 Preferred
stock was cancelled. As the fair value of Lorals common
stock from January 1, to December 23, 2008 was less
than the conversion price ($30.1504), we did not record any
beneficial conversion feature during 2008 (see Note 10 to
the Loral consolidated financial statements).
|
(9) |
|
Cash flow (used in) provided by
operating activities includes cash flow from operating
activities provided by discontinued operations in 2004.
|
(10) |
|
Cash flow (used in) provided by
investing activities includes cash flow provided by (used in)
investing activities of discontinued operations for the period
January 1, 2005 to October 1, 2005 and 2004.
|
(11) |
|
As a result of our Chapter 11
filing, Old Lorals debt obligations, preferred stock
obligations and certain other liabilities existing at
July 15, 2003, the date Old Loral and certain of its
subsidiaries filed voluntary petition for reorganization, were
classified as liabilities subject to compromise on our balance
sheets at December 31, 2004. These obligations were
extinguished as of the Effective Date.
|
35
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our consolidated financial statements (the
financial statements) included in Item 15 of
this Annual Report on
Form 10-K.
Loral Space & Communications Inc., a Delaware
corporation, together with its subsidiaries is a leading
satellite communications company with substantial activities in
satellite manufacturing and investments in satellite-based
communications services. Loral was formed on June 24, 2005
to succeed to the business conducted by its predecessor
registrant, Loral Space & Communications Ltd.
(Old Loral), which emerged from chapter 11 of
the federal bankruptcy laws on November 21, 2005 (the
Effective Date) pursuant to the terms of the fourth
amended joint plan of reorganization, as modified (the
Plan of Reorganization).
The terms, Loral, the Company,
we, our and us, when used in
this report with respect to the period prior to the Effective
Date, are references to Old Loral, and when used with respect to
the period commencing on and after the Effective Date, are
references to Loral Space & Communications Inc. These
references include the subsidiaries of Old Loral or Loral
Space & Communications Inc., as the case may be,
unless otherwise indicated or the context otherwise requires.
The term Parent Company is a reference to Loral
Space & Communications Inc., excluding its
subsidiaries.
On October 31, 2007, Loral and its Canadian Partner, Public
Sector Pension Investment Board (PSP), through
Telesat Holdings, Inc. (Telesat Holdco), a
newly-formed joint venture, completed the acquisition of Telesat
Canada from BCE Inc. (BCE). In connection with this
acquisition, Loral transferred on that same date substantially
all of the assets and related liabilities of Loral Skynet
Corporation (Loral Skynet) to Telesat Canada. Loral
holds a 64% economic interest and
331/3%
voting interest in Telesat Holdco, the ultimate parent company
of the resulting new entity. Loral accounts for this investment
using the equity method of accounting.
We refer to the acquisition of Telesat Canada and the related
transfer of Loral Skynet to Telesat Canada as the Telesat Canada
transaction. References to Telesat Canada with respect to
periods prior to the closing of this transaction are references
to the subsidiary of BCE and with respect to the period after
the closing of this transaction are references to Telesat Holdco
and/or its
subsidiaries as appropriate. Similarly, unless otherwise
indicated, references to Loral Skynet with respect to periods
prior to the closing of this transaction are references to the
operations of Lorals satellite services segment conducted
through Loral Skynet and with respect to the period commencing
on and after the closing of this transaction are, if related to
the fixed satellite services business, references to the Loral
Skynet operations within Telesat Canada.
Disclosure
Regarding Forward-Looking Statements
Except for the historical information contained in the
following discussion and analysis, the matters discussed below
are not historical facts, but are forward-looking
statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. In addition, we or our
representatives have made and may continue to make
forward-looking statements, orally or in writing, in other
contexts. These forward-looking statements can be identified by
the use of words such as believes,
expects, plans, may,
will, would, could,
should, anticipates,
estimates, project, intend,
or outlook or other variations of these words. These
statements, including without limitation those relating to
Telesat Canada, are not guarantees of future performance and
involve risks and uncertainties that are difficult to predict or
quantify. Actual events or results may differ materially as a
result of a wide variety of factors and conditions, many of
which are beyond our control. For a detailed discussion of these
and other factors and conditions, please refer to the
Commitments and Contingencies section below and to our other
periodic reports filed with the Securities and Exchange
Commission (SEC). We operate in an industry sector
in which the value of securities may be volatile and may be
influenced by economic and other factors beyond our control. We
undertake no obligation to update any forward-looking
statements.
36
Overview
Businesses
Loral is a leading satellite communications company with a
satellite manufacturing unit and investments in satellite
services businesses. Loral is organized into two operating
segments, satellite manufacturing and satellite services. For
the final two months of 2007 and going forward, Loral
participates in satellite services operations principally
through its investment in Telesat Canada.
Satellite
Manufacturing
Space Systems/Loral, Inc. (SS/L), designs and
manufactures satellites, space systems and space system
components for commercial and government customers whose
applications include fixed satellite services (FSS),
direct-to-home (DTH) broadcasting, mobile satellite
services (MSS), broadband data distribution,
wireless telephony, digital radio, digital mobile broadcasting,
military communications, weather monitoring and air traffic
management.
Satellite manufacturers have high fixed costs relating primarily
to labor and overhead. Based on its current cost structure, we
estimate that SS/L covers its fixed costs, including
depreciation and amortization, with an average of four to five
satellite awards a year depending on the size, power, pricing
and complexity of the satellite. Cash flow in the satellite
manufacturing business tends to be uneven. It takes two to three
years to complete a satellite project and numerous assumptions
are built into the estimated costs. SS/Ls cash receipts
are tied to the achievement of contract milestones that depend
in part on the ability of its subcontractors to deliver on time.
In addition, the timing of satellite awards is difficult to
predict, contributing to the unevenness of revenue and making it
more challenging to align the workforce to the workflow.
While its requirement for ongoing capital investment to maintain
its current capacity is relatively low, over the past two years
SS/L has modified and expanded its manufacturing facilities to
accommodate an expanded backlog. SS/L can now accommodate as
many as nine to 13 satellite awards per year, depending on the
complexity and timing of the specific satellites, and can
accommodate the integration and test of 13 to 14 satellites at
any given time in its Palo Alto facility. The expansion has also
reduced the companys reliance on outside suppliers for
certain RF components and sub-assemblies.
The satellite manufacturing industry is a knowledge-intensive
business, the success of which relies heavily on its
technological heritage and the skills of its workforce. The
breadth and depth of talent and experience resident in
SS/Ls workforce of approximately 2,500 personnel is
one of our key competitive resources.
Satellites are extraordinarily complex devices designed to
operate in the very hostile environment of space. This
complexity may lead to unanticipated costs during the design,
manufacture and testing of a satellite. SS/L establishes
provisions for costs based on historical experience and program
complexity to cover anticipated costs. As most of SS/Ls
contracts are fixed price, cost increases in excess of these
provisions reduce profitability and may result in losses to
SS/L, which may be material. Because the satellite manufacturing
industry is highly competitive, buyers have the advantage over
suppliers in negotiating prices, terms and conditions resulting
in reduced margins and increased assumptions of risk by
manufacturers such as SS/L.
Satellite
Services
The satellite services business is capital intensive and the
build-out of a satellite fleet requires substantial time and
investment. Once these investments are made, however, the costs
to maintain and operate the fleet are relatively low with the
exception of in-orbit insurance. Upfront investments are earned
back through the leasing of transponders to customers over the
life of the satellite. After nearly 40 years of operation,
Telesat Canada has established collaborative relationships with
its customers so annual receipts from the satellite services
business are fairly predictable with long term contracts and
high contract renewal rates.
Competition in the satellite services market has been intense in
recent years due to a number of factors, including transponder
over-capacity in certain geographic regions and increased
competition from fiber. This
37
competition puts pressure on prices, depending on market
conditions in various geographic regions and frequency bands.
As of March 1, 2009, Telesat Canada had 12 in-orbit
satellites (comprised of both owned and leased satellites).
Nimiq 3 is expected to be decommissioned in the second quarter
of 2009. Excluding the satellite to be decommissioned in 2009
Telesat Canadas fleet as of March 1, 2009 had an
average of approximately 54% of their expected total service
life remaining, with an average expected remaining service life
in excess of 7.5 years. In addition, one satellite was
launched in February 2009 and is expected to enter service in
the second quarter of 2009, while one satellite under
construction at SS/L is scheduled for launch later in 2009. The
satellite under construction is already 100% contracted to Bell
TV for 15 years or such later date as the customer may
request.
Until the closing of the Telesat Canada transaction on
October 30, 2007, Loral Skynet operated a global fixed
satellite services business. As part of this business, Loral
Skynet leased transponder capacity to commercial and government
customers for video distribution and broadcasting, high-speed
data distribution, Internet access and communications, and also
provided managed network services to customers using a hybrid
satellite and ground-based system. It also provided professional
services to other satellite operators such as fleet operating
services.
Future
Outlook
Critical success factors for SS/L include maintaining its
reputation for reliability, quality and superior customer
service. These factors are vital to securing new customers and
retaining current ones. At the same time, we must continue to
contain costs and maximize efficiencies. SS/L is focused on
increasing bookings and backlog, while maintaining the cost
efficiencies and process improvements realized over the past
several years. SS/L must continue to align its direct workforce
with the level of awards. Additionally, long-term growth at SS/L
generates working capital requirements, primarily for the
orbital component of the satellite contract which is payable to
SS/L over the life of the satellite.
The current economic environment may reduce the demand for
satellites. While we expect the replacement market to be
reliable over the next year, given the current credit crisis,
potential customers who are highly leveraged or in the
development stage may not be able to obtain the financing
necessary to purchase satellites. If SS/Ls satellite
awards fall below, on average, four to five awards per year, we
expect that we will reduce costs and capital expenditures to
accommodate this lower level of business. The timing of any
reduced demand for satellites is difficult to predict. It is
therefore also difficult to anticipate when to reduce costs and
capital expenditures to match any slowdown in business. A delay
in matching the timing of a reduction in business with a
reduction in expenditures would adversely affect our results of
operations and liquidity. In addition, in order to maintain its
ability to compete as one of the leading prime contractors for
technologically advanced space satellites, SS/L must
continuously retain the services of a core group of specialists
in a wide variety of disciplines for each phase of the design,
development, manufacture and testing of its products, thus
reducing SS/Ls flexibility to take action to reduce
workforce costs in the event of a slowdown or downturn in its
business.
Loral holds a 64% economic interest and a
331/3%
voting interest in Telesat Canada, the worlds fourth
largest satellite operator with approximately $4.2 billion
of backlog as of December 31, 2008.
Telesat Canada is committed to continuing to provide the strong
customer service and focus on innovation and technical expertise
that has allowed it to successfully build its business to date.
Building on its industry leading backlog and significant
contracted growth, Telesat Canadas focus is on taking
disciplined steps to grow the core business and sell newly
launched and existing in-orbit satellite capacity, and, in a
disciplined manner, use the strong cash flow generated by
existing business, contracted expansion satellites and cost
savings to strengthen the business.
Telesat Canada believes its existing satellite fleet offers a
strong combination of existing backlog, contracted revenue
growth (on Nimiq 4 which started service in the fourth quarter
of 2008, and on the in-construction satellite Nimiq 5) and
additional capacity (on the existing satellites and Telstar 11N
which is expected to start service in the second quarter of
2009) that provides a solid foundation upon which it will
seek to grow its revenues and cash flows.
38
Telesat Canada has received a non-binding offer for certain of
its international satellites and related assets and business.
These assets represented approximately 7% of Telesat
Canadas revenues and 9% of its Adjusted EBITDA for the
year ended December 31, 2008, and less than 2% of its
backlog as of December 31, 2008. One of these satellites is
nearing the end of its life and Telesat Canada must make a
decision in 2009 with respect to replacing it, which would cost
approximately $200 million to $300 million, incurred
over a period of approximately three years. If it is not sold,
Telesat Canadas current intention is to replace this
satellite, although no final decision has been made at this
time. Subject to Telesat Canadas obligations under its
financing arrangements, proceeds from any sale of these assets
would be used to fund replacement satellites or repay debt. The
offer is subject to further due diligence and other conditions,
and Telesat Canada cannot at this time assess the probability of
concluding this transaction or any other sale of these satellite
assets or at what price these satellites may be sold.
Telesat Canada believes that it is well-positioned to serve its
customers and the markets in which it participates. Telesat
Canada actively pursues opportunities to develop new satellites,
particularly in conjunction with current or prospective
customers, who will commit to a substantial amount of capacity
at the time the satellite construction contract is signed.
Although Telesat Canada regularly pursues opportunities to
develop new satellites, it does not procure additional or
replacement satellites unless it believes there is a
demonstrated need and a sound business plan for such capacity.
The satellite industry is characterized by a relatively fixed
cost base that allows significant revenue growth with relatively
minimal increases in operating costs, particularly for sales of
satellite capacity. Thus, Telesat Canada anticipates that it can
increase its revenue without proportional increases in operating
expenses, allowing for margin expansion. The fixed cost nature
of the business, combined with contracted revenue growth and
other growth opportunities is expected to produce growth in
operating income and cash flow.
For 2009, Telesat Canada is focused on the execution of its
business plan to serve its customers and the markets in which it
participates, the sale of capacity on its existing satellites,
the continuing efforts to achieve operating efficiencies, and on
the completion and launch of its in-construction satellite
(Nimiq 5).
We regularly explore and evaluate possible strategic
transactions and alliances. We also periodically engage in
discussions with satellite service providers, satellite
manufacturers and others regarding such matters, which may
include joint ventures and strategic relationships as well as
business combinations or the acquisition or disposition of
assets. In order to pursue certain of these opportunities, we
will require additional funds. There can be no assurance that we
will enter into additional strategic transactions or alliances,
nor do we know if we will be able to obtain the necessary
financing for these transactions on favorable terms, if at all.
In connection with the Telesat Canada transaction, Loral has
agreed that, subject to certain exceptions described in Telesat
Canadas shareholders agreement, for so long as Loral has
an interest in Telesat Canada, it will not compete in the
business of leasing, selling or otherwise furnishing fixed
satellite service, broadcast satellite service or audio and
video broadcast direct to home service using transponder
capacity in the C-band, Ku-band and
Ka-band
(including in each case extended band) frequencies and the
business of providing end-to-end data solutions on networks
comprised of earth terminals, space segment, and, where
appropriate, networking hubs.
Consolidated
Operating Results
Please refer to Critical Accounting Matters set forth below in
this section.
The following discussion of revenues and Adjusted EBITDA, (see
Note 15 to the financial statements), reflects the results
of our business segments for 2008, 2007 and 2006. The balance of
the discussion relates to our consolidated results unless
otherwise noted.
The common definition of EBITDA is Earnings Before
Interest, Taxes, Depreciation and Amortization. In
evaluating financial performance, we use revenues and operating
income (loss) before depreciation and amortization (including
amortization of stock-based compensation) (Adjusted
EBITDA) as the measure of a segments profit or loss.
Adjusted EBITDA is equivalent to the common definition of EBITDA
before: goodwill and other impairment charges; gain (loss) on
foreign exchange contracts; gains or losses on litigation not
related to our operations; impairment of available for sale
securities; loss on extinguishment of debt; other income
(expense); equity in net losses of affiliates; and minority
interest.
39
Adjusted EBITDA allows us and investors to compare our operating
results with that of competitors exclusive of depreciation and
amortization, interest and investment income, interest expense,
goodwill and other impairment charges, gains or (losses) on
foreign exchange contracts, gains or losses on litigation not
related to our operations, impairments of available for sale
securities, other income (expense), equity in net losses of
affiliates and minority interest. Financial results of
competitors in our industry have significant variations that can
result from timing of capital expenditures, the amount of
intangible assets recorded, the differences in assets
lives, the timing and amount of investments, the effects of
other income (expense), which are typically for non-recurring
transactions not related to the on-going business, and effects
of investments not directly managed. The use of Adjusted EBITDA
allows us and investors to compare operating results exclusive
of these items. Competitors in our industry have significantly
different capital structures. The use of Adjusted EBITDA
maintains comparability of performance by excluding interest
expense.
We believe the use of Adjusted EBITDA along with U.S. GAAP
financial measures enhances the understanding of our operating
results and is useful to us and investors in comparing
performance with competitors, estimating enterprise value and
making investment decisions. Adjusted EBITDA as used here may
not be comparable to similarly titled measures reported by
competitors. We also use Adjusted EBITDA to evaluate operating
performance of our segments, to allocate resources and capital
to such segments, to measure performance for incentive
compensation programs and to evaluate future growth
opportunities. Adjusted EBITDA should be used in conjunction
with U.S. GAAP financial measures and is not presented as
an alternative to cash flow from operations as a measure of our
liquidity or as an alternative to net income as an indicator of
our operating performance.
Loral is organized into two operating segments: Satellite
Manufacturing and Satellite Services. Our segment reporting data
includes unconsolidated affiliates that meet the reportable
segment criteria of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The
satellite services segment includes 100% of the results reported
by Telesat Canada for the year ended December 31, 2008 and
for the period from October 31, 2007 to December 31,
2007. Although we analyze Telesat Canadas revenue and
expenses under the satellite services segment, we eliminate its
results in our consolidated financial statements, where we
report our 64% share of Telesat Canadas results as equity
in net losses of affiliates.
The following reconciles Revenues and Adjusted EBITDA on a
segment basis to the information as reported in our financial
statements (in millions):
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Satellite Manufacturing
|
|
$
|
881.4
|
|
|
$
|
814.3
|
|
|
$
|
696.5
|
|
Satellite Services
|
|
|
685.2
|
|
|
|
241.2
|
|
|
|
163.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
|
1,566.6
|
|
|
|
1,055.5
|
|
|
|
860.3
|
|
Eliminations(1)
|
|
|
(12.0
|
)
|
|
|
(55.2
|
)
|
|
|
(63.0
|
)
|
Affiliate
eliminations(2)
|
|
|
(685.2
|
)
|
|
|
(117.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues as
reported(3)
|
|
$
|
869.4
|
|
|
$
|
882.5
|
|
|
$
|
797.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Manufacturing segment revenue increased by
$67 million in 2008 from 2007 primarily as a result of
increased revenue from new satellite awards received during 2008
and 2007, partially offset by reduced revenue from programs
completed or nearing completion. Satellite Services segment
revenue increased by $444 million in 2008 from 2007
primarily due to the inclusion of Telesat Canadas revenue
for the full year in 2008 compared to the period
October 31, 2007 to December 31, 2007.
Satellite Manufacturing segment revenue increased by
$118 million in 2007 from 2006 primarily due to new
satellite awards received during 2007 and 2006. Satellite
Services segment revenue increased by $77 million in 2007
from 2006 primarily due to the inclusion of Telesat
Canadas revenue for the period October 31, 2007 to
December 31, 2007.
40
Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Satellite Manufacturing
|
|
$
|
45.1
|
|
|
$
|
34.5
|
|
|
$
|
65.9
|
|
Satellite Services
|
|
|
436.5
|
|
|
|
118.4
|
|
|
|
68.0
|
|
Corporate
expenses(4)
|
|
|
(14.9
|
)
|
|
|
(37.9
|
)
|
|
|
(26.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA before eliminations
|
|
|
466.7
|
|
|
|
115.0
|
|
|
|
107.1
|
|
Eliminations(1)
|
|
|
(1.6
|
)
|
|
|
(6.1
|
)
|
|
|
(6.0
|
)
|
Affiliate
eliminations(2)
|
|
|
(427.2
|
)
|
|
|
(65.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
37.9
|
|
|
$
|
43.6
|
|
|
$
|
101.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Manufacturing segment Adjusted EBITDA increased
$11 million in 2008 from 2007 primarily as a result of
improved margins of $20 million on higher sales volume in
2008, partially offset by $6 million of increased warranty
expenses resulting from five launches in 2008 and a
$3 million loss on foreign exchange forward contracts in
2008. Satellite Services segment Adjusted EBITDA increased by
$318 million in 2008 from 2007 primarily due to the
inclusion of Telesat Canadas operating results for the
full year in 2008 as compared to the period October 31,
2007 to December 31, 2007 and a gain of $9 million
related to distributions from a bankruptcy claim against a
former customer of Loral Skynet. Corporate expenses decreased
$23 million in 2008 from 2007 primarily due to reductions
of $7 million for deferred compensation due to the decline
in the market price of our common stock, $6 million of
legal costs resulting from the conclusion of certain shareholder
and noteholder lawsuits, $6 million of severance costs
recorded in 2007 due to staff reductions and $5 million of
lower compensation costs resulting from staff reductions.
Increased management fees earned by Corporate for consulting
services provided to affiliates (see Note 16 to the
financial statements) were offset by decreased cost allocations
to the Satellite Manufacturing and Satellite Services segments.
Satellite Manufacturing segment Adjusted EBITDA decreased
$31 million in 2007 from 2006 as a result of transponder
rights valued at $19 million received in 2006 related to
the Satmex settlement agreement, $9 million for settlement
of launch vehicle litigation in 2006, increased research and
development expenses of $16 million in 2007, forward loss
recognition of $14 million for certain satellite programs
awarded during 2007 and increased marketing expenses of
$5 million in 2007, partially offset by $20 million of
margin increases from additional sales in 2007 and a
$12 million reduction of warranty expenses. Satellite
Services segment Adjusted EBITDA increased by $50 million
in 2007 from 2006 primarily due to the inclusion of Telesat
Canadas operating results for the period October 31,
2007 to December 31, 2007. Corporate expenses increased
$11 million in 2007 from 2006 primarily due to legal costs
of $7.1 million in connection with shareholders and
noteholders lawsuits and severance costs of $7.0 million.
41
Reconciliation
of Adjusted EBITDA to Net (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Adjusted EBITDA
|
|
$
|
37.9
|
|
|
$
|
43.6
|
|
|
$
|
101.1
|
|
Depreciation, amortization and stock-based
compensation(5)
|
|
|
(44.0
|
)
|
|
|
(103.3
|
)
|
|
|
(71.3
|
)
|
Impairment of
goodwill(6)
|
|
|
(187.9
|
)
|
|
|
|
|
|
|
|
|
Gain on contribution of Loral
Skynet(7)
|
|
|
|
|
|
|
104.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(194.0
|
)
|
|
|
45.2
|
|
|
|
29.8
|
|
Interest and investment income
|
|
|
11.9
|
|
|
|
39.3
|
|
|
|
31.5
|
|
Interest
expense(8)
|
|
|
(2.3
|
)
|
|
|
(2.3
|
)
|
|
|
(23.4
|
)
|
Gain (loss) on foreign exchange contracts
|
|
|
|
|
|
|
89.4
|
|
|
|
(5.8
|
)
|
Gain on litigation, net
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
Impairment of available for sale securities
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(16.2
|
)
|
|
|
|
|
Other (expense) income
|
|
|
(0.1
|
)
|
|
|
2.4
|
|
|
|
(2.0
|
)
|
Income tax provision
|
|
|
(45.7
|
)
|
|
|
(83.5
|
)
|
|
|
(20.8
|
)
|
Equity in net losses of affiliates
|
|
|
(495.7
|
)
|
|
|
(21.4
|
)
|
|
|
(7.2
|
)
|
Minority interest
|
|
|
|
|
|
|
(23.2
|
)
|
|
|
(24.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(692.9
|
)
|
|
$
|
29.7
|
|
|
$
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the elimination of intercompany sales and
intercompany Adjusted EBITDA, primarily for satellites under
construction by SS/L for Loral and its wholly owned subsidiaries
and for Satellite Services leasing transponder capacity to SS/L. |
|
(2) |
|
Represents the elimination of amounts attributed to Telesat
Canada whose results are reported in our consolidated statements
of operations as equity in net losses of affiliates. |
|
(3) |
|
Includes revenues from affiliates of $84.0 million,
$22.0 million and $11.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively. |
|
(4) |
|
Represents corporate expenses incurred in support of our
operations and for the years ended December 31, 2008, 2007
and 2006 includes $0 million, $0.3 million and
$1.2 million, respectively, of continuing expenses for
bankruptcy related matters, which after the adoption of
fresh-start accounting were classified as corporate general and
administrative expenses. |
|
(5) |
|
Includes non-cash stock-based compensation of $6.2 million
and $21.5 million for the years ended December 31,
2008 and 2007, respectively, as a result of shareholder approval
of the Stock Incentive Plan amendment on May 22, 2007 (see
Note 10 to the financial statements). |
|
(6) |
|
During the fourth quarter of 2008, we determined that the
implied fair value of SS/L goodwill had dropped below its
carrying value, and we recorded a charge to expense to reflect
this impairment. |
|
(7) |
|
In connection with the Telesat Canada transaction, which closed
on October 31, 2007, we recognized a gain on the
contribution of substantially all of the assets and related
liabilities of Loral Skynet to Telesat Canada (see Note 6
to the financial statements). |
|
(8) |
|
Interest expense for the year ended December 31, 2007
includes a reduction of $9 million resulting from the
reduction of warranty liability. |
42
2008
Compared with 2007 and 2007 Compared with 2006
The following compares our consolidated results for 2008, 2007
and 2006 as presented in our financial statements:
Revenues
from Satellite Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
Year Ended
|
|
|
2008
|
|
|
2007
|
|
|
|
December 31,
|
|
|
vs.
|
|
|
vs.
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Revenues from Satellite Manufacturing
|
|
$
|
881
|
|
|
$
|
814
|
|
|
$
|
697
|
|
|
|
8
|
%
|
|
|
17
|
%
|
Eliminations
|
|
|
(12
|
)
|
|
|
(53
|
)
|
|
|
(60
|
)
|
|
|
(77
|
)%
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Satellite Manufacturing as reported
|
|
$
|
869
|
|
|
$
|
761
|
|
|
$
|
637
|
|
|
|
14
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Satellite Manufacturing before eliminations
increased $67 million for 2008 as compared to 2007,
primarily as a result of $236 million of revenue from
$1.2 billion of new orders received in 2008, partially
offset by $163 million of reduced revenue from programs
completed or nearing completion which were awarded in earlier
periods. In addition, revenue in 2008 was reduced by
$3 million from losses on foreign exchange forward
contracts and revenue in 2007 included $3 million from the
renegotiation of orbital incentives. Eliminations for 2008
consist primarily of revenues applicable to Lorals
interest in a portion of the payload of the ViaSat-1 satellite
which is being constructed by SS/L (see Note 16 to the
financial statements). Eliminations for 2007 consisted primarily
of revenues recorded until October 31, 2007 for the
construction of Telstar 11N, a satellite then being manufactured
by SS/L for Loral Skynet. As a result, revenues from Satellite
Manufacturing as reported increased $108 million for 2008
as compared to 2007.
Revenues from Satellite Manufacturing before eliminations
increased $117 million for 2007 as compared to 2006,
primarily as a result of $155 million of revenue from
$721 million of new orders received in 2007 and
$236 million of increased revenue from $1 billion of
new orders received in 2006, partially offset by
$274 million of reduced revenue from programs completed or
nearing completion which were awarded in earlier years.
Eliminations consisted primarily of revenues recorded until
October 31, 2007 for the construction of Telstar 11N, a
satellite being manufactured by SS/L for Satellite Services. As
a result, revenues from Satellite Manufacturing as reported
increased $124 million in 2007 as compared to 2006.
Revenues
from Satellite Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
Year Ended
|
|
|
2007
|
|
|
|
December 31,
|
|
|
vs.
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Revenues from Satellite Services before specific items
|
|
$
|
|
|
|
$
|
126
|
|
|
$
|
149
|
|
|
|
(17
|
)%
|
Customer termination payment
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
Cash basis customer payments
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Satellite Services as reported
|
|
$
|
|
|
|
$
|
121
|
|
|
$
|
161
|
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Satellite Services in 2008 decreased from 2007 as
a result of the contribution of substantially all of the assets
and related liabilities of Loral Skynet to Telesat Canada on
October 31, 2007.
Revenues from Satellite Services before specific items in 2007
decreased $23 million compared to 2006. This reduction is
driven by reduced revenues of $26 million due to the
contribution of Loral Skynet to Telesat Canada on
October 31, 2007, $8 million resulting from reduced
revenue in 2007 due to Boeings discontinuation of service
on our Estrela do Sul satellite in late 2006, and reduced
revenues of $4 million as a result of the restructuring of
the network services business in late 2006. These reductions
were offset by higher utilization of $11 million, including
$2 million on the Satmex 6 transponders that were added to
the fleet in the fourth quarter of 2006 and
43
$4 million of increased usage of our network services
products. Revenues from Satellite Services as reported in 2007
were lower by $15 million as a result of Boeings
contract termination payment in 2006 and by $3 million due
to timing of cash revenue recognition. Eliminations primarily
consist of revenues from leasing transponder capacity to
Satellite Manufacturing. As a result, Revenues from Satellite
Services as reported decreased by $40 million in 2007 as
compared to 2006.
Cost of
Satellite Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Year Ended December 31,
|
|
|
vs.
|
|
|
vs.
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Cost of Satellite Manufacturing includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Satellite Manufacturing before specific identified
charges
|
|
$
|
747
|
|
|
$
|
657
|
|
|
$
|
537
|
|
|
|
14
|
%
|
|
|
23
|
%
|
Depreciation, amortization and stock-based compensation
|
|
|
39
|
|
|
|
36
|
|
|
|
23
|
|
|
|
7
|
%
|
|
|
56
|
%
|
Transponder rights provided to SS/L in the Satmex settlement
agreement
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
Accrued warranty obligations
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Provisions for inventory obsolescence
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Satellite Manufacturing
|
|
$
|
788
|
|
|
$
|
689
|
|
|
$
|
551
|
|
|
|
14
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Satellite Manufacturing as a% of Satellite Manufacturing
revenues as reported
|
|
|
91
|
%
|
|
|
90
|
%
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
Cost of Satellite Manufacturing as reported for 2008 increased
by $99 million over 2007. Cost of Satellite Manufacturing
before specific charges increased by $90 million. This
increase is primarily due to $67 million of increased costs
resulting from additional revenue during 2008 and costs of
$23 million for Telstar 11N which prior to the Telesat
Canada transaction were eliminated. Depreciation, amortization
and stock-based compensation expense increased $3 million,
primarily as a result of $1 million of compensation expense
related to restricted stock units awarded in 2007 and
$2 million of depreciation due to increased capital
expenditures related to facility expansion. Warranty expenses
increased $6 million as a result of five satellite launches
in 2008.
Cost of Satellite Manufacturing as reported for 2007 increased
by $138 million over 2006. Cost of Satellite Manufacturing
before specific charges increased by $120 million. This
increase is primarily due to $106 million of increased
costs resulting from additional revenue during the year and
forward loss recognition of $14 million for certain
satellite programs awarded during 2007. Included in 2006 is a
reduction of cost of $19 million related to transponder
rights provided to SS/L by the Satmex settlement agreement.
Warranty expenses improved $12 million based upon a
resolution of certain warranty obligations for less than
previously estimated amounts. Depreciation, amortization and
stock-based compensation expense increased by $13 million
as a result of additional amortization of fair value adjustments
in connection with the adoption of fresh start accounting and
$3 million from compensation expense related to restricted
stock units awarded during 2007.
44
Cost of
Satellite Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
Year Ended
|
|
|
2007
|
|
|
|
December 31,
|
|
|
vs.
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cost of Satellite Services includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Satellite Services before specific identified charges
|
|
$
|
|
|
|
$
|
42
|
|
|
$
|
53
|
|
|
|
(21
|
)%
|
Depreciation and amortization
|
|
|
|
|
|
|
44
|
|
|
|
46
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Satellite Services
|
|
$
|
|
|
|
$
|
86
|
|
|
$
|
99
|
|
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Satellite Services as a% of Satellite Services revenues
as reported
|
|
|
|
|
|
|
71
|
%
|
|
|
61
|
%
|
|
|
|
|
The decrease in Cost of Satellite Services in 2008 from 2007
resulted from the contribution of substantially all of the
assets and related liabilities of Loral Skynet to Telesat Canada
on October 31, 2007.
Cost of Satellite Services was $86 million and
$99 million for the years ended December 31, 2007 and
2006, respectively. Cost of Satellite Services before specific
identified charges decreased $11 million in 2007 as
compared to 2006 primarily as a result of the contribution of
Loral Skynet to Telesat Canada on October 31, 2007. In
addition, in 2007 there was a $2 million reduction in
personnel costs from 2006 due to lower headcount.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Year Ended December 31,
|
|
|
vs.
|
|
|
vs.
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Selling, general and administrative expenses includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses before specific
charges
|
|
$
|
87
|
|
|
$
|
133
|
|
|
$
|
118
|
|
|
|
(35
|
)%
|
|
|
12
|
%
|
Litigation costs
|
|
|
5
|
|
|
|
11
|
|
|
|
6
|
|
|
|
(58
|
)%
|
|
|
90
|
%
|
Stock based compensation
|
|
|
5
|
|
|
|
23
|
|
|
|
2
|
|
|
|
(77
|
)%
|
|
|
|
|
Continuing expenses for bankruptcy related matters
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses as reported
|
|
$
|
97
|
|
|
$
|
167
|
|
|
$
|
127
|
|
|
|
(42
|
)%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenues as reported
|
|
|
11
|
%
|
|
|
19
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses as reported were
$97 million and $167 million for the years ended
December 31, 2008 and 2007, respectively. Selling, general
and administrative expenses before specific charges decreased by
$46 million in 2008 as compared to 2007, due primarily to a
reduction of $28 million as a result of the contribution of
Loral Skynet to Telesat Canada on October 31, 2007 and
lower Corporate expenses of $17 million including
reductions of $7 million for deferred compensation due to
the decline in the market price of our common stock,
$6 million of severance costs recorded in 2007 due to staff
reductions (see Note 14 to the financial statements) and
$5 million due to reduced compensation from the staff
reductions. Litigation costs were $6 million lower in 2008
due to the conclusion of certain shareholder and noteholder
lawsuits. The stock-based compensation expense reduction of
$18 million resulted primarily from the 2007 charges of
$6 million attributable to acceleration of options in
connection with the Telesat Canada transaction and
$8 million from the approval of stock option plan
amendments at the stockholders meeting on May 22, 2007 (see
Note 10 to the financial statements).
Selling, general and administrative expenses as reported were
$167 million and $127 million for the years ended
December 31, 2007 and 2006, respectively. Selling, general
and administrative expenses before specific charges increased by
$15 million as compared to 2006, primarily due to:
increased SS/L costs of $16 million for research and
development of payload product and satellite control
improvements, $5 million for marketing related
45
expenses due to a higher volume of bid opportunities in the
market place and $2 million for other expenses and
increased corporate costs of $7 million for severance
related to personnel reductions. These cost increases were
partially offset by decreases at Satellite Services of
$2 million in marketing related expenses, $3 million
reversal of bad debt and other costs and $9 million as a
result of the contribution of Loral Skynet to Telesat Canada on
October 31, 2007. The increase in litigation costs was
primarily a result of various shareholder and noteholders suits.
Stock-based compensation expense of $23 million in 2007
included a charge of $6 million attributable to
acceleration of options in connection with the Telesat Canada
transaction and a charge of $8 million as a result of the
approval of stock option plan amendments at the stockholders
meeting on May 22, 2007. Continuing expenses for bankruptcy
related matters decreased $1 million as a result of minimal
professional fees incurred in 2007 as compared to 2006.
Gain on
Recovery from Customer Bankruptcy
During 2008, we recorded a gain of $9 million related to
distributions from a bankruptcy claim against a former customer
of Loral Skynet. The receivables underlying the claim had been
previously written-off or not recognized due to the
customers bankruptcy.
Impairment
of Goodwill
During 2008, we determined that the implied fair value of SS/L
goodwill, which was established in connection with our adoption
of fresh start accounting, had decreased below its
carrying value. We recorded a charge to expense in the fourth
quarter of 2008 of $187.9 million to reflect this
impairment.
Gain on
Contribution of Loral Skynet to Telesat Canada
Represents the gain in 2007 on the contribution of substantially
all of the assets and related liabilities of Loral Skynet to
Telesat Canada on October 31, 2007, in connection with the
Telesat Canada transaction, as follows (in millions):
|
|
|
|
|
Consideration received for the contribution of Loral Skynet to
Telesat Holdco:
|
|
|
|
|
Cash and marketable securities
|
|
$
|
61.5
|
|
Fair value of equity in Telesat Holdco
|
|
|
670.5
|
|
|
|
|
|
|
Total consideration
|
|
|
732.0
|
|
Book value of contributed net assets of Loral Skynet
|
|
|
440.5
|
|
|
|
|
|
|
Consideration in excess of book value
|
|
$
|
291.5
|
|
|
|
|
|
|
Gain recognized
|
|
$
|
104.9
|
|
|
|
|
|
|
The consideration we received for the contribution of
substantially all of Loral Skynets assets and liabilities
was $292 million greater than the carrying value of those
assets and liabilities. In accordance with
EITF 01-2,
Interpretations of APB Opinion No. 29, we recognized
a gain of $105 million, representing the gain attributable
to PSPs economic interest in the contributed assets and
liabilities of Loral Skynet through its 36% ownership interest
in Telesat Canada. Loral will have a significant continuing
interest in Telesat Canada and can only recognize a gain to the
extent of PSPs interest in the contributed assets of Loral
Skynet.
Gain on
Litigation Settlement
Represents a $9 million recovery of launch vehicle deposits
in 2006 in connection with a claim against a supplier for the
wrongful termination of launch service agreements.
46
Interest
and Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Interest and investment income
|
|
$
|
12
|
|
|
$
|
39
|
|
|
$
|
32
|
|
Interest and investment income decreased $27 million for
2008 as compared to 2007. This decrease includes
$12 million due to lower average investment balances in
2008 of $230 million compared with $390 million in
2007, as a result of the closing of the Telesat Canada
transaction on October 31, 2007 and the significant use of
cash during 2008, $11 million from the decreased sales of
Globalstar Inc. common stock in 2008 compared with 2007 and
$4 million from reduced interest rates on investments. As a
result of the fall in interest rates and our move to safer
investments during the financial crisis, our investment returns
decreased to approximately 3.00% in 2008 from approximately
5.25% in 2007.
Interest and investment income increased $7 million for the
year ended December 31, 2007 as compared to 2006 primarily
due to higher cash balances as a result of the completion of the
$300 million preferred stock financing in February 2007 and
higher short-term interest rates in 2007 over 2006. This
includes increases of $4 million due to higher cash
balances and short-term interest rates and an increase of
$4 million primarily due to the partial sale of our
holdings in Globalstar Inc. common stock. These increases were
partially offset by lower interest income on vendor financing
and orbital incentives of $1 million.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Interest cost before capitalized interest
|
|
$
|
3
|
|
|
$
|
12
|
|
|
$
|
26
|
|
Capitalized interest
|
|
|
(1
|
)
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost before capitalized interest decreased by
$9 million for the year ended December 31, 2008 as
compared to 2007. This reduction included $16 million due
to the extinguishment of Loral Skynet debt as a result of the
Telesat Canada transaction, partially offset by reduced interest
expense of $6 million in 2007 relating to warranty
liabilities. Capitalized interest decreased by $9 million
in 2008 due to the sale of the Telesat T11N satellite under
construction to Telesat Canada on October 31, 2007.
Interest cost before capitalized interest decreased by
$14 million for the year ended December 31, 2007 as
compared to 2006, primarily due to reduced interest expense of
$9 million relating to warranty liabilities. In addition,
interest expense was lower in 2007 by $5 million due to the
early extinguishment of the Loral Skynet 14% senior secured
notes and the repayment of the Valley National Bank loan in
connection with the Telesat Canada transaction (see Note 8
to the financial statements). Capitalized interest increased by
$7 million due to higher construction in process balances
primarily for the Telstar 11N satellite.
Gain
(Loss) on Foreign Exchange Contracts
For the year ended December 31, 2007, we recorded a net
gain of $89 million reflecting the change in the fair value
of the forward contracts and currency basis swap entered into by
Loral Skynet relating to the Telesat Canada transaction. The net
gain on these transactions, which was realized when the
instruments were contributed to Telesat Holdco on
October 23, 2007, has been recognized in the statement of
operations and avoided a corresponding increase in the US dollar
purchase price equivalent that would have been paid to BCE for
Telesat Canada. Loss on foreign exchange contracts in 2006
represents unrealized losses of $6 million on derivative
contracts entered into in connection with the anticipated
acquisition of Telesat Canada.
47
Gain on
Litigation, Net
During 2008, we recorded income of $58 million related to a
gain on litigation recovery from Rainbow DBS and expense of
$19.5 million related to the award of attorneys fees
and expenses to the plaintiffs for shareholder litigation
arising from the issuance of our Series-1 Preferred Stock which
was concluded during 2008 (see Note 14 to the financial
statements).
Impairment
of Available for Sale Securities
During 2008, we recorded impairment charges of $5.8 million
to reflect other-than-temporary declines in the value of our
investment in Globalstar Inc. common stock (see Note 6 to
the financial statements).
Loss on
Extinguishment of Debt
For the year ended December 31, 2007, we recorded a charge
for the early extinguishment of the Loral Skynet 14% senior
secured notes, which is comprised of a $13 million
redemption premium and a $4 million write-off of deferred
financing costs.
Other
(Expense) Income
Other income decreased $2 million in 2008 from 2007,
primarily due to the recognition of a $4 million deferred
gain realized in 2007 in connection with the sale of an orbital
slot in 2006, partially offset by losses on foreign currency
transactions in 2007 (other than the foreign exchange contracts
related to the Telesat Canada transaction).
Other income increased $4 million, primarily due to the
recognition of a $4 million deferred gain realized in 2007
in connection with the sale of an orbital slot in 2006 (compared
to $1 million recognized in 2006) and the write-off of
an investment of $3 million in the fourth quarter of 2006,
partially offset by losses on foreign currency transactions
(other than the foreign exchange contracts related to the
Telesat Canada transaction).
Income
Tax Provision
During 2008, 2007 and 2006, we continued to maintain a 100%
valuation allowance against our net deferred tax assets, with
the exception of our $12.5 million of deferred tax asset
relating to AMT credit carryforwards. As of December 31,
2008, we had valuation allowances totaling $487.8 million,
which included a balance of $185.9 million relating to Old
Loral periods preceding our adoption of fresh-start accounting
on October 1, 2005. We will continue to maintain the
valuation allowance until sufficient positive evidence exists to
support its reversal. In the future if we were to determine that
we will be able to realize all or a portion of the benefit from
our deferred tax assets, under SFAS 141 (R) all future
reversals of the valuation allowance balance at October 1,
2005 will be recorded as a reduction to the income tax
provision. During 2008 and 2007, we utilized the benefits from
$38.6 million and $35.1 million, respectively, of
deferred tax assets from Old Loral to reduce our current tax
liability. The realization of these benefits created an excess
valuation allowance of $38.6 million in 2008 and
$35.1 million in 2007, the reversal of which was recorded
as a reduction to goodwill in accordance with SFAS 141.
Our income tax provision can be summarized as follows:
(i) for 2008, we recorded a current tax provision of
$16.3 million, which included a provision of
$41.6 million to increase our liability for uncertain tax
positions and a current tax benefit of $25.4 million
derived from tax strategies and a deferred tax provision of
$29.4 million, resulting in a total provision of
$45.7 million on a pre-tax loss of $151.5 million;
(ii) for 2007, we recorded a current tax provision of
$51.3 million, including a provision of $17.1 million
to increase our liability for uncertain tax positions, and a
deferred tax provision of $32.2 million, resulting in a
total provision of $83.5 million on pre-tax income of
$157.8 million; and (iii) for 2006, we recorded a
current tax provision of $11.8 million and a deferred tax
provision of $9.1 million, resulting in a total provision
of $20.9 million on pre-tax income of $30.1 million.
The deferred income tax provision for 2008 of $29.4 million
related primarily to (i) a provision of $38.6 million
recorded as a result of having utilized deferred tax benefits
from Old Loral to reduce our tax liability (where the excess
valuation allowance was recorded as a reduction to goodwill)
offset by (ii) a benefit of $9.2 million for the
increase to our deferred tax asset for federal and state AMT
credits.
48
The deferred income tax provision for 2007 of $32.2 million
related primarily to (i) a provision of $35.1 million
on current year income to the extent the taxes imposed on such
income were reduced by deferred tax benefits from Old Loral
(where the excess valuation allowance was recorded as a
reduction to goodwill), (ii) a provision of
$2.2 million for the decrease to our deferred tax asset for
federal and state AMT credits (which excludes an increase to AMT
credits of $2.2 million upon adoption of FIN 48),
(iii) an additional valuation allowance of
$3.0 million required against a net deferred tax asset
created when we reduced the deferred tax credits in accumulated
other comprehensive income by $3.0 million, offset by
(iv) a benefit of $9.0 million relating to current
activity.
The deferred income tax provision for 2006 of $9.1 million
related to (i) a provision of $10.4 million on current
year income to the extent the taxes imposed on such income were
reduced by deferred tax benefits from Old Loral (where the
excess valuation allowance was recorded as a reduction to
goodwill), (ii) offset by a benefit of $1.3 million
for the increase to our deferred tax asset for additional
federal and state AMT credits.
During 2006, we also recorded a deferred tax provision of
$26.0 million in accumulated other comprehensive income
related primarily to our adoption of Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans
(SFAS 158) (see Note 9 to the
financial statements), which created an excess valuation
allowance of $26.0 million that was recorded as a reduction
to goodwill.
See Critical Accounting Matters Taxation
below for discussion of our accounting method for income
taxes.
Equity in
Net Losses of Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Telesat Canada
|
|
$
|
(479.6
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
|
|
XTAR
|
|
|
(16.1
|
)
|
|
|
(10.6
|
)
|
|
|
(7.4
|
)
|
Other
|
|
|
|
|
|
|
(9.0
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(495.7
|
)
|
|
$
|
(21.4
|
)
|
|
$
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 31, 2007, Loral and its Canadian Partner, PSP,
through a newly-formed joint venture, completed the acquisition
of Telesat Canada from BCE. In connection with this acquisition,
Loral transferred substantially all of the assets and related
liabilities of Loral Skynet to Telesat Canada. Loral holds a 64%
economic interest and a
331/3%
voting interest in Telesat Holdco, the ultimate parent company
of the resulting new entity. Loral accounts for this investment
using the equity method of accounting (see Note 6 to the
financial statements).
49
Summary financial information for Telesat Canada for the year
ended December 31, 2008 and the period October 31,
2007 to December 31, 2007 and as of December 31, 2008
and 2007 follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
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|
|
|
|
|
|
October 31,
|
|
|
|
Year Ended
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2007
|
|
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|
December 31,
|
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|
to December 31,
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2008
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|
2007
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|
|
Statement of Operations Data:
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|
|
|
|
|
|
|
|
Revenues
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|
$
|
685.2
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|
|
$
|
117.8
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|
Operating expenses
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|
|
(258.0
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)
|
|
|
(52.5
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)
|
Impairment of long-lived and intangible assets
|
|
|
(454.9
|
)
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|
|
|
|
Depreciation, amortization and stock-based compensation
|
|
|
(226.0
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)
|
|
|
(41.2
|
)
|
Operating income
|
|
|
(253.7
|
)
|
|
|
24.1
|
|
Interest expense
|
|
|
(231.1
|
)
|
|
|
(41.3
|
)
|
Other expense, net
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|
|
(403.1
|
)
|
|
|
(45.6
|
)
|
Income tax benefit
|
|
|
139.9
|
|
|
|
61.5
|
|
Net loss
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|
|
(748.0
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)
|
|
|
(1.3
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)
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|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Balance Sheet Data:
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|
|
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|
|
|
|
Current assets
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|
$
|
179.8
|
|
|
$
|
143.7
|
|
Total assets
|
|
|
4,273.2
|
|
|
|
5,610.0
|
|
Current liabilities
|
|
|
171.4
|
|
|
|
229.5
|
|
Long-term debt, including current portion
|
|
|
2,901.6
|
|
|
|
2,828.0
|
|
Total liabilities
|
|
|
3,760.2
|
|
|
|
4,156.7
|
|
Redeemable preferred stock
|
|
|
116.0
|
|
|
|
143.1
|
|
Shareholders equity
|
|
|
397.0
|
|
|
|
1,310.2
|
|
As described in Note 6 to the financial statements,
Lorals equity in net loss of Telesat Canada is based on
our proportionate share of their results in accordance with
U.S. GAAP and in U.S. dollars. Our equity in net loss
of Telesat Canada excludes amortization of the fair value
adjustments applicable to Telesat Canadas acquisition of
the Loral Skynet assets and liabilities. Our equity in net loss
of Telesat Canada also reflects the elimination of our profit,
to the extent of our beneficial interest, on satellites we are
constructing for them.
Impairment of long-lived and intangible assets consists
primarily of an impairment charge to reduce orbital slot assets
to fair value. Other expense, net includes non-cash foreign
exchange losses of $654.2 million and $121.4 million
and non-cash gains on financial instruments of
$254.7 million and $78.1 million in 2008 and 2007,
respectively.
Telesat Canadas operating results are subject to
fluctuations as a result of exchange rate variations to the
extent that transactions are made in currencies other than
Canadian dollars. Telesat Canadas main currency exposures
as of December 31, 2008, lie in its U.S. dollar
denominated cash and cash equivalents, accounts receivable,
accounts payable and debt financing. The most significant impact
of variations in the exchange rate is on the U.S. dollar
denominated debt financing. We estimated that, after considering
the impact of hedges, a five percent weakening of the Canadian
dollar against the U.S. dollar at December 31, 2008
would have increased Telesat Canadas net loss for the year
2008 by approximately $177 million, while a five percent
strengthening of the Canadian dollar against the
U.S. dollar at December 31, 2008 would have decreased
Telesat Canadas net loss for the year 2008 by
approximately $177 million.
The equity losses in XTAR, L.L.C. (XTAR), our 56%
owned joint venture, represent our share of XTAR losses incurred
in connection with its operations. Other equity losses in
affiliates for 2007 include $3 million of cash
distributions received from Globalstar de Mexico for which our
investment balance has been written down to zero
50
and a loss of $11 million recognized in connection with an
agreement to sell our Globalstar investment partnership in
Brazil. This sale was completed in the first quarter of 2008.
Minority
Interest
Dividend expense on Loral Skynets Series A Preferred
Stock was $23.2 million and $24.8 million for the
years ended December 31, 2007 and 2006, respectively, and
is reflected as minority interest on our consolidated statements
of operations. On November 5, 2007, Loral Skynet redeemed
all issued and outstanding shares of this preferred stock in
connection with the completion of the Telesat Canada transaction
(see Note 10 to the financial statements).
Backlog
Backlog as of December 31, 2008 and 2007 was as follows (in
millions):
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|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Satellite Manufacturing
|
|
$
|
1,381
|
|
|
$
|
1,025
|
|
Satellite Services
|
|
|
4,207
|
|
|
|
5,251
|
|
|
|
|
|
|
|
|
|
|
Total backlog before eliminations
|
|
|
5,588
|
|
|
|
6,276
|
|
Satellite Manufacturing eliminations
|
|
|
(25
|
)
|
|
|
|
|
Satellite Services eliminations
|
|
|
(4,207
|
)
|
|
|
(5,251
|
)
|
|
|
|
|
|
|
|
|
|
Total backlog
|
|
$
|
1,356
|
|
|
$
|
1,025
|
|
|
|
|
|
|
|
|
|
|
It is expected that 67% of satellite manufacturing backlog as of
December 31, 2008 will be recognized as revenue during 2009.
Telesat Canada backlog at December 31, 2008 was
approximately $4.2 billion, of which approximately 12% will
be recognized as revenue during 2009. Included in backlog as of
December 31, 2008 is a contract covering the entire
capacity of the Nimiq 5 satellite, which has been leased for the
life of the satellite. This contract contains provisions such
that the customer, assuming the satellite is successfully and
timely launched and is operating nominally, may only terminate
its contract by paying Telesat Canada the present value of the
entire contracted amounts that would have been due for the
remaining life of the satellite.
As of December 31, 2008, Telesat Canada had received
approximately $275.9 million of customer prepayments,
including approximately $35.7 million relating to
satellites under construction. If the launch of a satellite
under construction were to fail or a customer were to terminate
its contract with Telesat Canada as a result of a substantial
delay in the launch of the satellite, Telesat Canada would be
obligated to return the customer prepayments applicable to such
satellite. Such repayment obligations would be funded by
insurance proceeds (if any), cash on hand
and/or
borrowing availability under the revolving credit facility.
Critical
Accounting Matters
The preparation of financial statements in conformity with
U.S. GAAP requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and
expenses reported for the period. Actual results could differ
from estimates.
Fresh-Start
Accounting
In connection with our emergence from Chapter 11, we
adopted fresh-start accounting as of October 1, 2005, which
required all of our assets and liabilities to be stated at
estimated fair value. Significant judgment was exercised by
management in estimating the fair values.
51
Revenue
recognition
Most of our Satellite Manufacturing revenue is associated with
long-term fixed-price contracts. Revenue and profit from
satellite sales under these long-term contracts are recognized
using the cost-to-cost percentage of completion method, which
requires significant estimates. We use this method because
reasonably dependable estimates can be made based on historical
experience and various other assumptions that are believed to be
reasonable under the circumstances. These estimates include
forecasts of costs and schedules, estimating contract revenue
related to contract performance (including estimated amounts for
penalties, performance incentives and orbital incentives that
will be received as the satellite performs on orbit) and the
potential for component obsolescence in connection with
long-term procurements. These estimates are assessed continually
during the term of the contract and revisions are reflected when
the conditions become known. Provisions for losses on contracts
are recorded when estimates determine that a loss will be
incurred on a contract at completion. Under firm fixed-price
contracts, work performed and products shipped are paid for at a
fixed price without adjustment for actual costs incurred in
connection with the contract; accordingly, favorable changes in
estimates in a period will result in additional revenue and
profit, and unfavorable changes in estimates will result in a
reduction of revenue and profit or the recording of a loss that
will be borne solely by us.
Billed
receivables, vendor financing and long-term
receivables
We are required to estimate the collectibility of our billed
receivables which are included in contracts in process on our
consolidated balance sheet, vendor financing and long-term
receivables. A considerable amount of judgment is required in
assessing the collectibility of these receivables, including the
current creditworthiness of each customer and related aging of
the past due balances. Charges for (recoveries of) bad debts
recorded to the income statement on billed receivables for the
years ended December 31, 2008, 2007 and 2006, were
$0.7 million, $(2.4) million, and $0.3 million,
respectively. At December 31, 2008 and 2007, billed
receivables were net of allowances for doubtful accounts of
$0.9 million and $0.2 million, respectively. We
evaluate specific accounts when we become aware of a situation
where a customer may not be able to meet its financial
obligations due to a deterioration of its financial condition,
credit ratings or bankruptcy. The reserve requirements are based
on the best facts available to us and are re-evaluated
periodically.
Inventories
Inventories are reviewed for estimated obsolescence or unusable
items and, if appropriate, are written down to the net
realizable value based upon assumptions about future demand and
market conditions. If actual future demand or market conditions
are less favorable than those we project, additional inventory
write-downs may be required. These are considered permanent
adjustments to the cost basis of the inventory. Charges for
inventory obsolescence recorded to the consolidated statements
of operations for the years ended December 31, 2008 and
2007 were insignificant. Charges for inventory obsolescence
recorded to the consolidated statement of operations for the
year ended December 31, 2006 were $1.7 million.
Fair
Value Measurements
All available for sale securities are measured at fair value
based on quoted market prices at the end of the reporting
period. In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements
(SFAS 157), to define fair value, establish
a framework for measuring fair value in accordance with
U.S. GAAP and expand disclosures about fair value
measurements. SFAS 157 establishes a fair value measurement
hierarchy to price a particular asset or liability. In February
2008, the FASB issued FASB Staff Position
157-2,
Effective Date of FASB Statement No. 157, which
provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and liabilities (such as
goodwill), except those that are recognized or disclosed in the
Companys financial statements at fair value at least
annually. Accordingly, the Company adopted the provisions of
SFAS 157 only for its financial assets and liabilities
recognized or disclosed at fair value on a recurring basis
effective January 1, 2008. The Companys financial
assets measured at fair value on a recurring basis as of
December 31, 2008 consist of marketable securities which
were valued at $0.2 million and foreign exchange forward
contracts valued at $14.6 million. The Company has no
financial liabilities measured at fair value on a recurring
basis as of
52
December 31, 2008. The marketable securities are classified
as Level 1 and the foreign exchange forward contracts are
classified as Level 2 in the fair value measurement
hierarchy under SFAS 157 as of December 31, 2008.
A Level 1 fair value represents a fair value that is
derived from unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability
to access at the measurement date.
A Level 2 fair value represents a fair value which is
derived from observable market data (i.e. benchmark yields, spot
rates and other industry and economic events).
Level 1 Lorals marketable
securities, which are included in other current assets,
consisted entirely of an investment in the common stock of
Globalstar Inc. (see Note 6 to the financial statements).
Lorals investment in Globalstar Inc. is accounted for as
an available for sale security under the provisions
of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115).
Generally, unrealized gains and losses on this investment are
recorded as a component of accumulated other comprehensive
income. For the year ended December 31, 2008, we recorded
impairment charges of $5.8 million for other-than-temporary
declines in the value of our investment in Globalstar Inc.
common stock.
Level 2 During 2008, Loral entered into
a series of foreign exchange forward contracts, with maturities
through 2011, designed to manage the risk of currency exchange
rate fluctuations on cash receipts associated with a satellite
manufacturing contract denominated in EUROs. These contracts
have been designated as cash flow hedges and are tested
quarterly for effectiveness. The effective portion of the gain
or loss on a cash flow hedge is recorded as a component of
accumulated other comprehensive income and the remaining gain or
loss is included in income. The Company has elected to use the
income approach to value the derivatives, using observable
Level II market expectations at the measurement date and
standard valuation techniques to convert future amounts to a
single present value amount assuming participants are motivated,
but not compelled to transact. Level II inputs are limited
to quoted prices for similar assets or liabilities in active
markets and inputs other than quoted prices that are observable
for the asset or liability (including interest rates and credit
risk). As of December 31, 2008, the fair value of these
contracts was $14.6 million, of which $8.9 million was
included in other current assets and $5.7 million was
included in other assets based upon the maturity dates of the
forward contracts. During the year ended December 31, 2008,
we recorded a reduction to revenue of $2.7 million and
recorded an unrealized gain in accumulated other comprehensive
income of $18.2 million related to these contracts.
Evaluation
of Investments in Affiliates for Impairment
The carrying values of our investments in affiliates are
reviewed for impairment in accordance with Accounting Principles
Board (APB) Opinion No. 18, Equity Method of
Accounting for Investments in Common Stock. We monitor our
equity method investments for factors indicating
other-than-temporary impairment. An impairment loss would be
recognized when there has been a loss in value of the affiliate
that is other than temporary. Evaluating investments in
affiliates for impairment requires significant subjective
judgments by management.
Taxation
Loral is subject to U.S. federal, state and local income
taxation on its worldwide income and foreign taxes on certain
income from sources outside the United States. Our foreign
subsidiaries are subject to taxation in local jurisdictions.
Telesat Canada is subject to tax in Canada and other
jurisdictions and Loral will provide in operating earnings any
additional U.S. current or deferred tax required on
distributions received or deemed distributions from Telesat
Canada.
We use the liability method in accounting for taxes whereby
income taxes are recognized during the year in which
transactions are recorded in the financial statements. Deferred
taxes reflect the future tax effect of temporary differences
between the carrying amount of assets and liabilities for
financial and income tax reporting and are measured by applying
statutory tax rates in effect for the year during which the
differences are expected to reverse. We assess the
recoverability of our deferred tax assets and, based upon this
analysis, record a valuation allowance against the deferred tax
assets to the extent recoverability does not satisfy the
more likely than not recognition criteria in
SFAS 109. Based upon this analysis, we concluded during the
fourth quarter of 2002 that, due to
53
insufficient positive evidence substantiating recoverability, a
100% valuation allowance should be established for our net
deferred tax assets.
For 2008, we continued to maintain the 100% valuation allowance
against our net deferred tax assets increasing the valuation
allowance at December 31, 2007 of $241.2 million by
$246.5 million to a balance of $487.8 million at
December 31, 2008, which included $185.9 million
relating to the opening balance at October 1, 2005. As of
December 31, 2008, we had gross deferred tax assets of
approximately $532.5 million, which when offset by our
deferred tax liabilities of $32.2 million and our valuation
allowance of $487.8 million, resulted in a net deferred tax
asset of $12.5 million on our consolidated balance sheet.
We will maintain the valuation allowance until sufficient
positive evidence exists to support its reversal. In the future,
if we were to determine that we will be able to realize all or a
portion of the benefit from our deferred tax assets, under
SFAS 141 (R) any reduction to the valuation allowance
balance at October 1, 2005 will be recorded as a reduction
to the income tax provision. During 2008, we reversed
$38.6 million of excess valuation allowance relating to the
balance as of October 1, 2005, which was recorded as a
reduction to goodwill in accordance with SFAS 141.
Effective January 1, 2007, we adopted the Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a
companys financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected
to be taken in a tax return. For benefits to be recognized in
the financial statements, a tax position must be
more-likely-than-not to be sustained upon examination by the
taxing authorities based on the technical merits of the
position. The amount recognized is measured as the largest
amount of benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. The interpretation also
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. The Company recognizes accrued interest and
penalties related to uncertain tax positions in income tax
expense (see Note 9 to the financial statements).
Prior to adopting FIN 48, our policy was to establish tax
contingency liabilities for potential audit issues. The tax
contingency liabilities were based on our estimate of the
probable amount of additional taxes that may be due in the
future. Any additional taxes due would be determined only upon
completion of current and future federal, state and
international tax audits.
Management has concluded that, as of December 31, 2008, the
previously reported material weakness relating to our accounting
for and disclosure of income taxes has been remediated.
Pension
and other employee benefits
We maintain a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans. In addition to
providing pension benefits, we provide certain health care and
life insurance benefits for retired employees and dependents.
These pension and other employee benefit costs are developed
from actuarial valuations. Inherent in these valuations are key
assumptions, including the discount rate and expected long-term
rate of return on plan assets. Material changes in these pension
and other employee postretirement benefit costs may occur in the
future due to changes in these assumptions, as well as our
actual experience.
The discount rate is subject to change each year, based on a
hypothetical yield curve developed from a portfolio of high
quality, corporate, non-callable bonds with maturities that
match our projected benefit payment stream. The resulting
discount rate reflects the matching of the plan liability cash
flows to the yield curve. Changes in applicable high-quality
long-term corporate bond indices, such as the Moodys AA
Corporate Bond Index, are also considered. The discount rate
determined on this basis was 6.5% as of December 31, 2008,
which was unchanged from December 31, 2007.
The expected long-term rate of return on pension plan assets is
selected by taking into account the expected duration of the
plans projected benefit obligation, asset mix and the fact
that its assets are actively managed to mitigate risk. Allowable
investment types include equity investments and fixed income
investments. Pension plan assets are managed by Russell
Investment Corp. (Russell), which allocates the
assets into specified Russell-designed funds as we direct. Each
specified Russell fund is then managed by investment managers
chosen by
54
Russell. The targeted long-term allocation of our pension plan
assets is 60% in equity investments and 40% in fixed income
investments. Based on this target allocation, the twenty five
year historical return of our asset mix has been 9.0%. The
expected long-term rate of return on plan assets determined on
this basis was 8.5% for 2008, 8.5% for 2007 and 9% for 2006. For
2009, we will use an expected long-term rate of return of 8%.
These pension and other employee postretirement benefit costs
are expected to increase to approximately $21.5 million in
2009 from $9.5 million in 2008, primarily due to the
decrease in the expected return on assets and increased
amortization of actuarial losses. Lowering the discount rate and
the expected long-term rate of return each by 0.5% would have
increased these pension and other employee postretirement
benefits costs by approximately $0.2 million and
$1.4 million, respectively, in 2008.
The benefit obligations for pensions and other employee benefits
exceeded the fair value of plan assets by $235 million at
December 31, 2008 (the unfunded benefit
obligations). We are required to recognize the funded
status of a benefit plan on our balance sheet. Market conditions
and interest rates significantly affect future assets and
liabilities of Lorals pension and other employee benefits
plans.
Stock-Based
Compensation
We use the fair value method of accounting for stock-based
compensation, pursuant to the provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123R). In addition, we account for
options granted to non-employees in accordance with EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. We use the
Black-Scholes-Merton option-pricing model to measure fair value
of these stock option awards. The Black-Scholes-Merton model
requires us to make significant judgments regarding the
assumptions used within the model, the most significant of which
are the stock price volatility assumption, the expected life of
the option award, the risk-free rate of return and dividends
during the expected term. Changes in these assumptions could
have a material impact on the amount of stock-based compensation
we recognize. (See Notes 2 and 10 to the financial
statements).
Goodwill
and Other Intangible Assets
Goodwill represents the amount by which the Companys
reorganization equity value exceeded the fair value of its
tangible assets and identified intangible assets less its
liabilities, as of October 1, 2005, the date we adopted
fresh-start accounting. Pursuant to the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142), goodwill is not amortized.
Goodwill is subject to an annual impairment test, or if events
and circumstances change and indicators of impairment are
present, goodwill will be tested for impairment between annual
tests. As a result of the decline of Lorals stock price
and the decline in comparable company values, we performed an
interim impairment test as of June 30, 2008 and updated our
annual impairment test through November 30, 2008. This most
recent impairment test resulted in the recording of an
impairment charge in 2008 for the entire goodwill balance of
$187.9 million (see Notes 2 and 7 to the financial
statements). The Companys estimate of the fair value of
SS/L employed both a comparable public company analysis, which
considered the valuation multiples of companies deemed
comparable, in whole or in part, to the Company and a discounted
cash flow analysis that calculated a present value of the
projected future cash flows of SS/L. The Company considered both
quantitative and qualitative factors in assessing the
reasonableness of the underlying assumptions used in the
valuation process. Testing goodwill for impairment requires
significant subjective judgments by management.
Goodwill also had been reduced by the decreases to the valuation
allowance as of October 1, 2005 and other tax adjustments
(see Income Taxes, below) and the transfer in October 2007 of
substantially all of the assets and related liabilities of Loral
Skynet in connection with the Telesat Canada transaction. For
the year ended December 31, 2008 we recorded a reduction to
goodwill in the amount of $38.6 related to the reduction of our
income tax valuation allowance as of October 1, 2005.
As of December 31, 2008, intangible assets consist
primarily of internally developed software and technology and
trade names recorded in connection with the adoption of
fresh-start accounting. The fair values of our intangible assets
were calculated using several approaches that encompassed the
use of excess earnings, relief from royalty and the
build-up
methods. The excess earnings, relief from royalty and
build-up
approaches are variations of the income approach. The income
approach, more commonly known as the discounted cash flow
55
approach, estimates fair value based on the cash flows that an
asset can be expected to generate over its useful life. This
process involves subjective judgment by management. Identifiable
intangible assets with finite useful lives are amortized on a
straight-line basis over the estimated useful lives of the
assets.
Contingencies
Contingencies by their nature relate to uncertainties that
require management to exercise judgment both in assessing the
likelihood that a liability has been incurred as well as in
estimating the amount of potential loss, if any. We accrue for
costs relating to litigation, claims and other contingent
matters when such liabilities become probable and reasonably
estimable. Such estimates may be based on advice from third
parties or on managements judgment, as appropriate. Actual
amounts paid may differ from amounts estimated, and such
differences will be charged to operations in the period in which
the final determination of the liability is made. Management
considers the assessment of loss contingencies as a critical
accounting policy because of the significant uncertainty
relating to the outcome of any potential legal actions and other
claims and the difficulty of predicting the likelihood and range
of the potential liability involved, coupled with the material
impact on our results of operations that could result from legal
actions or other claims and assessments. The most important
contingencies affecting our financial statements are detailed in
Note 14 to the financial statements, Commitments and
Contingencies.
Liquidity
and Capital Resources
Loral
As described above, the Companys principal assets are
ownership of 100% of the issued and outstanding capital stock of
SS/L and a 64% non-controlling economic interest in Telesat
Canada. In addition, the Company has a 56% non-controlling
economic interest in XTAR. SS/Ls operations are
consolidated in the Companys financial statements while
the operations of Telesat Canada and XTAR are not consolidated
but presented using the equity method of accounting. The Parent
Company has no debt. SS/L and Telesat Canada both have third
party debt with financial institutions and XTAR has debt to its
LLC member, Hisdesat, Lorals joint venture partner in
XTAR. In addition, XTAR has an obligation to Arianespace, S.A.
which it expects will be fully satisfied by June 30, 2009.
The Parent Company has provided a guarantee of the SS/L debt but
has not provided a guarantee for the Telesat Canada or XTAR
debt. Cash is maintained at the Parent Company, SS/L, Telesat
Canada and at XTAR to support the operating needs of each
respective entity. The ability of SS/L and Telesat Canada to pay
dividends and management fees in cash to the Parent Company is
governed by applicable covenants relating to the debt at each of
those entities and in the case of Telesat Canada and XTAR by
their respective shareholder agreements.
Cash and
Available Credit
At December 31, 2008, the Company had $118 million of
cash and cash equivalents and $6 million of restricted
cash. On October 16, 2008, SS/L entered into a
$100 million revolving credit agreement with a group of
banks (the SS/L Credit Agreement) and as of
December 31, 2008, $55 million was drawn in the form
of loans and approximately $5 million was issued in the
form of letters of credit. Restricted cash decreased
approximately $19 million during 2008 due to the release of
restrictions on cash relating to the Skynet Noteholders
Litigation ($12 million) and to the replacement of
SS/Ls former Letter of Credit Facility ($7 million).
At February 27, 2009, the Company had approximately
$126 million of cash and cash equivalents, restricted cash
remained at the year end level, and SS/L had reduced its
borrowings under the SS/L Credit Agreement to $25 million.
This improvement in our net cash position is primarily the
result of receipt of satellite contract milestone payments in
the first quarter of 2009.
Cash
Management
We have a cash management investment program that seeks a
competitive return while maintaining a conservative risk
profile. Our cash management investment policy establishes what
we believe to be conservative guidelines relating to the
investment of surplus cash. The policy allows us to invest in
commercial paper, money market funds and other similar short
term investments but does not permit us to engage in speculative
or leveraged transactions, nor does it permit us to hold or
issue financial instruments for trading purposes. The cash
management investment policy was designed to preserve capital
and safeguard principal, to meet all of our liquidity
requirements
56
and to provide a competitive rate of return. The policy
addresses dealer qualifications, lists approved securities,
establishes minimum acceptable credit ratings, sets
concentration limits, defines a maturity structure, requires all
firms to safe keep securities on our behalf, requires certain
mandatory reporting activity and discusses review of the
portfolio. We operate the cash management investment program
under the guidelines of our investment policy and continuously
monitor the investments to avoid risks.
We currently invest our cash in several liquid money market
funds. These money market funds include Treasury funds,
Government funds, and Prime AAA funds. The dispersion across
funds reduces the exposure of a default at one fund. We do not
currently hold any investments in auction rate securities or
enhanced money market funds that have been subject to liquidity
issues and price declines.
Liquidity
At the Parent Company, we expect that our cash and cash
equivalents will be sufficient to fund our projected
expenditures for the year. For 2009, these expenditures include
funding operating costs of approximately $12.3 million, net
of management fees, funding approximately $21.3 million for
our portion of the construction and launch of the ViaSat 1
satellite, $8.8 million of attorney fees that were paid in
January as required under the Implementing Order by the Court of
Chancery in the Delaware Plaintiffs litigation regarding the
issuance of our Series-1 Preferred Stock to MHR in 2007 (see
Note 14 to the financial statements) and an additional
$4.5 million investment in XTAR (see Note 6 to the
financial statements). The Company has also received a request
for indemnification from its directors who are affiliated with
MHR for legal costs in the Delaware Plaintiffs litigation (see
Note 14 to the financial statements) that may or may not be
recoverable from insurance. We believe that SS/L, Telesat Canada
and XTAR will have sufficient liquidity to fund their respective
operations and capital requirements and make all required debt
service as discussed below.
Telesat Canadas debt agreements contain restrictions
relating to the cash payments under Lorals consulting
agreement with Telesat Canada and restrict the payment of cash
dividends above $75 million. As a result, the Parent
Company expects that in the next year the $5 million annual
fee under its consulting agreement with Telesat Canada will
continue to be paid in subordinated notes rather than cash, and
that it will not receive cash dividends from Telesat Canada.
In addition to our cash on hand we may consider accessing the
capital markets for debt or equity at the Parent Company. The
proceeds of a debt or equity offering would be used to further
strengthen our balance sheet, given the ongoing difficult
financial environment, and provide liquidity to fund various
potential growth opportunities for our business lines. This
would not only provide for the contingencies at SS/L discussed
below but also bolster the confidence of SS/Ls customers
in SS/L as a critical supplier. Given the current environment,
however, there can be no assurance that the Company will be able
to obtain such financing on favorable terms acceptable to us, if
at all.
Space
Systems/Loral
Cash
In 2008, SS/L, largely related to supporting growth, used
approximately $180 million of cash from operations
primarily from increased contract assets of approximately
$173 million resulting from milestone payments from
customers that lagged behind SS/L expenditures, and the funding
of approximately $44 million of orbital receivables (net of
$19 million prepayment) on its satellite contracts in the
normal course, offset by approximately $43 million in net
income adjusted for non-cash items. In addition, capital
expenditures of approximately $54 million in 2008 were in
excess of recurring requirements which we expect to normalize at
$25 million to $30 million in future years as SS/L
substantially completed its facility expansion and continues its
program of upgrading next-generation test equipment.
In 2009, SS/L anticipates that it will significantly improve its
cash flow. While SS/L will continue to build its orbital
receivable balance, overall cash flow from operations in 2009 is
expected to be positive, as the same satellite construction
contracts that used cash in 2008 have significant milestone
payments that become due during 2009. In addition, capital
expenditures at SS/L in 2009 are anticipated to be approximately
$41 million, significantly lower than the 2008 level
reflecting substantial completion of its facility expansion.
SS/L maintains the flexibility to defer
57
or reduce a significant portion of its ongoing capital
expenditures if the volume of ongoing business is materially
reduced or as other circumstances may require. During the first
two months of 2009, SS/L repaid $30 million of the
$55 million of outstanding debt on December 31, 2008
under the SS/L Credit Agreement.
Available
Credit and Liquidity
The SS/L Credit Agreement, which is guaranteed pursuant to a
Parent Guarantee Agreement (the Parent Guarantee),
provides SS/L with a $100 million revolving credit
facility, including a $50 million letter of credit
sublimit. The SS/L Credit Agreement matures on October 16,
2011, and is secured by the assets and common stock of SS/L. The
SS/L Credit Agreement contains certain covenants which, among
other things, limit the incurrence of additional indebtedness,
capital expenditures, investments, dividends or stock
repurchases, asset sales, mergers and consolidations, liens,
changes to the line of business and other matters customarily
restricted in such agreements. It also contains financial
covenants whereby SS/L must maintain a certain consolidated
leverage ratio and consolidated interest coverage ratio. SS/L
anticipates that over the coming year it will be in compliance
with its financial covenants and have the full $100 million
available to it under the SS/L Credit Agreement. The Parent
Guarantee limits the amount of dividends or other distributions
to our stockholders that can be made by Loral from the
disposition of any capital stock of Telesat Holdings Inc. to the
greater of
(i) 662/3%
of the proceeds or (ii) the amount by which the proceeds
exceed $200 million.
SS/L agreed to make up to $100 million in loans to a
customer, Sirius Satellite Radio Inc. (Sirius), in
the Amended and Restated Customer Credit Agreement (the
Sirius Credit Agreement) relating to the
construction of the satellites known as FM-5 and FM-6 (the
FM-5 Satellite and FM-6 Satellite,
respectively). As per this agreement, on December 20, 2008,
the ability of Sirius to reimburse itself for milestone payments
previously paid permanently expired, and no amounts were
outstanding thereunder. In addition, as per the Sirius Credit
Agreement, given the timing of future milestone payments on FM-5
and the date at which Sirius availability to draw on
FM-5 milestone
payments expires, Loral anticipates that Sirius will not be able
to draw on future milestone payments owed on FM-5.
Drawings under the Sirius Credit Agreement would be secured by a
first-priority security interest in the
FM-6
Satellite. We currently believe that Sirius does not meet all of
the conditions precedent to draw under the Sirius Credit
Agreement, including the condition that Sirius have a public
market equity value of at least $1 billion. There can be no
assurance that Sirius will not meet such conditions in the
future (see Note 14 to the financial statements). If Sirius
were to meet the conditions to draw on the Credit Agreement for
FM-6 it would have the ability to finance approximately
$32 million against future milestone payments. As of
February 27, 2009, Sirius is current with all of its
required milestone payments to SS/L. Absent unforeseen
circumstances, over the coming year SS/L believes that with its
cash on hand, cash flow from operations and availability under
the SS/L Credit Agreement, it has adequate liquidity to operate
its business and finance loans contemplated by the Sirius Credit
Agreement.
Satellite construction contracts often include provisions for
orbital incentives where a portion of the contract value
(typically about 10%) is received over the 12 to 15 year
life of the satellite. Receipt of these orbital incentives is
contingent upon performance of the satellite in accordance with
contractual specifications. As of December 31, 2008, SS/L
has orbital receivables of approximately $181 million, of
which $3 million is in current assets (see Note 4 to
the financial statements). Approximately $49 million of
these receivables are related to satellites in-orbit and
$132 million are related to satellites that are under
construction. SS/L expects to increase its orbital receivable
asset by approximately $68 million during 2009. Continued
growth in the Satellite Manufacturing business will result in a
corresponding growth in the amount of orbital receivables.
Current economic conditions could affect the ability of
customers to make payments, including orbital incentive
payments, under satellite construction contracts with SS/L.
Though most of SS/Ls customers are substantial
corporations for which creditworthiness is generally high, SS/L
has certain customers which are either highly leveraged or are
in the developmental stage and are not fully funded. Customers
that are facing near-term maturities on their existing debt also
have elevated credit risk under current market conditions. There
can be no assurances that these customers will not delay
contract payments to, or seek financial relief, from SS/L. If
customers fall behind or are unable to meet their payment
obligations, SS/Ls liquidity will be adversely affected.
As of
58
December 31, 2008, such customers accounted for billed and
unbilled accounts receivable of approximately $82 million,
orbital receivables of approximately $74 million and
backlog of $204 million. For the quarter ending
March 31, 2009 SS/L has received, and anticipates it will
receive $77 million from such customers.
There can be no assurance that SS/Ls customers,
particularly those that SS/L has identified as having elevated
credit risk, will not default on their obligations to SS/L in
the future and that such defaults will not materially and
adversely affect SS/L and Loral. In the event of an uncured
contract default by the customer, SS/Ls construction
contracts generally provide SS/L with significant rights even if
their customers (or successors) have paid significant amounts
under the contract. These rights typically include the right to
stop work on the satellite and the right to terminate the
contract for default. In the latter case, SS/L would generally
have the right to retain, and sell to other customers, the
satellite or satellite components that are under construction.
However, the exercise of such rights could be impeded by the
assertion by customers of defenses and counterclaims, including
claims of breach of performance obligations on the part of SS/L,
and our recovery could be reduced by the lack of a ready resale
market for the affected satellites or their components. In
either case, our liquidity could be adversely affected pending
the resolution of such customer disputes.
SS/Ls contracts impose a variety of contractual
obligations on SS/L including the requirement to deliver the
satellite by an agreed upon date, subject to negotiated
allowances. If SS/L were unable to meet its contract
obligations, including delivering the satellite at the agreed
upon date in a contract the customer would have the right to
terminate the contract for contractor default. If a contract is
terminated for contractor default, SS/L would be required to
refund the payments made to SS/L to date, which could be
significant. In such circumstances, SS/L would, however, keep
the satellite under construction and be able to recoup some of
its losses through the resale of the satellite or its components
to another customer. It has been SS/Ls experience that as
the satellite is generally critical to the execution of a
customers operations and business plan such customers will
usually renegotiate a revised delivery date with SS/L versus
terminating the contract for contractor default and losing the
satellite. Nonetheless, the obligation to return all funds paid
to SS/L in the later stages of a contract, due to termination
for contractor default, would have a material adverse effect on
SS/Ls liquidity.
The current economic environment may also reduce the demand for
satellites. If SS/Ls satellite awards fall below, on
average, four to five awards per year, SS/L will be required to
reduce costs and capital expenditures to accommodate this lower
level of activity. The timing of any reduced demand for
satellites is difficult to predict. It is, therefore, difficult
to anticipate when to reduce costs and capital expenditures to
match any slowdown in business. A delay in matching the timing
of a reduction in business with a reduction in expenditures
could adversely affect our liquidity. We believe that
SS/Ls existing liquidity along with the availability under
the SS/L Credit Agreement are sufficient to finance SS/L, even
if we receive fewer than four to five awards in 2009. If SS/L
were to experience a shortage of orders below the four to five
awards per year for multiple years, SS/L could require
additional financing, the amount and timing of which would
depend on the magnitude of the order shortfall coupled with the
timing of a reduction in costs and capital expenditures. There
can be no assurances that the SS/L could obtain such financing
on favorable terms, if at all.
Telesat
Canada
Cash and
Available Credit
As of December 31, 2008, Telesat Canada had CAD
98 million of cash and short-term investments as well as
approximately CAD 153 million of borrowing availability
under its Revolving Facility. Telesat Canada believes that cash
and short-term investments as of December 31, 2008, net
cash provided by operating activities, cash flow from customer
prepayments, and drawings on the available lines of credit under
the Credit Facility (as defined below) will be adequate to meet
its expected cash requirement for activities in the normal
course of business, including interest and required principal
payments on debt as well as planned capital expenditures through
at least the next 12 months.
Telesat Canada has adopted conservative policies relating to and
governing the investment of its surplus cash. The investment
policy does not permit Telesat Canada to engage in speculative
or leveraged transactions, nor does it permit Telesat Canada to
hold or issue financial instruments for trading purposes. The
investment policy was designed to preserve capital and safeguard
principal, to meet all liquidity requirements of Telesat Canada
and to
59
provide a competitive rate of return. The investment policy
addresses dealer qualifications, lists approved securities,
establishes minimum acceptable credit ratings, sets
concentration limits, defines a maturity structure, requires all
firms to safe keep securities, requires certain mandatory
reporting activity and discusses review of the portfolio.
Telesat Canada operates its investment program under the
guidelines of its investment policy.
Liquidity
The Telesat Canada purchase price of CAD 3.25 billion as
well as transaction fees and expenses, the repayment of existing
Loral Skynet debt and preferred stock, and Telesat Canada debt
were funded by cash from Loral and PSP as well as borrowings by
Telesat Canada.
A large portion of Telesat Canadas annual cash receipts
are reasonably predictable because they are primarily derived
from an existing backlog of long-term customer contracts and
high contract renewal rates. Telesat Canada believes its cash
flow from operations will be sufficient to provide for its
capital requirements and to fund its interest and debt payment
obligations through 2009. Cash required for the construction of
the Nimiq 5 and Telstar 11N satellites will be funded from some
or all of the following: cash and short-term investments, cash
flow from operations, cash flow from customer prepayments or
through borrowings on available lines of credit under the Credit
Facility.
Telesat Canada maintains a target of approximately CAD
25 million in cash and cash equivalents within its
subsidiary operating entities for the management of its
liquidity. Telesat Canadas intention is to maintain at
least this level of cash and cash equivalents to assist with the
day-to-day management of its cash flows.
Debt
In connection with the acquisition, Telesat Canada entered into
agreements with a syndicate of banks to provide Telesat Canada
with, in each case as described below, senior secured credit
facilities (the Credit Facility), a senior bridge
loan facility (the Senior Bridge Loan) and a senior
subordinated bridge loan facility (the Senior Subordinated
Bridge Loan) (together the Facilities). The
Facilities are also guaranteed by Telesat Holdings Inc. and
certain Telesat Canada subsidiaries.
Senior
Secured Credit Facilities
The Credit Facility consists of several tranches, which are
described below.
The Credit Facility is secured by substantially all of Telesat
Canadas assets. Under the terms of the Credit Facility,
Telesat Canada is required to comply with certain covenants
which are usual and customary for highly leveraged transactions,
including financial reporting, maintenance of certain financial
covenant ratios for leverage and interest coverage, a
requirement to maintain minimum levels of satellite insurance,
restrictions on capital expenditures, a restriction on
fundamental business changes or the creation of subsidiaries,
restrictions on investments, restrictions on dividend payments,
restrictions on the incurrence of additional debt, restrictions
on asset dispositions and restrictions on transactions with
affiliates. Telesat Canada was also required to enter into swap
agreements that will effectively fix or cap the interest rates
on at least 50% of its funded debt for a 3 year period
ending October 31, 2010. Each tranche of the Credit
Facility is subject to mandatory principal repayment
requirements, which, in the initial years, are generally 1/4 of
1% of the initial aggregate principal amount.
Revolving
Facility
The Revolving Facility is a CAD 153 million loan facility
with a maturity date of October 31, 2012. Loans under the
Revolving Facility currently bear interest at a floating rate of
the Bankers Acceptance borrowing rate plus an applicable margin
of 275 basis points. The applicable margin is subject to a
leverage pricing grid. The Revolving Facility currently has an
unused commitment fee of 50 bps that is subject to
adjustment based upon a leverage pricing grid. As of
December 31, 2008, other than approximately CAD
0.2 million in drawings related to letters of credit, there
were no borrowings under this facility.
60
Canadian
Term Loan Facility
The Canadian Term Loan Facility is a CAD 200 million loan
with a maturity date of October 31, 2012. The Canadian Term
Loan Facility bears interest at a floating rate of the Bankers
Acceptance borrowing rate plus an applicable margin of
275 basis points. The required repayments on the Canadian
term loan facility were $5 million for the year ended
December 31, 2008 and will be $10 million for the year
ended December 31, 2009.
U.S. Term
Loan Facility
The U.S. Term Loan Facility is for $1.905 billion with
a final maturity date of October 31, 2014. The
U.S. Term Loan Facility is made up of two facilities, a
$1.755 billion U.S. Term Loan I Facility and a
$150 million U.S. Term Loan II Facility that was
a 12 month delayed draw facility for satellite capital
expenditures. The U.S. Term Loan Facility bears interest at
LIBOR plus an applicable margin of 300 basis points.
The U.S. Term Loan II Facility has an unused
commitment fee of
1/2
the applicable margin which is 150 basis points. Telesat
Canada drew the full amount of this facility during the
12 month availability period. As of December 31, 2008,
$150 million of the facility was drawn.
In order to hedge the currency risk for Telesat Canada both at
closing and over the life of the loans, Loral Skynet entered
into a currency basis swap to synthetically convert
$1.054 billion of US dollar commitment to CAD
1.224 billion and transferred the benefit of the basis swap
to Telesat Canada prior to closing. The CAD 1.224 billion
bears interest at a floating rate of Bankers Acceptance plus an
applicable margin of approximately 387 basis points.
Senior
Bridge Loan
The Senior Bridge Loan was a $692.8 million senior
unsecured loan advanced on the closing date. The Senior Bridge
Loan had a maturity of October 31, 2008 and an initial
interest rate per annum equal to the greater of 9% or
three-month LIBOR plus the applicable margin. The applicable
margin increased over time subject to an interest rate cap of
11%. The Senior Bridge Loan was subject to a securities demand
on or after April 28, 2008.
On June 30, 2008, Telesat exchanged the outstanding
$692.8 million Senior bridge loan for $692.8 million
Senior notes. The Senior notes bear interest at an annual rate
of 11.0% and are due November 1, 2015. The Senior notes
include covenants or terms that restrict Telesats ability
to, among other things, (i) incur additional indebtedness,
(ii) incur liens, (iii) pay dividends or make certain
other restricted payments, investments or acquisitions,
(iv) enter into certain transactions with affiliates,
(v) modify or cancel the Companys satellite
insurance, (vi) effect mergers with another entity, and
(vii) redeem the Senior notes prior to May 1, 2012, in
each case subject to exceptions provided in the Senior notes
indenture.
Senior
Subordinated Bridge Loan
The Senior Subordinated Bridge Loan is a $217.2 million
senior subordinated unsecured loan advanced on the closing date.
The Senior Subordinated Bridge Loan had a maturity of
October 31, 2008 and an initial interest rate per annum
equal to the greater of 10.5% or three-month LIBOR plus the
applicable margin. The applicable margin increased over time
subject to an interest rate cap of 12.5%. The Senior
Subordinated Bridge Loan was subject to a securities demand on
or after April 28, 2008.
On June 30, 2008, Telesat Canada also exchanged the
outstanding $217.2 million Senior subordinated bridge loan
for $217.2 million Senior subordinated notes. The Senior
subordinated notes bear interest at a rate of 12.5% and are due
November 1, 2017. The Senior subordinated notes include
covenants or terms that restrict Telesat Canadas ability
to, among other things, (i) incur additional indebtedness,
(ii) incur liens, (iii) pay dividends or make certain
other restricted payments, investments or acquisitions,
(iv) enter into certain transactions with affiliates,
(v) modify or cancel the Companys satellite
insurance, (vi) effect mergers with another entity, and
(vii) redeem the Senior subordinated notes prior to
May 1, 2013, in each case subject to exceptions provided in
the Senior subordinated notes indenture.
61
Interest
Expense
An estimate of the interest expense on the Facilities is based
upon assumptions of LIBOR and Bankers Acceptance rates and the
applicable margin for the Credit Facility, the Senior Bridge
Loan and the Senior Subordinated Bridge Loan. Telesat
Canadas estimated interest expense for 2009 is
approximately CAD 288 million.
Derivatives
Telesat Canada has used interest rate and currency derivatives
to hedge its exposure to changes in interest rates and changes
in foreign exchange rates.
Telesat Canada uses forward contracts to hedge its foreign
currency risk on anticipated transactions, mainly related to the
construction of satellites. At December 31, 2008, Telesat
Canada had outstanding foreign exchange contracts which require
them to pay Canadian dollars to receive $58.7 million for future
capital expenditures. The fair value of these derivative
contract liabilities resulted in an unrealized gain of CAD
10.8 million as of December 31, 2008. These forward
contracts are due between February 2, 2009 and
December 1, 2009.
In order to hedge the currency risk for Telesat Canada, both at
closing and over the life of the loans, Loral Skynet entered
into a currency basis swap to synthetically convert
$1.054 billion of the U.S. Term Loan Facility debt
into CAD 1.224 billion of debt. Loral Skynet transferred
the currency basis swap to Telesat Canada prior to closing. The
fair value of this derivative contract at December 31, 2008
resulted in an unrealized gain of CAD 8.8 million.
On November 30, 2007, Telesat Canada entered into a series
of five interest rate swaps to fix interest rates on
$600 million of U.S. dollar denominated debt and CAD
630 million of Canadian dollar denominated debt for an
average term of 3.2 years. Average rates achieved, before
any borrowing spread, were 4.12% on the U.S. dollar
denominated swaps and 4.35% on the Canadian dollar denominated
swaps. As of December 31, 2008, the fair value of these
derivative contract liabilities was an unrealized loss of CAD
81.9 million. With these transactions, Telesat Canada met
its requirement under the Credit Facility to effectively fix or
cap at least 50% of its funded debt for a three year period from
October 31, 2007.
Capital
Expenditures
Telesat Canada has entered into contracts for construction,
insurance and launch of the Nimiq 5 and Telstar 11N satellites.
The outstanding commitments as of December 31, 2008 on
these contracts are approximately $163.4 million. These
expenditures will be funded from some or all of the following:
cash and short-term investments, cash flow from operations ,
cash flow from customer prepayments or through borrowings on
available lines of credit under the Credit Facility.
XTAR
In January 2009, XTAR reached an agreement with Arianespace,
S.A. to settle its revenue-based fee that was to be paid over
time. To enable XTAR to be able to make these settlement
payments, XTAR has issued a capital call to its LLC members for
$8 million in 2009. The capital call required Loral to
increase its investment in XTAR by approximately
$4.5 million, representing its 56% share of
$8 million. This settlement benefits XTAR by providing a
significant reduction to amounts that it would have been
required to pay in the future and satisfies XTARs
obligations to Arianespace.
62
Contractual
Obligations and Other Commercial Commitments
The following tables aggregate our contractual obligations and
other commercial commitments as of December 31, 2008 (in
thousands).
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Operating
leases(1)
|
|
$
|
38,011
|
|
|
$
|
9,723
|
|
|
$
|
15,295
|
|
|
$
|
5,904
|
|
|
$
|
7,089
|
|
Unconditional purchase
obligations(2)
|
|
|
507,862
|
|
|
|
356,992
|
|
|
|
150,870
|
|
|
|
|
|
|
|
|
|
Other long-term
obligations(3)
|
|
|
53,209
|
|
|
|
24,010
|
|
|
|
29,199
|
|
|
|
|
|
|
|
|
|
Revolving credit
agreement(4)
|
|
|
55,000
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations(5)
|
|
$
|
654,082
|
|
|
$
|
390,725
|
|
|
$
|
250,364
|
|
|
$
|
5,904
|
|
|
$
|
7,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Amounts
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Committed
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Stand by letter of credit
|
|
$
|
4,927
|
|
|
$
|
4,927
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents future minimum payments
under operating leases with initial or remaining terms of one
year or more.
|
(2) |
|
SS/L has entered into various
purchase commitments with suppliers due to the long lead times
required to produce purchased parts.
|
(3) |
|
Represents our commitment in
connection with an agreement entered into between Loral and
ViaSat for the purchase by Loral of a portion of the ViaSat-1
satellite which is being constructed by SS/L for ViaSat (see
Note 16 to the financial statements).
|
(4) |
|
On October 16, 2008, SS/L
entered into a Credit Agreement with several banks and other
financial institutions. The Credit Agreement provides for a
$100 million senior secured revolving credit facility. The
Revolving Facility includes a $50 million letter of credit
sublimit. The Credit Agreement is for a term of three years,
maturing on October 16, 2011 (see Note 8 to the
financial statements). Payment amounts shown exclude interest
which is not expected to be significant.
|
(5) |
|
Does not include our FIN 48
liabilities for uncertain tax positions of $109.0 million.
Because the timing of future cash outflows associated with our
FIN 48 liabilities for uncertain tax positions is highly
uncertain, we are unable to make reasonably reliable estimates
of the period of cash settlement with the respective taxing
authorities (see Note 9 to the financial statements).
|
Net Cash
(Used in) Provided by Operating Activities
Net cash used in operating activities for 2008 was
$202 million. This was primarily due to an increase in
contracts in process of $216 million and a decrease in
customer advances of $20 million, primarily resulting from
progress on new satellite programs, a decrease in taxes payable
of $55 million, primarily due to tax payments, net of
refunds, of $30 million, a decrease in pension and post
retirement liabilities of $19 million and a decrease in
accrued expenses and other current liabilities of
$22 million which includes a Telesat Canada post-closing
final adjustment payment to PSP of $9 million, partially
offset by an increase in accounts payable of $24 million,
an increase in long term liabilities of $33 million,
primarily due to a $41 million liability for uncertain tax
positions and a net loss after adjustment for non-cash items of
$69 million.
Net cash provided by operating activities for 2007 was
$27 million. This was primarily due to a decrease in
accounts receivable of $65 million from the collection of
vendor financing from a customer and a $22 million increase
in cash from net income adjusted for non-cash items including an
increase in income taxes payable attributable to taxes expensed
in 2007 to be paid in 2008 related to the gain from the
contribution of substantially all of the Loral Skynet assets and
related liabilities to Telesat Canada. These sources of cash
were partially offset by an increase in
contracts-in-process
of $61 million and a reduction in customer advances of
$17 million due to continued progress on the related
satellite programs.
Net cash provided by operating activities for 2006 was
$88 million. This was primarily due to the net loss
adjusted for non-cash items of $86 million, an increase in
customer advances of $51 million resulting from timing of
satellite program milestone payments and higher accrued expenses
and other current liabilities of $18 million in part due to
higher accrued interest. This change was partially offset by an
increase in inventory of $32 million, which
63
was made to accommodate increased volume and a reduction of
$20 million in pension and other postretirement liabilities
primarily due to contributions made to the pension plan of
$28 million (see Note 12 to the financial statements).
Net Cash
(Used in) Provided By Investing Activities
Net cash used in investing activities for 2008 was
$47 million, primarily resulting from capital expenditures
of $65 million, partially offset by a decrease in
restricted cash of $19 million as a result of the release
of restrictions on $12 million of cash relating to the
Skynet Noteholder Litigation and the release of restrictions on
$7 million of cash due to the replacement of SS/Ls
former Letter of Credit Facility.
Net cash provided by investing activities for 2007 was
$62 million, primarily resulting from the net effect of
cash management of short-term investments of $118 million
and net proceeds received for the contribution of Loral Skynet
to Telesat Canada of $58 million. These changes were
partially offset by capital expenditures of $96 million, an
increase in restricted cash of $20 million and a net
distribution from an equity investment of $2 million.
Net cash used in investing activities for 2006 was
$176 million, resulting from capital expenditures of
$82 million and the Companys purchase of short-term
investments of $107 million, partially offset by proceeds
from the sale of available-for-sale securities of
$7 million and proceeds received from the disposition of an
orbital slot of $6 million.
Net Cash
Provided by (Used in) Financing Activities
Net cash provided by financing activities for 2008 was
$52 million, primarily resulting from the proceeds, net of
expenses, from borrowings under the SS/L Credit Agreement.
Net cash provided by financing activities for 2007 was
$40 million, primarily resulting from the proceeds, net of
expenses, from the sale of preferred stock of $284 million,
the borrowing of a term loan of $141 million from Valley
National to fund redemption of the Loral Skynet Notes and the
proceeds from the exercise of stock options of $2 million,
partially offset by the distribution of proceeds for the
redemption of the Loral Skynet Preferred Stock of
$238 million, the repayment of the Loral Skynet Notes of
$126 million, the redemption premium of $13 million
paid on the extinguishment of the Loral Skynet Notes and cash
dividends paid on the Loral Skynet Preferred Stock of
$12 million.
Net cash used in financing activities for 2006 was
$1 million, resulting from the cash dividend payment on the
Loral Skynet Preferred Stock made in the third quarter.
Other
During 2008, we made approximately $28 million in
contributions to the qualified pension plan and funded
approximately $3 million for other employee post-retirement
benefit plans. During 2007, Loral made no contributions to the
qualified pension plan and funded approximately $3 million
for other employee post-retirement benefit plans. In September
2006, Loral made the minimum required contribution of
$2 million to the pension plan and made an additional
voluntary contribution to the pension plan of $25 million.
The additional voluntary contribution was made to improve the
funded status of the pension plan and to reduce future expected
contributions. During 2009, based on current estimates, we
expect to contribute approximately $24 million to the
qualified pension plan and expect to fund approximately
$4 million for other employee post-retirement benefit plans.
Affiliate
Matters
Loral has made certain investments in joint ventures in the
satellite services business that are accounted for under the
equity method of accounting (see Note 6 to the financial
statements for further information on affiliate matters).
64
Our consolidated statements of operations reflect the effects of
the following amounts related to transactions with or
investments in affiliates (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Revenues
|
|
$
|
84.0
|
|
|
$
|
22.0
|
|
|
$
|
11.3
|
|
Elimination of Lorals proportionate share of (profits)
losses relating to affiliate transactions
|
|
|
(5.0
|
)
|
|
|
1.9
|
|
|
|
0.4
|
|
Profits (losses) relating to affiliate transactions not
eliminated
|
|
|
2.8
|
|
|
|
(1.1
|
)
|
|
|
(0.3
|
)
|
Commitments
and Contingencies
Our business and operations are subject to a number of
significant risks, the most significant of which are summarized
in Item 1A Risk Factors and also in
Note 14 to the financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Foreign
Currency
The Company, in the normal course of business, is subject to the
risks associated with fluctuations in foreign currency exchange
rates. As of December 31, 2008, SS/L had the following
amounts denominated in Japanese Yen and EUROs (which have been
translated into U.S. dollars based on the December 31,
2008 exchange rates) that were unhedged (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
Foreign Currency
|
|
|
$
|
|
|
Future revenues Japanese Yen
|
|
¥
|
64.9
|
|
|
$
|
0.7
|
|
Future expenditures Japanese Yen
|
|
¥
|
3,491.2
|
|
|
$
|
38.6
|
|
Contracts-in-process,
unbilled receivables Japanese Yen
|
|
¥
|
10.4
|
|
|
$
|
0.1
|
|
Future expenditures EUROs
|
|
|
6.2
|
|
|
$
|
8.8
|
|
Derivatives
Hedges of foreign currency denominated contract revenues and
related purchases are designated as cash flow hedges and
evaluated for effectiveness at least quarterly. Effectiveness is
tested using regression analysis. The effective portion of the
gain or loss on a cash flow hedge is recorded as a component of
other comprehensive income and reclassified to income in the
same period or periods in which the hedged transaction affects
income. Any remaining gain or loss on the hedge is included in
income.
On July 9, 2008, SS/L was awarded a satellite contract
denominated in EUROs and SS/L entered into a series of foreign
exchange forward contracts with maturities through 2011 to hedge
the associated foreign currency exchange risk. These foreign
exchange forward contracts have been designated as cash flow
hedges of future Euro denominated receivables.
During the year ended December 31, 2008, losses of
$2.5 million were excluded from the assessment of hedge
effectiveness and were recorded as a reduction of revenue, and
unrealized gains of $18.2 million were included in
accumulated other comprehensive income.
The fair value of the cash flow hedges at December 31, 2008
was $14.6 million of which $8.9 million is included in
other current assets and $5.7 million is included in other
assets.
We estimate that $9.2 million of net derivative gain
included in accumulated other comprehensive income will be
reclassified into earnings within the next 12 months.
65
The maturity of foreign currency exchange contracts held as of
December 31, 2008 is consistent with the contractual or
expected timing of the transactions being hedged, principally
receipt of customer payments under long-term contracts. These
foreign exchange contracts mature as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Sell
|
|
|
|
|
|
|
At
|
|
|
At
|
|
|
|
Euro
|
|
|
Contract
|
|
|
Market
|
|
Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
2009
|
|
|
65,540
|
|
|
$
|
99,793
|
|
|
$
|
91,376
|
|
2010
|
|
|
19,210
|
|
|
|
29,388
|
|
|
|
26,734
|
|
2011
|
|
|
23,493
|
|
|
|
35,663
|
|
|
|
32,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,243
|
|
|
$
|
164,844
|
|
|
$
|
150,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Buy
|
|
|
|
|
|
|
At
|
|
|
At
|
|
|
|
Euro
|
|
|
Contract
|
|
|
Market
|
|
Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
2009
|
|
|
4,520
|
|
|
$
|
6,294
|
|
|
$
|
6,315
|
|
The Company is exposed to credit-related losses in the event of
non-performance by counter parties to these financial
instruments, but does not expect any counter party to fail to
meet its obligation because we execute foreign exchange
contracts only with well capitalized financial institutions.
Loral does not enter into foreign currency transactions for
trading and speculative purposes.
On June 20, 2008, in anticipation of receiving the
July 9, 2008 satellite contract described above, Loral
entered into a currency option transaction that allowed Loral to
convert 97.7 million into $149.5 million. Loral
paid a premium of $0.5 million for this option. For the
year ended December 31, 2008, Loral recorded a charge of
$0.5 million, as the options expired unexercised on
July 10, 2008.
Interest
The Company had $55 million of borrowings outstanding under
the SS/L Credit Agreement at December 31, 2008. Borrowings
under this facility are limited to Eurodollar Loans for periods
ending in one, two, three or six months or ABR Loans which rate
is adjusted daily based upon changes in the Prime Rate of
Federal Funds Rate. Because of the nature of the borrowing under
a revolving credit facility, the borrowing rate adjusts to
changes in interest rates over time. For a $100 million
credit facility, if it were fully borrowed, a 1.00% change in
interest rates would effect the Companys interest expense
by $1 million for the year. The Company had no other
long-term debt or other exposure to changes in interest rates
with respect thereto. Prior to the close of the Telesat Canada
transaction in 2007, Loral Skynet had debt at a fixed rate of
14.0%.
As of December 31, 2008, the only marketable securities
held by the Company was 984,173 shares of Globalstar Inc.
common stock. During the year, our excess cash was invested in
money market securities; we did not hold any other marketable
securities.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See Index to Financial Statements and Financial Statement
Schedules on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our chief executive officer and our chief financial officer,
after evaluating the effectiveness of our disclosure controls
and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act) as of December 31,
66
2008, have concluded that our disclosure controls and procedures
were effective and designed to ensure that information relating
to Loral and its consolidated subsidiaries required to be
disclosed in our filings under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the Securities Exchange Commission rules and forms.
The term disclosure controls and procedures means controls and
other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Commissions rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that the information
required to be disclosed by an issuer in the reports that it
files or submits under the Exchange Act is accumulated and
communicated to the issuers management, including its
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in
Rule 13a-15(f)
of the Exchange Act. Under the supervision and with the
participation of our management, including our chief executive
officer and our chief financial officer, we conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on the framework set forth in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our evaluation under
such criteria, our management concluded that our internal
control over financial reporting was effective as of
December 31, 2008.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2008 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in its attestation report which is included below.
Remediation
of Previously Disclosed Material Weakness
As reported in our Annual Report on
Form 10-K
for the year ended December 31, 2007, our management
previously concluded that a material weakness existed related to
our accounting for and disclosure of income taxes. Specifically,
the Company did not maintain adequate processes and a sufficient
number of technically qualified personnel to enable the timely
resolution of issues associated with the Companys income
tax closing process primarily relating to those issues
attributable to the Telesat Canada transaction.
Management has concluded that, as of December 31, 2008, the
previously reported material weakness has been remediated. The
remediation actions taken during 2008 included the following:
|
|
|
|
|
The Company hired a Director of Tax, who assists our Vice
President of Tax with the management of all tax planning,
accounting and reporting processes.
|
|
|
|
The Company augmented its internal resources by engaging an
accounting firm to assist in the preparation of our tax
accounting and disclosure.
|
|
|
|
A full process evaluation was completed and process improvements
were implemented.
|
Changes
in Internal Controls Over Financial Reporting
Other than the control improvements discussed above, there were
no changes in our internal control over financial reporting
during the quarter ended December 31, 2008 that have
materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our management, including our chief executive officer and our
chief financial officer, does not expect that our disclosure
controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no
matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control
systems objectives will be met. The design of a control
system must reflect the fact that there are
67
resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and
instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the
controls. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or
procedures.
68
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the internal control over financial reporting of
Loral Space & Communications Inc. and subsidiaries
(the Company) as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
that risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2008, of
the Company and our report dated March 16, 2009 expressed
an unqualified opinion on those consolidated financial
statements and included explanatory paragraphs relating to the
Companys adoption of new accounting standards.
/s/ DELOITTE &
TOUCHE LLP
New York, New York
March 16, 2009
69
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Executive
Officers of the Registrant
The following table sets forth information concerning the
executive officers of Loral as of March 1, 2009.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Michael B. Targoff
|
|
|
64
|
|
|
Chief Executive Officer since March 1, 2006, President since
January 2008 and Vice Chairman of the Board of Directors since
November 2005. Prior to that, founder of Michael B. Targoff
& Co.
|
C. Patrick DeWitt
|
|
|
62
|
|
|
Senior Vice President since January 2008. Vice President from
November 2005 to January 2008. Vice President of Old Loral from
January 2002 to November 2005. Chief Executive Officer of SS/L
since June 2006. President of SS/L from November 2001 to June
2006.
|
Avi Katz
|
|
|
50
|
|
|
Senior Vice President, General Counsel and Secretary since
January 2008. Vice President, General Counsel and Secretary from
November 2005 to January 2008. Vice President, General Counsel
and Secretary of Old Loral from November 1999 to November 2005.
|
Richard P. Mastoloni
|
|
|
44
|
|
|
Senior Vice President of Finance and Treasurer since January
2008. Vice President and Treasurer from November 2005 to January
2008. Vice President and Treasurer of Old Loral from February
2002 to November 2005. Vice President of Old Loral from
September 2001 to February 2002.
|
Harvey B. Rein
|
|
|
55
|
|
|
Senior Vice President and Chief Financial Officer since January
2008. Vice President and Controller from November 2005 to
January 2008. Vice President and Controller of Old Loral from
April 1996 to November 2005.
|
John Capogrossi
|
|
|
55
|
|
|
Vice President and Controller since January 2008. Executive
Director, Financial Planning and Analysis, from October 2006 to
January 2008. Assistant Controller from November 2005 to October
2006. Assistant Controller of Old Loral from January 2001 to
November 2005.
|
The remaining information required under Item 10 will be
presented in the Companys 2009 definitive proxy statement
which is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
Information required under Item 11 will be presented in the
Companys 2009 definitive proxy statement which is
incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information required under Item 12 will be presented in the
Companys 2009 definitive proxy statement which is
incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Information required under Item 13 will be presented in the
Companys 2009 definitive proxy statement which is
incorporated herein by reference.
70
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information required under Item 14 will be presented in the
Companys 2009 definitive proxy statement which is
incorporated herein by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) 1. Financial Statements
|
|
|
|
|
Index to Financial Statements and Financial Statement Schedule
|
|
|
F-1
|
|
|
|
|
|
|
Loral Space & Communications Inc. and
Subsidiaries:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
|
F-3
|
|
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006
|
|
|
F-4
|
|
Consolidated Statements of Shareholders Equity for the
years ended December 31, 2008, 2007 and 2006
|
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7
|
|
|
|
|
|
|
(a) 2. Financial Statement Schedule
|
|
|
|
|
Schedule II
|
|
|
F-69
|
|
Separate Financial Statements of Subsidiaries not consolidated
Pursuant to
Rule 3-09
of
Regulation S-X
|
|
|
|
|
|
|
|
|
|
Telesat Holdings Inc. and Subsidiaries:
|
|
|
|
|
Report of Independent Registered Accountants
|
|
|
F-70
|
|
Comments by Independent Registered Chartered Accountants on
Canada United States of America Reporting Difference
|
|
|
F-71
|
|
Consolidated Statements of (Loss) Earnings for the year ended
December 31, 2008 and the period October 31, 2007 to
December 31, 2007
|
|
|
F-72
|
|
Consolidated Statements of Comprehensive (Loss) Income for the
year ended December 31, 2008 and the period
October 31, 2007 to December 31, 2007
|
|
|
F-73
|
|
Consolidated Statements of Shareholders Equity for the
year ended December 31, 2008 and the period
October 31, 2007 to December 31, 2007
|
|
|
F-74
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
|
F-75
|
|
Consolidated Statements of Cash Flow for the year ended
December 31, 2008 and the period October 31, 2007 to
December 31, 2007
|
|
|
F-76
|
|
Notes to Consolidated Financial Statements
|
|
|
F-77
|
|
|
|
|
|
|
XTAR, L.L.C.:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-121
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
|
F-122
|
|
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007, and 2006
|
|
|
F-123
|
|
Consolidated Statements of Members Equity for the years
ended December 31, 2008, 2007, and 2006
|
|
|
F-124
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007, and 2006
|
|
|
F-125
|
|
Notes to Consolidated Financial Statements
|
|
|
F-126
|
|
71
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Debtors Fourth Amended Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code dated June 3, 2005(1)
|
|
2
|
.2
|
|
Modification to Debtors Fourth Amended Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code
dated August 1, 2005(2)
|
|
2
|
.3
|
|
Letter Agreement among Loral Space & Communications
Inc., Loral Skynet Corporation, Public Sector Pension Investment
Board, 4363205 Canada Inc. and 4363213 Canada Inc. dated
December 14, 2006(6)
|
|
2
|
.4
|
|
Share Purchase Agreement among 4363213 Canada Inc., BCE Inc. and
Telesat Canada dated December 16, 2006(6)
|
|
2
|
.5
|
|
Letter Agreement among Loral Space & Communications
Inc., Public Sector Pension Investment Board and BCE Inc. dated
December 16, 2006(6)
|
|
2
|
.6
|
|
Asset Transfer Agreement, dated as of August 7, 2007, by
and among 4363205 Canada Inc., Loral Skynet Corporation and
Loral Space & Communications Inc.(9)
|
|
2
|
.7
|
|
Amendment No. 1 to Asset Transfer Agreement, dated as of
September 24, 2007, by and among 4363205 Canada Inc., Loral
Skynet Corporation and Loral Space & Communications
Inc.(10)
|
|
2
|
.8
|
|
Asset Purchase Agreement, dated as of August 7, 2007, by
and among Loral Skynet Corporation, Skynet Satellite Corporation
and Loral Space & Communications Inc.(9)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Loral
Space & Communications Inc. dated December 23,
2008(20)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Loral Space &
Communications Inc. dated December 23, 2008(20)
|
|
10
|
.1
|
|
Amended and Restated Customer Credit Agreement, dated as of
July 30, 2007, by and between Sirius Satellite Radio Inc.
and Space Systems/Loral, Inc.(8)
|
|
10
|
.2
|
|
First Amendment and Waiver to Amended and Restated Credit
Agreement dated as of May 22, 2008 between Sirius Satellite
Radio Inc. and Space Systems/Loral, Inc.(15)
|
|
10
|
.3
|
|
Credit Agreement, dated as of October 16, 2008, among Space
Systems/Loral, Inc., as Borrower, the several lenders from time
to time party thereto, Bank of America, N.A., as Documentation
Agent, ING Bank, N.V., as Syndication Agent, and JPMorgan Chase
Bank, N.A., as Administrative Agent(18)
|
|
10
|
.4
|
|
Parent Guarantee Agreement, dated as of October 22, 2008,
by Loral Space & Communications Inc. in favor of
JPMorgan Chase Bank, N.A., as Administrative Agent.(18)
|
|
10
|
.5
|
|
Ancillary Agreement, dated as of August 7, 2007, by and
among Loral Space & Communications Inc., Loral Skynet
Corporation, Public Sector Pension Investment Board, 4363205
Canada Inc. and 4363230 Canada Inc.(9)
|
|
10
|
.6
|
|
Adjustment Agreement, dated as of October 29, 2007, between
Telesat Interco Inc. (formerly 4363213 Canada Inc.), BCE Inc.
and Telesat Canada(11)
|
|
10
|
.7
|
|
Omnibus Agreement, dated as of October 30, 2007, by and
among Loral Space & Communications Inc., Loral Skynet
Corporation, Public Sector Pension Investment Board, Red Isle
Private Investments Inc. and Telesat Holdings Inc. (formerly
4363205 Canada Inc.)(11)
|
|
10
|
.8
|
|
Shareholders Agreement, dated as of October 31, 2007,
between Public Sector Pension Investment Board, Red Isle Private
Investments Inc., Loral Space & Communications Inc.,
Loral Space & Communications Holdings Corporation,
Loral Holdings Corporation, Loral Skynet Corporation, John P.
Cashman, Colin D. Watson, Telesat Holdings Inc. (formerly
4363205 Canada Inc.), Telesat Interco Inc. (formerly 4363213
Canada Inc.), Telesat Canada and MHR Fund Management LLC(11)
|
|
10
|
.9
|
|
Consulting Services Agreement, dated as of October 31,
2007, by and between Loral Space & Communications Inc.
and Telesat Canada(11)
|
|
10
|
.10
|
|
Indemnity Agreement, dated as of October 31, 2007, by and
among Loral Space & Communications Inc., Telesat
Canada, Telesat Holdings Inc., Telesat Interco Inc. and Henry
Gerard (Hank) Intven(11)
|
|
10
|
.11
|
|
Acknowledgement and Indemnity Agreement, dated as of
October 31, 2007, between Loral Space &
Communications Inc., Telesat Canada, Telesat Holdings Inc.
(formerly 4363205 Canada Inc.), Telesat Interco Inc. (formerly
4363213 Canada Inc.) and McCarthy Tétrault LLP(11)
|
|
10
|
.12
|
|
Amended and Restated Registration Rights Agreement dated
December 23, 2008 by and among Loral Space &
Communications Inc. and the Persons Listed on the Signature
Pages Thereof(20)
|
72
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.13
|
|
Partnership Interest Purchase Agreement dated December 21,
2007 by and among GSSI, LLC, Globalstar, Inc., Loral/DASA
Globalstar, LP, Globalstar do Brasil, SA., Loral/DASA do Brasil
Holdings Ltda., Loral Holdings LLC, Global DASA LLC, LGP
(Bermuda) Ltd., Mercedes-Benz do Brasil Ltda. (f/k/a
DaimlerChrysler do Brasil Ltda.) and Loral Space &
Communications Inc.(12)
|
|
10
|
.14
|
|
Beam Sharing Agreement, dated as of January 11, 2008, by
and between Loral Space & Communications Inc. and
ViaSat Inc.(13)
|
|
10
|
.15
|
|
Option Agreement, dated as of January 11, 2008, by and
between Loral Space & Communications Inc. and Telesat
Canada(13)
|
|
10
|
.16
|
|
Employment Agreement between Loral Space &
Communications Inc. and Michael B. Targoff dated as of
March 28, 2006 and amended and restated as of
December 17, 2008
|
|
10
|
.17
|
|
Form of Officers and Directors Indemnification
Agreement between Loral Space & Communications Inc.
and Loral Executives(3)
|
|
10
|
.18
|
|
Officers and Directors Indemnification Agreement
between Space Systems/Loral, Inc. and C. Patrick DeWitt dated
November 21, 2005(3)
|
|
10
|
.19
|
|
Loral Space Management Incentive Bonus Program (Adopted as of
December 17, 2008) (20)
|
|
10
|
.20
|
|
Loral Space & Communications Inc. 2005 Stock Incentive
Plan (Amended and Restated as of November 7, 2008)
|
|
10
|
.21
|
|
Form of Amended and Restated Non-Qualified Stock Option
Agreement under Loral Space & Communications Inc. 2005
Stock Incentive Plan for Senior Management dated as of
December 21, 2005 and amended and restated as of
November 10, 2008
|
|
10
|
.22
|
|
Non-Qualified Stock Option Agreement under Loral
Space & Communications Inc. 2005 Stock Incentive Plan
between Loral Space & Communications Inc. and Michael
B. Targoff dated March 28, 2006(4)
|
|
10
|
.23
|
|
Restricted Stock Unit Agreement dated March 5, 2009 between
Loral Space & Communications Inc. and Michael B.
Targoff(21)
|
|
10
|
.24
|
|
Restricted Stock Unit Agreement dated March 5, 2009 between
Loral Space & Communications Inc. and C. Patrick
DeWitt(21)
|
|
10
|
.25
|
|
Form of Director 2006 Restricted Stock Agreement(7)
|
|
10
|
.26
|
|
Form of Director 2007 Restricted Stock Agreement(7)
|
|
10
|
.27
|
|
Form of Director 2008 Restricted Stock Agreement
|
|
10
|
.28
|
|
Form of Employee Restricted Stock Agreement(7)
|
|
10
|
.29
|
|
Amended and Restated Space Systems/Loral, Inc. Supplemental
Executive Retirement Plan (Amended and Restated as of
December 17, 2008) (20)
|
|
10
|
.30
|
|
Loral Savings Supplemental Executive Retirement Plan (Amended
and Restated as of December 17, 2008) (20)
|
|
10
|
.31
|
|
Loral Space & Communications Inc. Severance Policy for
Corporate Officers (Amended and Restated as of December 17,
2008) (20)
|
|
14
|
.1
|
|
Code of Conduct, Revised as of June 11, 2008(16)
|
|
21
|
.1
|
|
List of Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP
|
|
23
|
.3
|
|
Consent of Deloitte & Touche LLP
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 302 of
the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 302 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002
|
73
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002
|
|
99
|
.1
|
|
Credit Agreement, dated as of October 31, 2007, among
Telesat Interco Inc. (formerly 4363213 Canada Inc.), Telesat
Holdings Inc. (formerly 4363205 Canada Inc.), 4363230 Canada
Inc., Telesat LLC, certain subsidiaries of Telesat Holdings
Inc., as guarantors, the lenders party thereto from time to
time, Morgan Stanley Senior Funding, Inc., as administrative
agent, and Morgan Stanley & Co. Incorporated, as
collateral agent for the lenders, UBS Securities LLC, as
syndication agent, JPMorgan Chase Bank, N.A., The Bank of Nova
Scotia, as issuing bank, and Citibank, N.A., Canadian Branch or
any of its lending affiliates, as co-documentation agents, and
Morgan Stanley & Co. Incorporated, UBS Securities LLC
and J.P. Morgan Securities Inc., as joint lead arrangers
and joint book running managers(11)
|
|
99
|
.2
|
|
Articles of Incorporation of Telesat Holdings Inc. (formerly
4363205 Canada Inc.)(11)
|
|
99
|
.3
|
|
By-Law No. 1 of Telesat Holdings Inc. (formerly 4363205
Canada Inc.)(11)
|
|
99
|
.4
|
|
Letter Agreement dated March 28, 2008 among Loral
Space & Communications Inc., Loral Skynet Corporation,
Public Sector Pension Investment Board, Red Isle Private
Investment Inc. and Telesat Holdings Inc.(14)
|
|
99
|
.5
|
|
Memorandum Opinion dated September 19, 2008 of the Court of
Chancery of the State of Delaware in In re Loral
Space & Communications Inc. Consolidated Litigation
and GPC XLI L.L.C., et al. v. Loral Space &
Communications Inc., et al.(17)
|
|
99
|
.6
|
|
Implementing Order of the Court of Chancery of the State of
Delaware dated November 10, 2008(19)
|
|
|
|
(1) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on June 8, 2005. |
|
(2) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on August 5, 2005. |
|
(3) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on November 23, 2005. |
|
(4) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2005. |
|
(5) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K/A
filed by the Company on June 26, 2006. |
|
(6) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on December 21, 2006. |
|
(7) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on May 29, 2007. |
|
(8) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on August 2, 2007. |
|
(9) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on August 9, 2007. |
|
(10) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on September 27, 2007. |
|
(11) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on November 2, 2007. |
|
(12) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed December 21, 2007. |
|
(13) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on January 16, 2008. |
|
(14) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on March 31, 2008. |
|
(15) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on May 28, 2008. |
|
(16) |
|
Incorporated by reference from the Companys Current
Quarterly Report on
Form 10-Q
filed on June 16, 2008. |
|
(17) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on September 23, 2008. |
|
(18) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on October 22, 2008. |
|
(19) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on November 12, 2008. |
|
(20) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on December 23, 2008. |
|
(21) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed on March 10, 2009. |
|
|
|
Filed herewith. |
|
|
|
Management compensation plan. |
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS INC.
|
|
|
|
By:
|
/s/ MICHAEL
B. TARGOFF
|
Michael B. Targoff
Vice Chairman of the Board,
Chief Executive Officer and President
Dated: March 16, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ MICHAEL
B. TARGOFF
Michael
B. Targoff
|
|
Vice Chairman of the Board, Chief
Executive Officer and President
|
|
March 16, 2009
|
|
|
|
|
|
/s/ MARK
H. RACHESKY, M.D.
Mark
H. Rachesky, M.D.
|
|
Director, Non-Executive Chairman of the Board
|
|
March 16, 2009
|
|
|
|
|
|
/s/ SAI
S. DEVABHAKTUNI
Sai
S. Devabhaktuni
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
/s/ HAL
GOLDSTEIN
Hal
Goldstein
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
/s/ JOHN
D. HARKEY, JR.
John
D. Harkey, Jr.
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
/s/ ARTHUR
L. SIMON
Arthur
L. Simon
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
/s/ JOHN
P. STENBIT
John
P. Stenbit
|
|
Director
|
|
March 16, 2009
|
|
|
|
|
|
/s/ HARVEY
B. REIN
Harvey
B. Rein
|
|
Senior Vice President and CFO
(Principal Financial Officer)
|
|
March 16, 2009
|
|
|
|
|
|
/s/ JOHN
CAPOGROSSI
John
Capogrossi
|
|
Vice President and Controller
(Principal Accounting Officer)
|
|
March 16, 2009
|
75
INDEX TO
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
Loral Space & Communications Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-69
|
|
Separate Financial Statements of Subsidiaries not consolidated
Pursuant to
Rule 3-09
of
Regulation S-X
|
|
|
|
|
Telesat Holdings Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
F-70
|
|
|
|
|
F-71
|
|
|
|
|
F-72
|
|
|
|
|
F-73
|
|
|
|
|
F-74
|
|
|
|
|
F-75
|
|
|
|
|
F-76
|
|
|
|
|
F-77
|
|
XTAR, L.L.C.:
|
|
|
|
|
|
|
|
F-121
|
|
|
|
|
F-122
|
|
|
|
|
F-123
|
|
|
|
|
F-124
|
|
|
|
|
F-125
|
|
|
|
|
F-126
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Loral Space & Communications Inc. and subsidiaries
(the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the 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 present
fairly, in all material respects, the financial position of the
Company as of December 31, 2008 and 2007, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 9 to the consolidated financial
statements, as of January 1, 2007, the Company changed its
method of accounting for uncertain tax positions to adopt the
provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB
No. 109.
As discussed in Note 12 to the consolidated financial
statements, as of December 31, 2006, the Company changed
its method of accounting for pensions and other employee
benefits to adopt the provisions of Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and other Postretirement Plans.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2009 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE LLP
New York, New York
March 16, 2009
F-2
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
117,548
|
|
|
$
|
314,694
|
|
Contracts-in-process
|
|
|
213,651
|
|
|
|
109,376
|
|
Inventories
|
|
|
109,755
|
|
|
|
96,968
|
|
Restricted cash
|
|
|
690
|
|
|
|
12,816
|
|
Other current assets
|
|
|
53,596
|
|
|
|
36,034
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
495,240
|
|
|
|
569,888
|
|
Property, plant and equipment, net
|
|
|
188,270
|
|
|
|
147,828
|
|
Long-term receivables
|
|
|
184,701
|
|
|
|
132,400
|
|
Investments in affiliates
|
|
|
72,642
|
|
|
|
566,196
|
|
Goodwill
|
|
|
|
|
|
|
227,058
|
|
Intangible assets, net
|
|
|
31,578
|
|
|
|
42,854
|
|
Other assets
|
|
|
23,436
|
|
|
|
16,715
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
995,867
|
|
|
$
|
1,702,939
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
91,052
|
|
|
$
|
69,205
|
|
Accrued employment costs
|
|
|
41,819
|
|
|
|
42,890
|
|
Customer advances and billings in excess of costs and profits
|
|
|
184,592
|
|
|
|
251,954
|
|
Income taxes payable
|
|
|
233
|
|
|
|
31,239
|
|
Accrued interest and preferred dividends
|
|
|
207
|
|
|
|
4,979
|
|
Other current liabilities
|
|
|
31,471
|
|
|
|
39,512
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
349,374
|
|
|
|
439,779
|
|
Borrowings under revolving credit facility
|
|
|
55,000
|
|
|
|
|
|
Pension and other postretirement liabilities
|
|
|
230,660
|
|
|
|
152,341
|
|
Long-term liabilities
|
|
|
151,176
|
|
|
|
137,261
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
786,210
|
|
|
|
729,381
|
|
Commitments and contingencies Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2008
|
|
|
|
|
|
|
|
|
Series A-1
cumulative 7.5% convertible preferred stock, $0.01 par
value; 2,200,000 shares authorized, 141,953 shares
issued and outstanding at December 31, 2007
|
|
|
|
|
|
|
41,873
|
|
Series B-1
cumulative 7.5% convertible preferred stock, $0.01 par
value; 2,000,000 shares authorized, 900,821 shares
issued and outstanding at December 31, 2007
|
|
|
|
|
|
|
265,777
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
Voting common stock, $.01 par value; 30,494,327 shares
authorized, 20,286,992 and 20,292,746 shares issued and
outstanding
|
|
|
203
|
|
|
|
203
|
|
Non-voting common stock, $0.1 par value;
9,505,673 shares authorized, issued and outstanding at
December 31, 2008
|
|
|
95
|
|
|
|
|
|
Paid-in capital
|
|
|
1,007,011
|
|
|
|
663,127
|
|
Accumulated deficit
|
|
|
(750,922
|
)
|
|
|
(33,939
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(46,730
|
)
|
|
|
36,517
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
209,657
|
|
|
|
973,558
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
995,867
|
|
|
$
|
1,702,939
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues from satellite manufacturing
|
|
$
|
869,398
|
|
|
$
|
761,363
|
|
|
$
|
636,632
|
|
Revenues from satellite services
|
|
|
|
|
|
|
121,091
|
|
|
|
160,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
869,398
|
|
|
|
882,454
|
|
|
|
797,333
|
|
Cost of satellite manufacturing
|
|
|
787,758
|
|
|
|
688,991
|
|
|
|
550,821
|
|
Cost of satellite services
|
|
|
|
|
|
|
86,213
|
|
|
|
98,614
|
|
Selling, general and administrative expenses
|
|
|
97,015
|
|
|
|
166,936
|
|
|
|
127,080
|
|
Gain on recovery from customer bankruptcy
|
|
|
(9,338
|
)
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
187,940
|
|
|
|
|
|
|
|
|
|
Gain on contribution of Loral Skynet
|
|
|
|
|
|
|
(104,942
|
)
|
|
|
|
|
Gain on litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(193,977
|
)
|
|
|
45,256
|
|
|
|
29,818
|
|
Interest and investment income
|
|
|
11,857
|
|
|
|
39,279
|
|
|
|
31,526
|
|
Interest expense
|
|
|
(2,268
|
)
|
|
|
(2,312
|
)
|
|
|
(23,449
|
)
|
Gain (loss) on foreign exchange contracts
|
|
|
|
|
|
|
89,364
|
|
|
|
(5,750
|
)
|
Gain on litigation, net
|
|
|
38,823
|
|
|
|
|
|
|
|
|
|
Impairment of available for sale securities
|
|
|
(5,823
|
)
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(16,155
|
)
|
|
|
|
|
Other (expense) income
|
|
|
(135
|
)
|
|
|
2,354
|
|
|
|
(2,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes, equity in net losses of
affiliates and minority interest
|
|
|
(151,523
|
)
|
|
|
157,786
|
|
|
|
30,117
|
|
Income tax provision
|
|
|
(45,744
|
)
|
|
|
(83,457
|
)
|
|
|
(20,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in net losses of affiliates and
minority interest
|
|
|
(197,267
|
)
|
|
|
74,329
|
|
|
|
9,237
|
|
Equity in net losses of affiliates
|
|
|
(495,649
|
)
|
|
|
(21,430
|
)
|
|
|
(7,163
|
)
|
Minority interest
|
|
|
|
|
|
|
(23,240
|
)
|
|
|
(24,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(692,916
|
)
|
|
|
29,659
|
|
|
$
|
(22,720
|
)
|
Preferred dividends
|
|
|
(24,067
|
)
|
|
|
(19,379
|
)
|
|
|
|
|
Beneficial conversion feature related to the issuance of Loral
Series A-1
Preferred Stock
|
|
|
|
|
|
|
(25,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(716,983
|
)
|
|
$
|
(15,405
|
)
|
|
$
|
(22,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(35.13
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
20,407
|
|
|
|
20,087
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
Series B-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Voting
|
|
|
Non-Voting
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Income
|
|
|
Shareholders
|
|
|
|
Issued
|
|
|
Amount
|
|
|
Issued
|
|
|
Amount
|
|
|
Issued
|
|
|
Amount
|
|
|
Issued
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
Equity
|
|
|
Balance, January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
$
|
642,210
|
|
|
$
|
(15,261
|
)
|
|
$
|
15
|
|
|
$
|
627,164
|
|
Adjustment to initially apply SFAS 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,951
|
|
|
|
29,951
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,720
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,109
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,611
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
644,708
|
|
|
|
(37,981
|
)
|
|
|
40,075
|
|
|
|
647,002
|
|
Cumulative effect related to adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,238
|
)
|
|
|
|
|
|
|
(6,238
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,659
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,558
|
)
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,101
|
|
Issuance of Series -1 preferred stock
|
|
|
137
|
|
|
$
|
40,237
|
|
|
|
859
|
|
|
$
|
253,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,864
|
)
|
|
|
|
|
|
|
|
|
|
|
284,386
|
|
Issuance of Series -1 preferred stock as payment for dividend
|
|
|
5
|
|
|
|
1,636
|
|
|
|
42
|
|
|
|
12,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,400
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
|
|
1,921
|
|
Restricted shares surrendered to fund withholding taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(982
|
)
|
|
|
|
|
|
|
|
|
|
|
(982
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
26,345
|
|
|
|
|
|
|
|
|
|
|
|
26,347
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,379
|
)
|
|
|
|
|
|
|
(19,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
142
|
|
|
|
41,873
|
|
|
|
901
|
|
|
|
265,777
|
|
|
|
20,293
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
663,127
|
|
|
|
(33,939
|
)
|
|
|
36,517
|
|
|
|
973,558
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692,916
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,247
|
)
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(776,163
|
)
|
Issuance of Series -1 preferred stock as payment for dividend
|
|
|
3
|
|
|
|
822
|
|
|
|
78
|
|
|
|
23,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,249
|
|
Restricted shares surrendered to fund withholding taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
(338
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,621
|
|
|
|
|
|
|
|
|
|
|
|
7,621
|
|
Series-1 preferred dividends
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
4,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,797
|
|
Cancellation and conversion of Series-1 preferred stock to
non-voting common stock
|
|
|
(145
|
)
|
|
|
(43,313
|
)
|
|
|
(979
|
)
|
|
|
(293,383
|
)
|
|
|
|
|
|
|
|
|
|
|
9,506
|
|
|
|
95
|
|
|
|
336,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,067
|
)
|
|
|
|
|
|
|
(24,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
20,287
|
|
|
$
|
203
|
|
|
|
9,506
|
|
|
$
|
95
|
|
|
$
|
1,007,011
|
|
|
$
|
(750,922
|
)
|
|
$
|
(46,730
|
)
|
|
$
|
209,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
LORAL
SPACE & COMMUNICATIONS INC.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(692,916
|
)
|
|
$
|
29,659
|
|
|
$
|
(22,720
|
)
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash items
|
|
|
762,210
|
|
|
|
(35,971
|
)
|
|
|
108,584
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
64,828
|
|
|
|
(9,129
|
)
|
Contracts-in-process
|
|
|
(216,354
|
)
|
|
|
(60,884
|
)
|
|
|
5,551
|
|
Inventories
|
|
|
(12,787
|
)
|
|
|
(15,872
|
)
|
|
|
(31,990
|
)
|
Long-term receivables
|
|
|
13,947
|
|
|
|
(266
|
)
|
|
|
(2,214
|
)
|
Other current assets and other assets
|
|
|
3,393
|
|
|
|
6,369
|
|
|
|
7,964
|
|
Accounts payable
|
|
|
23,681
|
|
|
|
6,041
|
|
|
|
(12,812
|
)
|
Accrued expenses and other current liabilities
|
|
|
(22,455
|
)
|
|
|
15,866
|
|
|
|
17,756
|
|
Customer advances
|
|
|
(19,710
|
)
|
|
|
(17,751
|
)
|
|
|
50,634
|
|
Income taxes payable
|
|
|
(55,034
|
)
|
|
|
28,719
|
|
|
|
391
|
|
Pension and other postretirement liabilities
|
|
|
(19,010
|
)
|
|
|
8,663
|
|
|
|
(20,453
|
)
|
Long-term liabilities
|
|
|
32,825
|
|
|
|
(2,282
|
)
|
|
|
(3,725
|
)
|
Other
|
|
|
|
|
|
|
4
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(202,210
|
)
|
|
|
27,123
|
|
|
|
88,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(64,559
|
)
|
|
|
(95,761
|
)
|
|
|
(82,157
|
)
|
Decrease (increase) in restricted cash in escrow
|
|
|
18,637
|
|
|
|
(19,709
|
)
|
|
|
(323
|
)
|
Proceeds received for the contribution of Loral Skynet net of
cash contributed
|
|
|
|
|
|
|
57,591
|
|
|
|
|
|
Proceeds received from disposition of orbital slot
|
|
|
|
|
|
|
|
|
|
|
5,742
|
|
Distribution from an equity investment
|
|
|
|
|
|
|
2,955
|
|
|
|
250
|
|
Proceeds from the sale of short-term investments and
available-for-sale securities
|
|
|
162
|
|
|
|
468,571
|
|
|
|
7,098
|
|
Purchase of short-term investments
|
|
|
(500
|
)
|
|
|
(350,895
|
)
|
|
|
(106,588
|
)
|
Investments in and advances to affiliates
|
|
|
(1,048
|
)
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(47,308
|
)
|
|
|
61,519
|
|
|
|
(175,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under SS/L revolving credit facility
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(2,628
|
)
|
|
|
|
|
|
|
|
|
Proceeds from term loan (Loral Skynet Notes refinancing facility)
|
|
|
|
|
|
|
141,050
|
|
|
|
|
|
Repayment of Loral Skynet Notes
|
|
|
|
|
|
|
(126,000
|
)
|
|
|
|
|
10% redemption fee on extinguishment of Loral Skynet Notes
|
|
|
|
|
|
|
(12,600
|
)
|
|
|
|
|
Preferred stock issuance costs
|
|
|
|
|
|
|
(8,864
|
)
|
|
|
|
|
Proceeds from the sale of Series-1 preferred stock
|
|
|
|
|
|
|
293,250
|
|
|
|
|
|
Redemption of Loral Skynet Preferred Stock
|
|
|
|
|
|
|
(237,599
|
)
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
|
2,097
|
|
|
|
|
|
Cash dividends paid on Loral Skynet Preferred Stock
|
|
|
|
|
|
|
(11,824
|
)
|
|
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
52,372
|
|
|
|
39,510
|
|
|
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(197,146
|
)
|
|
|
128,152
|
|
|
|
(89,254
|
)
|
Cash and cash equivalents beginning of year
|
|
|
314,694
|
|
|
|
186,542
|
|
|
|
275,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
117,548
|
|
|
$
|
314,694
|
|
|
$
|
186,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
LORAL
SPACE & COMMUNICATIONS INC.
|
|
1.
|
Organization
and Principal Business
|
Loral Space & Communications Inc. (Loral),
together with its subsidiaries, is a leading satellite
communications company with substantial activities in satellite
manufacturing and investments in satellite-based communications
services. Loral, a Delaware corporation, was formed on
June 24, 2005, to succeed to the business conducted by its
predecessor registrant, Loral Space & Communications
Ltd. (Old Loral), which emerged from chapter 11
of the federal bankruptcy laws on November 21, 2005 (the
Effective Date) pursuant to the terms of the fourth
amended joint plan of reorganization, as modified (the
Plan of Reorganization).
The terms Loral, the Company,
we, our and us when used in
these financial statements with respect to the period prior to
the Effective Date, are references to Old Loral, and when used
with respect to the period commencing on and after the Effective
Date, are references to Loral. These references include the
subsidiaries of Old Loral or Loral, as the case may be, unless
otherwise indicated or the context otherwise requires.
Loral is organized into two segments:
Satellite
Manufacturing:
Our subsidiary, Space Systems/Loral, Inc. (SS/L),
designs and manufactures satellites, space systems and space
system components for commercial and government customers whose
applications include fixed satellite services (FSS),
direct-to-home (DTH) broadcasting, mobile satellite
services (MSS), broadband data distribution,
wireless telephony, digital radio, digital mobile broadcasting,
military communications, weather monitoring and air traffic
management.
Satellite
Services:
Until October 31, 2007, the operations of our satellite
services segment were conducted through Loral Skynet Corporation
(Loral Skynet), which leased transponder capacity to
commercial and government customers for video distribution and
broadcasting, high-speed data distribution, Internet access and
communications, and provided managed network services to
customers using a hybrid satellite and ground-based system. It
also provided professional services such as fleet operating
services to other satellite operators. At October 31, 2007,
Loral Skynet had four in-orbit satellites and had one satellite
under construction at SS/L.
On October 31, 2007, Loral and its Canadian partner, Public
Sector Pension Investment Board (PSP), through
Telesat Holdings Inc. (Telesat Holdco), a
newly-formed joint venture, completed the acquisition of Telesat
Canada from BCE Inc. (BCE). In connection with this
acquisition, Loral transferred on that same date substantially
all of the assets and related liabilities of Loral Skynet to
Telesat Canada. Loral holds a 64% economic interest and a
331/3%
voting interest in Telesat Holdco, the ultimate parent company
of the resulting new entity (see Note 6). We use the equity
method of accounting for our investment in Telesat Canada.
We refer to the acquisition of Telesat Canada and the related
transfer of Loral Skynet to Telesat Canada as the Telesat Canada
transaction. References to Telesat Canada with respect to
periods prior to the closing of this transaction are references
to the subsidiary of BCE and with respect to the period after
the closing of this transaction are references to Telesat Holdco
and/or its
subsidiaries, as appropriate. Similarly, unless otherwise
indicated, references to Loral Skynet with respect to periods
prior to the closing of this transaction are references to the
operations of Lorals satellite services segment as
conducted through Loral Skynet and with respect to the period
commencing on and after the closing of this transaction are, if
related to the fixed satellite services business, references to
the Loral Skynet operations within Telesat Canada.
F-7
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The consolidated financial statements include the results of
Loral and its subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United
States of America. All intercompany transactions have been
eliminated.
As noted above, we emerged from bankruptcy on November 21,
2005 and pursuant to Statement of Position
No. 90-7,
Financial Reporting of Entities in Reorganization Under the
Bankruptcy Code
(SOP 90-7),
we adopted fresh-start accounting as of October 1, 2005 and
determined the fair value of our assets and liabilities. Upon
emergence, our reorganization equity value was allocated to our
assets and liabilities, which were stated at fair value in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations
(SFAS 141). In addition, our accumulated
deficit was eliminated, and our new debt and equity were
recorded in accordance with distributions pursuant to the Plan
of Reorganization.
Investments in Telesat Canada and XTAR, L.L.C.
(XTAR) are accounted for using the equity method of
accounting. Income and losses of affiliates are recorded based
on our beneficial interest. Intercompany profit arising from
transactions with affiliates is eliminated to the extent of our
beneficial interest. Equity in losses of affiliates is not
recognized after the carrying value of an investment, including
advances and loans, has been reduced to zero, unless guarantees
or other funding obligations exist. The Company monitors its
equity method investments for factors indicating
other-than-temporary impairment. An impairment loss would be
recognized when there has been a loss in value of the affiliate
that is other than temporary.
Use of
Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of
America (U.S. GAAP) requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
amounts of revenues and expenses reported for the period. Actual
results could differ from estimates.
Most of our satellite manufacturing revenue is associated with
long-term contracts which require significant estimates. These
estimates include forecasts of costs and schedules, estimating
contract revenue related to contract performance (including
orbital incentives) and the potential for component obsolescence
in connection with long-term procurements. Significant estimates
also include the estimated useful lives of our plant and
equipment, and finite lived intangible assets, the fair value of
indefinite lived intangible assets and goodwill, the fair value
of stock based compensation, the realization of deferred tax
assets, gains or losses on derivative instruments and our
pension liabilities.
Cash and
Cash Equivalents, Restricted Cash and Available for Sale
Securities
As of December 31, 2008, the Company had
$117.5 million of cash and cash equivalents, and
$5.7 million of restricted cash ($0.7 million included
in other current assets and $5.0 million included in other
assets on our consolidated balance sheet). Cash and cash
equivalents include liquid investments with maturities of less
than 90 days at the time of purchase. Management determines
the appropriate classification of its investments at the time of
purchase and at each balance sheet date. Investments in publicly
traded common stock are classified as available for sale
securities. Available for sale securities are carried at fair
value with unrealized gains and losses, if any, reported in
accumulated other comprehensive income (loss).
Concentration
of Credit Risk
Financial instruments which potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents, foreign exchange contracts,
contracts-in-process,
long-term receivables and advances and loans to affiliates (see
Note 6). Our cash and cash equivalents are maintained with
high-credit-quality financial
F-8
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
institutions. Historically, our customers have been primarily
large multinational corporations and U.S. and foreign
governments for which the creditworthiness was generally
substantial. In recent years, we have added commercial customers
which are highly leveraged, as well as those in the development
stage which are partially funded. Management believes that its
credit evaluation, approval and monitoring processes combined
with contractual billing arrangements provide for management of
potential credit risks with regard to our current customer base.
However, the global financial markets have been adversely
impacted by the current market environment that includes
illiquidity, market volatility, widening credit spreads, changes
in interest rates, and currency exchange fluctuations. These
credit and financial market conditions may have a negative
impact on certain of our customers and could negatively impact
the ability of such customers to pay amounts owed or to enter
into future contracts with us.
Inventories
Inventories consist principally of parts and subassemblies used
in the manufacture of satellites which have not been
specifically identified to
contracts-in-process,
and are valued at the lower of cost or fair value. Cost is
determined using the
first-in-first-out
(FIFO) or average cost method. As of December 31, 2008 and
2007, inventory was reduced by an allowance for obsolescence of
$27.2 million and $28.4 million, respectively.
Fair
Value Measurements
All available for sale securities are measured at fair value
based on quoted market prices at the end of the reporting
period. In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements
(SFAS 157), to define fair value, establish
a framework for measuring fair value in accordance with
U.S. GAAP and expand disclosures about fair value
measurements. SFAS 157 establishes a fair value measurement
hierarchy to price a particular asset or liability. In February
2008, the FASB issued FASB Staff Position
157-2,
Effective Date of FASB Statement No. 157, which
provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and liabilities (such as
goodwill), except those that are recognized or disclosed in the
Companys financial statements at fair value at least
annually. Accordingly, the Company adopted the provisions of
SFAS 157 only for its financial assets and liabilities
recognized or disclosed at fair value on a recurring basis
effective January 1, 2008. The Companys financial
assets measured at fair value on a recurring basis as of
December 31, 2008 consist of marketable securities which
were valued at $0.2 million and foreign exchange forward
contracts valued at $14.6 million. The Company has no
financial liabilities measured at fair value on a recurring
basis as of December 31, 2008. The marketable securities
are classified as Level 1 and the foreign exchange forward
contracts are classified as Level 2 in the fair value
measurement hierarchy under SFAS 157 as of
December 31, 2008.
A Level 1 fair value represents a fair value that is
derived from unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability
to access at the measurement date.
A Level 2 fair value represents a fair value which is
derived from observable market data (i.e. benchmark yields, spot
rates and other industry and economic events).
Level 1 Lorals marketable
securities, which are included in other current assets,
consisted entirely of an investment in the common stock of
Globalstar Inc. (see Note 6). Lorals investment in
Globalstar Inc. is accounted for as an available for
sale security under the provisions of
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115).
Generally, unrealized gains and losses on this investment are
recorded as a component of accumulated other comprehensive
income (loss). For the year ended December 31, 2008, we
recorded impairment charges of $5.8 million for
other-than-temporary declines in the value of our investment in
Globalstar Inc. common stock.
Level 2 During 2008, Loral entered into
a series of foreign exchange forward contracts, with maturities
through 2011, designed to manage the risk of currency exchange
rate fluctuations on cash receipts associated with a satellite
manufacturing contract denominated in EUROs. These contracts
have been designated as cash flow hedges
F-9
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and are tested quarterly for effectiveness. The effective
portion of the gain or loss on a cash flow hedge is recorded as
a component of accumulated other comprehensive income (loss) and
the remaining gain or loss is included in income. The Company
has elected to use the income approach to value the derivatives,
using observable Level II market expectations at the
measurement date and standard valuation techniques to convert
future amounts to a single present value amount assuming
participants are motivated, but not compelled to transact.
Level II inputs are limited to quoted prices for similar
assets or liabilities in active markets and inputs other than
quoted prices that are observable for the asset or liability
(including interest rates and credit risk). As of
December 31, 2008, the fair value of these contracts was
$14.6 million, of which $8.9 million was included in
other current assets and $5.7 million was included in other
assets based upon the maturity dates of the forward contracts.
During the year ended December 31, 2008, we recorded a
reduction to revenue of $7 million and recorded an
unrealized gain in accumulated other comprehensive income of
$18.2 million related to these contracts.
In addition, SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS 159) was effective for us on
January 1, 2008. SFAS 159 expands opportunities to use
fair value measurements in financial reporting and permits
entities to choose to measure many financial instruments and
certain other items at fair value. We did not elect the fair
value option for any of our qualifying financial instruments.
Property,
Plant and Equipment
As of October 1, 2005, we adopted fresh-start accounting
and our property, plant and equipment were recorded at their
fair values. Depreciation is provided on the straight-line
method for satellites and related equipment over the estimated
useful lives of the related assets. Depreciation is provided
primarily on accelerated methods for other owned assets over the
estimated useful life of the related assets. Leasehold
improvements are amortized over the shorter of the lease term or
the estimated useful life of the improvements. Below are the
estimated useful lives of our property, plant and equipment as
of December 31, 2008:
|
|
|
|
|
|
|
Years
|
|
|
Land improvements
|
|
|
20
|
|
Buildings and building improvements
|
|
|
10 to 45
|
|
Leasehold improvements
|
|
|
2 to 17
|
|
Equipment, furniture and fixtures
|
|
|
5 to 10
|
|
Costs incurred through October 30, 2007 in connection with
the construction and successful deployment of Loral Skynet
satellites and related equipment were capitalized. Such costs
included direct contract costs, allocated indirect costs, launch
costs, launch and in-orbit test insurance and construction
period interest. Capitalized interest related to the
construction of satellites for 2007 and 2006 was
$8.4 million and $2.2 million, respectively. All
capitalized satellite costs were amortized over the estimated
useful life of the related satellite. The estimated useful life
of the satellites was determined by engineering analyses
performed at the satellites in-service date. Satellite
lives were reevaluated periodically based on updated engineering
analyses. Losses from unsuccessful launches and in-orbit
failures of our satellites, net of insurance proceeds (so long
as such amounts were determinable and receipt was probable),
were recorded in the period a loss occurred (see Valuation of
Long-Lived Assets below). Satellite transponder rights,
representing the contractual right to satellite transponder
capacity for the economic life of a satellite, were accounted
for as capital leases, included in fixed assets and depreciated
over their estimated useful life. Depreciation of satellite
transponder rights was included in cost of satellite services.
On October 31, 2007, all Loral Skynet satellites and
related equipment were contributed to Telesat Canada in
connection with the Telesat Canada transaction (see Note 6).
Valuation
of Long-Lived Assets
The carrying values of our satellites and long-lived assets are
reviewed for impairment in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. We periodically evaluate potential
F-10
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impairment loss relating to our satellites and other long-lived
assets, when a change in circumstances occurs, by assessing
whether the carrying amount of these assets can be recovered
over their remaining lives through the future undiscounted
expected cash flows to be generated by those assets (excluding
financing costs). If the expected undiscounted future cash flows
are less than the carrying value of the long-lived asset, an
impairment charge would be recorded based on such assets
carrying value in excess of its estimated fair value. Changes in
estimates of future cash flows could result in an impairment of
the asset in a future period.
Goodwill
and Other Intangible Assets
Goodwill represents the amount by which the Companys
reorganization equity value exceeded the fair value of its
tangible assets and identified intangible assets less its
liabilities, as of October 1, 2005, the date we adopted
fresh-start accounting. Pursuant to the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142), goodwill is not amortized.
Goodwill is subject to an annual impairment test, or if events
and circumstances change and indicators of impairment are
present, goodwill will be tested for impairment between annual
tests. As a result of the decline of Lorals stock price
and the decline in comparable company values we performed an
interim impairment test as of June 30, 2008 and updated our
2008 annual impairment test through November 30, 2008. This
most recent impairment test resulted in the recording of an
impairment charge in 2008 for the entire goodwill balance of
$187.9 million (see Note 7). The Companys
estimate of the fair value of SS/L employed both a comparable
public company analysis, which considered the valuation
multiples of companies deemed comparable, in whole or in part,
to the Company and a discounted cash flow analysis that
calculated a present value of the projected future cash flows of
SS/L. The Company considered both quantitative and qualitative
factors in assessing the reasonableness of the underlying
assumptions used in the valuation process. Testing goodwill for
impairment requires significant subjective judgments by
management.
Goodwill also had been reduced by the decreases to the valuation
allowance as of October 1, 2005 and other tax adjustments
(see Income Taxes, below) and the transfer in October 2007 of
substantially all of the assets and related liabilities of Loral
Skynet in connection with the Telesat Canada transaction. For
the year ended December 31, 2008 we recorded a reduction to
goodwill in the amount of $38.6 million related to the
reduction of our income tax valuation allowance as of
October 1, 2005.
Intangible assets consist primarily of backlog, internally
developed software and technology and trade names all of which
were recorded at fair value in connection with the adoption of
fresh-start accounting. The fair values were calculated using
several approaches that encompassed the use of excess earnings,
relief from royalty and the
build-up
methods. The excess earnings, relief from royalty and
build-up
approaches are variations of the income approach. The income
approach, more commonly known as the discounted cash flow
approach, estimates fair value based on the cash flows that an
asset can be expected to generate over its useful life.
Identifiable intangible assets with finite useful lives are
amortized on a straight-line basis over the estimated useful
lives of the assets.
Contingencies
Contingencies by their nature relate to uncertainties that
require management to exercise judgment both in assessing the
likelihood that a liability has been incurred as well as in
estimating the amount of potential loss, if any. We accrue for
costs relating to litigation, claims and other contingent
matters when such liabilities become probable and reasonably
estimable. Such estimates may be based on advice from third
parties or on managements judgment, as appropriate. Actual
amounts paid may differ from amounts estimated, and such
differences will be charged to operations in the period in which
the final determination of the liability is made.
F-11
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
Satellite
Manufacturing
Revenue from satellite sales under long-term fixed-price
contracts is recognized following the provisions of Statement of
Position
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, using the cost-to-cost
percentage-of-completion method. Revenue includes the basic
contract price and estimated amounts for penalties and incentive
payments, including award fees, performance incentives, and
estimated orbital incentives discounted to their present value
at launch date. Costs include the development effort required
for the production of high-technology satellites, non-recurring
engineering and design efforts in early periods of contract
performance, as well as the cost of qualification testing
requirements. Contracts are typically subject to termination for
convenience or for default. If a contract is terminated for
convenience by a customer or due to a customers default,
we are generally entitled to our costs incurred plus a
reasonable profit.
Revenue under cost-reimbursable type contracts is recognized as
costs are incurred; incentive fees are estimated and recognized
over the contract term.
U.S. government contract risks include dependence on future
appropriations and administrative allotment of funds and changes
in government policies. Costs incurred under
U.S. government contracts are subject to audit. Management
believes the results of such audits will not have a material
effect on Lorals financial position or its results of
operations.
Losses on contracts are recognized when determined. Revisions in
profit estimates are reflected in the period in which the
conditions that require the revision become known and are
estimable. In accordance with industry practice,
contracts-in-process
include unbilled amounts relating to contracts and programs with
long production cycles, a portion of which may not be billable
within one year.
Loral
Skynet
Through the closing of the Telesat Canada transaction on
October 31, 2007, satellite capacity and network services
were provided under lease and network services agreements that
generally provided for the use of satellite transponders and, in
certain cases, earth stations and other terrestrial
communications equipment for periods generally ranging from one
year to the end of life of the satellite. Some of these
agreements had certain obligations, including providing spare or
substitute capacity, if available, in the event of satellite
failure. If no spare or substitute capacity was available, the
agreement may be terminated. Revenue under transponder lease and
network services agreements was recognized as services were
performed, provided that a contract existed, the price was fixed
or determinable and collectibility was reasonably assured.
Revenues under contracts that included fixed lease payment
increases were recognized on a straight-line basis over the life
of the lease.
Lease contracts qualifying for capital lease treatment,
typically based, among other factors, upon the term of the lease
and the transfer of substantially all of the benefits and risks
incident to the ownership of the transponder or satellite, were
accounted for as sales-type leases. For sales-type lease
transactions, we recognized as revenue the net present value of
the future minimum lease payments or the cash received for
prepaid lease arrangements. The cost basis of the transponder
was charged to cost of sales. During the life of the lease, we
recognized as interest income in each respective period, that
portion of each periodic lease payment, if any, deemed to be
attributable to interest. The balance of each periodic lease
payment, representing principal repayment, was recognized as a
reduction of the net investment in sales-type leases.
Other terrestrial communications equipment represents network
elements (such as antennas and transmission equipment) necessary
to enable communication between multiple terrestrial locations
through a customer- selected satellite communications service
provider. Revenue from equipment sales was recognized upon
acceptance by the customer or upon delivery, if the equipment
already met all of the criteria and specifications in the
customer-specific acceptance provision, provided that a contract
existed, the price was fixed or determinable and collectibility
F-12
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
was reasonably assured. Revenues under arrangements that
included both services and equipment elements were allocated
based on the relative fair values of the elements of the
arrangement; otherwise, revenue was recognized as services were
provided over the life of the arrangement.
Research
and Development
Independent research and development costs, which are expensed
as incurred, were $34.6 million, $36.5 million and
$20.5 million for 2008, 2007 and 2006, respectively, and
are included in selling, general and administrative expenses in
our statement of operations.
Derivative
Instruments
We follow SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133) as amended and interpreted,
which among other things requires that all derivative
instruments be recorded on the balance sheet at their fair
value. Changes in fair value of derivatives that have been
designated as cash flow hedging instruments are included in the
Unrealized gains on cash flow hedges as a component
of other comprehensive income (loss) in the accompanying
consolidated statements of stockholders equity to the
extent of the effectiveness of such hedging instruments. Any
ineffective portion of the change in fair value of the
designated hedging instruments is included in the consolidated
statements of operations. Changes in fair value of derivatives
that are not designated as hedging instruments will be included
in the consolidated statements of operations (see Notes 6
and 13).
Minority
Interest
On November 21, 2005, Loral Skynet issued one million of
its two million authorized shares of Series A 12%
non-convertible preferred stock, $0.01 par value per share
(the Loral Skynet Preferred Stock), which were
distributed in accordance with the Plan of Reorganization.
Dividend expense on Loral Skynet Preferred Stock is reflected as
minority interest on our consolidated statements of operations
for the years ended December 31, 2007 and 2006. On
November 5, 2007 all of the issued and outstanding shares
of Loral Skynet Preferred Stock were redeemed in connection with
the completion of the Telesat Canada transaction (See
Note 10).
Stock-Based
Compensation
We follow SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)), for accounting for stock
based compensation, for all stock options granted by us. Stock
options granted to non-employees are accounted for in accordance
with EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
(EITF 96-18).
Under SFAS 123(R), stock-based compensation expense is
measured at the grant date based on the fair value of the award,
and the cost is recognized as expense ratably over the
awards vesting period. We use the Black-Scholes-Merton
option-pricing model to measure fair value of these stock option
awards. The Black-Scholes-Merton model requires us to make
significant judgments regarding the assumptions used within the
model, the most significant of which are the stock price
volatility assumption, the expected life of the option award,
the risk-free rate of return and dividends during the expected
term.
Under SFAS 123(R), the Company is required to estimate
expected forfeitures of stock-based awards at the grant date and
recognize compensation cost only for those awards expected to
vest. The forfeiture assumption is ultimately adjusted to the
actual forfeiture rate. Therefore, changes in the forfeiture
assumptions may impact the timing of the total amount of expense
recognized over the vesting period. Estimated forfeitures are
reassessed in subsequent periods and may change based on new
facts and circumstances. We emerged from bankruptcy on
November 21, 2005, and as a result, we did not have
sufficient stock price history upon which to base our volatility
assumption for measuring our stock options. In determining the
volatility used in our model, we considered the
F-13
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
volatility of the stock prices of selected companies in the
satellite industry, the nature of those companies, our emergence
from bankruptcy and other factors in determining our stock price
volatility. We based our estimate of the average life of a stock
option using the midpoint between the vesting and expiration
dates as allowed by SEC Staff Accounting
Bulletin No. 107, Share-Based Payment. Our
risk-free rate of return assumption for options was based on
term-matching, nominal, monthly U.S. Treasury constant
maturity rates as of the date of grant. We assumed no dividends
during the expected term.
Deferred
Compensation
Pursuant to the Plan of Reorganization we entered into deferred
compensation arrangements for certain key employees that
generally vest over four years and expire after seven years. The
initial deferred compensation awards were calculated by
multiplying $9.44 by the number of shares of common stock
underlying the stock options granted to these key employees (see
Note 10). We are accreting the liability through charges to
expense over the vesting period. The value of the deferred
compensation may increase or decrease depending on stock price
performance within a defined range, until the occurrence of
certain events, including the exercise of the related stock
options and vesting will accelerate if there is a change of
control as defined. During 2008, stock-based compensation was
reduced by $4.6 million due to the decline in the
Companys share price. The deferred compensation cost
charged to expense, net of estimated forfeitures, was
$6.4 million and $3.3 million for the years ended
December 31, 2007 and 2006, respectively. As of
December 31, 2008, no deferred compensation has been
recognized because the share price of Loral was below $19 per
share. If the share price of Loral were to exceed $19, we would
recognize compensation expense up to a maximum of
$6.7 million at a share price of $28.44. In connection with
the Telesat Canada transaction which closed on October 31,
2007, deferred compensation cost of $2.6 million was
charged to expense due to accelerated vesting from change in
control provisions.
Income
Taxes
Loral Space & Communications Inc. and its subsidiaries
are subject to U.S. federal, state and local income
taxation on their worldwide income and foreign taxation on
certain income from sources outside the United States. Telesat
Canada is subject to tax in Canada and other jurisdictions and
Loral will provide in operating earnings any additional
U.S. current or deferred tax required on distributions
received or deemed distributions from Telesat Canada.
Deferred income taxes reflect the future tax effect of temporary
differences between the carrying amount of assets and
liabilities for financial and income tax reporting and are
measured by applying statutory tax rates in effect for the year
during which the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent it
is more likely than not that the deferred tax assets will not be
realized. Under
SOP 90-7,
for periods prior to January 1, 2009 any reduction to the
balance of the valuation allowance as of October 1, 2005
first reduced goodwill, then other intangible assets with any
excess treated as an increase to
paid-in-capital.
Upon adoption of SFAS 141( R) on January 1, 2009,
all future reversals of the valuation allowance balance as of
October 1, 2005 will be recorded as a reduction to the
income tax provision. (see Note 9).
Effective January 1, 2007, we adopted the Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a
companys financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected
to be taken in a tax return. For benefits to be recognized in
the financial statements, a tax position must be
more-likely-than-not to be sustained upon examination by the
taxing authorities based on the technical merits of the
position. The amount recognized is measured as the largest
amount of benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. The interpretation also
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and
F-14
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transition. The Company recognizes accrued interest and
penalties related to uncertain tax positions in income tax
expense.
Prior to adopting FIN 48, our policy was to maintain tax
contingency liabilities for potential audit issues. The tax
contingency liabilities were based on our estimate of the
probable amount of additional taxes that may be due in the
future. Any additional taxes due would be determined only upon
completion of current and future federal, state and
international tax audits.
Additional
Cash Flow Information
The following represents non-cash activities and supplemental
information to the consolidated statements of cash flows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Non-cash operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on contribution of Loral Skynet
|
|
$
|
|
|
|
$
|
(104,942
|
)
|
|
$
|
|
|
Equity in net losses of affiliates
|
|
|
495,649
|
|
|
|
21,430
|
|
|
|
7,163
|
|
Satmex settlement
|
|
|
|
|
|
|
|
|
|
|
(18,605
|
)
|
Minority interest
|
|
|
|
|
|
|
23,240
|
|
|
|
24,794
|
|
Deferred taxes
|
|
|
29,385
|
|
|
|
32,205
|
|
|
|
9,105
|
|
Depreciation and amortization
|
|
|
36,367
|
|
|
|
76,910
|
|
|
|
68,300
|
|
Stock based compensation
|
|
|
7,621
|
|
|
|
26,347
|
|
|
|
2,997
|
|
Impairment of cost basis investment
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Provisions for inventory obsolescence
|
|
|
|
|
|
|
543
|
|
|
|
1,678
|
|
Warranty expense accruals (accrual reversals)
|
|
|
431
|
|
|
|
(18,879
|
)
|
|
|
12,180
|
|
(Recoveries of) provisions for bad debts on billed receivables
|
|
|
700
|
|
|
|
(1,917
|
)
|
|
|
356
|
|
Adjustment to revenue straightlining assessment
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
Write-off of construction in process
|
|
|
|
|
|
|
2,164
|
|
|
|
|
|
Loss on disposition of fixed assets
|
|
|
63
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
16,155
|
|
|
|
|
|
Impairment of goodwill
|
|
|
187,940
|
|
|
|
|
|
|
|
|
|
Impairment of available for sale securities
|
|
|
5,823
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
|
|
|
|
(1,686
|
)
|
|
|
|
|
Amortization of prior service credit and actuarial gains
|
|
|
(3,200
|
)
|
|
|
(3,285
|
)
|
|
|
|
|
Gain on disposition of an orbital slot
|
|
|
|
|
|
|
(3,600
|
)
|
|
|
(1,149
|
)
|
Amortization of fair value adjustments related to orbital
incentives
|
|
|
(3,088
|
)
|
|
|
|
|
|
|
|
|
Gain on disposition of available for sale securities
|
|
|
(162
|
)
|
|
|
(11,088
|
)
|
|
|
(7,098
|
)
|
Unrealized loss on non-qualified pension plan assets
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
Non-cash net interest
|
|
|
(149
|
)
|
|
|
|
|
|
|
113
|
|
Loss/(gain) on foreign currency transactions and contracts
|
|
|
3,439
|
|
|
|
(89,364
|
)
|
|
|
5,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-cash operating items
|
|
$
|
762,210
|
|
|
$
|
(35,971
|
)
|
|
$
|
108,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities received in connection with the
sale of Globalstar do Brazil
|
|
$
|
6,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid
|
|
$
|
1,706
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in affiliate not yet paid
|
|
$
|
1,048
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Preferred stock by subsidiary as payment for dividend
|
|
$
|
|
|
|
$
|
23,343
|
|
|
$
|
14,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Loral Series-1 Preferred Stock as payment for
dividend
|
|
$
|
24,248
|
|
|
$
|
14,400
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends on Loral
Series-1
Preferred Stock
|
|
$
|
4,797
|
|
|
$
|
4,979
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-voting common stock and cancellation of Loral
Series-1
Preferred Stock
|
|
$
|
336,696
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,380
|
|
|
$
|
24,891
|
|
|
$
|
17,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid, net of refunds
|
|
$
|
29,835
|
|
|
$
|
5,292
|
|
|
$
|
6,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for reorganization items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
|
|
|
$
|
(160
|
)
|
|
$
|
(9,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
$
|
|
|
|
$
|
(740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor settlement
|
|
|
|
|
|
$
|
|
|
|
$
|
(432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
SFAS 141(R)
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) broadens
the guidance of SFAS 141, extending its applicability to
all transactions and other events in which one entity obtains
control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired,
liabilities assumed, and interests transferred as a result of
business combinations. SFAS 141(R) expands on required
disclosures to improve the statement users abilities to
evaluate the nature and financial effects of business
combinations. SFAS 141(R) requires the acquirer to
recognize an adjustment to income tax expense for changes in the
valuation allowance for acquired deferred tax assets and FIN 48
liabilities. SFAS 141(R) is effective for the Company on
January 1, 2009. As a result of the adoption of
SFAS No. 141(R), any future reductions in our deferred
tax valuation allowance and FIN 48 liabilities as of
October 1, 2005 (our fresh start accounting date), will
reduce income tax expense.
FSP
FAS 142-3
In April 2008, the FASB issued FSP
FAS 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS 142. The
intent of FSP
FAS 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other applicable accounting
literature. FSP
FAS 142-3
is effective for the Company on January 1, 2009. The
adoption of FSP
FAS 142-3
is not expected to have a material impact on our consolidated
financial statements.
FSP
FAS 157-3
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for that Asset is Not Active (FSP
FAS 157-3).
FSP
FAS 157-3
amends SFAS 157 to illustrate key considerations in
determining the fair value of a financial asset in an inactive
market. FSP
FAS 157-3
did not
F-16
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prescribe any new disclosure requirements but it emphasizes
SFAS 157s requirements for an entity to disclose
significant unobservable inputs (Level 3 inputs). FSP
FAS 157-3
was effective upon issuance and did not have a material impact
on our consolidated financial statements.
SFAS 160
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that a
non-controlling interest in a subsidiary be reported as equity
and the amount of consolidated net income specifically
attributable to the non-controlling interest be identified in
the consolidated financial statements. It also calls for
consistency in the manner of reporting changes in the
parents ownership interest and requires fair value
measurement of any non-controlling equity investment retained in
a deconsolidation. SFAS 160 is effective for the Company on
January 1, 2009. The adoption of SFAS 160 is not
expected to have a material impact on our consolidated financial
statements.
SFAS 161
In March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161
amends SFAS 133 and SFAS 107, Disclosure about Fair
Value of Financial Instruments by requiring increased
qualitative, quantitative and credit-risk disclosures about an
entitys derivative instruments and hedging activities but
does not change SFAS 133s scope or accounting.
SFAS 161 is effective for the Company on January 1,
2009. The adoption of SFAS 161 is not expected to have a
material impact on our consolidated financial statements.
FSP
FAS 132(R)-1
In December 2008, the FASB issued FSP FAS 132(R)-1,
Employers Disclosure about Postretirement Benefit Pan
Assets (FSP FAS 132(R)-1). FSP
FAS 132(R)-1 amends SFAS 132 Employers
Disclosure about Postretirement Benefits, to provide
guidance on an employers disclosures about plan assets of
a defined benefit pension or other retirement plan. FSP
FAS 132(R)-1 is effective for the Company on
January 1, 2009. The Company will provide the additional
disclosures required by FSP FAS 132(R)-1 beginning in 2009.
EITF
08-6
In November 2008, the FASB ratified the Emerging Issues Task
Force (EITF) consensus on Issue
No. 08-6,
Equity Method Investment Accounting
Considerations
(EITF 08-6)
which addresses certain effects of SFAS Nos. 141(R) and 160
on an entitys accounting for equity-method investments.
The consensus indicates, among other things, that transaction
costs for an investment should be included in the cost of the
equity-method investment (and not expensed) and shares
subsequently issued by the equity-method investee that reduce
the investors ownership percentage should be accounted for
as if the investor had sold a proportionate share of its
investment, with gains or losses recorded through earnings.
EITF 08-6
is effective for transactions occurring after December 31,
2008. The Company does not expect this standard to have a
material impact on our consolidated results of operations or
financial condition.
F-17
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Accumulated
Other Comprehensive Income (Loss)
|
The components of accumulated other comprehensive income (loss)
and other comprehensive income (loss) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cumulative translation adjustment
|
|
$
|
|
|
|
$
|
498
|
|
Proportionate share of Telesat Holdco other comprehensive income
|
|
|
(4,065
|
)
|
|
|
|
|
Reclassification of our proportionate share of Telesat Holdco
other comprehensive income
|
|
|
4,065
|
|
|
|
|
|
Unrealized gain on foreign currency hedge
|
|
|
18,182
|
|
|
|
|
|
Unrealized gains on available-for-sale securities, net of taxes
of $(2,108) and $(4,447) for 2008 and 2007, respectively
|
|
|
3,302
|
|
|
|
6,987
|
|
Reclassification adjustment for (losses) included in net income,
net of taxes of $2,204 and $4,542 for 2008 and 2007, respectively
|
|
|
(3,186
|
)
|
|
|
(6,546
|
)
|
Net actuarial (losses) gains, net of taxes of $(26,123) and
$(26,086) for 2008 and 2007, respectively
|
|
|
(57,288
|
)
|
|
|
40,072
|
|
Amortization of actuarial gains and prior service credits
|
|
|
(5,246
|
)
|
|
|
(2,000
|
)
|
Reclassification due to contribution of Loral Skynet, net of
taxes of $3,015 for 2008 and 2007
|
|
|
(2,494
|
)
|
|
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(46,730
|
)
|
|
$
|
36,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cumulative translation adjustment
|
|
$
|
(498
|
)
|
|
$
|
211
|
|
|
$
|
272
|
|
Proportionate share of Telesat Holdco other comprehensive income
|
|
|
(4,065
|
)
|
|
|
|
|
|
|
|
|
Reclassification of our proportionate share of Telesat Holdco
other comprehensive income
|
|
|
4,065
|
|
|
|
|
|
|
|
|
|
Unrealized gain on foreign currency hedge
|
|
|
18,182
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on available-for-sale securities, net
of taxes of $2,339, $1,976 and $(6,423) for 2008,2007 and 2006,
respectively
|
|
|
(3,685
|
)
|
|
|
(2,850
|
)
|
|
|
9,837
|
|
Reclassification adjustment for gains (losses) included in net
income, net of taxes of $(2,338) and $4,542 for 2008 and 2007,
respectively
|
|
|
3,360
|
|
|
|
(6,546
|
)
|
|
|
|
|
Net actuarial (losses) gains, net of taxes of $(37) and $(6,532)
for 2008 and 2007, respectively
|
|
|
(97,360
|
)
|
|
|
10,121
|
|
|
|
|
|
Amortization of actuarial gains and prior service credits
|
|
|
(3,246
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
Reclassification due to contribution of Loral Skynet, net of
taxes of $3,015 for 2007
|
|
|
|
|
|
|
(2,494
|
)
|
|
|
|
|
Adjustment to initially apply SFAS 158, net of taxes of
$(19,554) for 2006
|
|
|
|
|
|
|
|
|
|
|
29,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(83,247
|
)
|
|
$
|
(3,558
|
)
|
|
$
|
40,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Contracts-in-Process
and Long-Term Receivables
|
Contracts-in-Process
Contracts-in-Process
consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
U.S. government contracts:
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
$
|
2,218
|
|
|
$
|
193
|
|
Unbilled receivables
|
|
|
2,448
|
|
|
|
1,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,666
|
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
Commercial contracts:
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
|
120,237
|
|
|
|
60,355
|
|
Unbilled receivables
|
|
|
88,748
|
|
|
|
47,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,985
|
|
|
|
108,017
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
213,651
|
|
|
$
|
109,376
|
|
|
|
|
|
|
|
|
|
|
Unbilled amounts include recoverable costs and accrued profit on
progress completed, which have not been billed. Such amounts are
billed in accordance with the contract terms, typically upon
shipment of the product, achievement of contractual milestones,
or completion of the contract and, at such time, are
reclassified to billed receivables. Fresh-start fair value
adjustments relating to
contracts-in-process
are amortized on a percentage of completion basis as performance
under the related contract is completed.
Long-Term
Receivables
Billed receivables relating to long-term contracts are expected
to be collected within one year. We classify deferred billings
and the orbital component of unbilled receivables expected to be
collected beyond one year as long-term. Fresh-start fair value
adjustments relating to long-term receivables are amortized on
the effective interest method over the life of the related
orbital stream.
Receivable balances related to satellite orbital incentive
payments, billings deferred and the Telesat Canada consulting
services fee (see Note 16) as of December 31,
2008 are scheduled to be received as follows (in thousands):
|
|
|
|
|
|
|
Long-Term
|
|
|
|
Receivables
|
|
|
2009
|
|
$
|
2,728
|
|
2010
|
|
|
4,669
|
|
2011
|
|
|
16,746
|
|
2012
|
|
|
12,309
|
|
2013
|
|
|
12,757
|
|
Thereafter
|
|
|
138,220
|
|
|
|
|
|
|
|
|
|
187,429
|
|
Less, current portion included in
contracts-in-process
|
|
|
(2,728
|
)
|
|
|
|
|
|
Long-term receivables
|
|
$
|
184,701
|
|
|
|
|
|
|
F-19
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization of fresh-start accounting fair value adjustments
relating to
contracts-in-process,
long-term receivables, customer advances and billings in excess
of costs and profits and deferred revenue was
$(1.8) million, $(4.7) million and
$(18.2) million in 2008, 2007 and 2006, respectively.
|
|
5.
|
Property,
Plant and Equipment
|
Property, Plant & Equipment consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land and land improvements
|
|
$
|
26,913
|
|
|
$
|
26,799
|
|
Buildings
|
|
|
59,038
|
|
|
|
49,917
|
|
Leasehold improvements
|
|
|
10,870
|
|
|
|
8,691
|
|
Equipment, furniture and fixtures
|
|
|
133,916
|
|
|
|
94,844
|
|
Satellite capacity under construction (see note 16)
|
|
|
10,478
|
|
|
|
|
|
Other construction in progress
|
|
|
21,863
|
|
|
|
18,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,078
|
|
|
|
198,803
|
|
Accumulated depreciation and amortization
|
|
|
(74,808
|
)
|
|
|
(50,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,270
|
|
|
$
|
147,828
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for property, plant and
equipment was $23.8 million in 2008, $62.8 million in
2007 and $69.7 million in 2006.
In September 2006, Loral Skynet terminated a customers
leasehold interests with respect to two transponders on Telstar
18 by exercising its option to accelerate the lease termination
payment that would otherwise have been payable by Loral Skynet
to the customer in August 2009. In connection with the early
termination, Loral Skynet made a payment to the customer of
$9.1 million. We recorded a charge to Satellite Services
cost of sales of $1.0 million in connection with this
transaction, which represents the difference between the payment
made and the present value of our lease termination obligation
for the two transponders at the date of the transaction. The
remaining lease termination obligation was assumed by Telesat
Canada in connection with the Telesat Canada transaction.
On August 17, 2006, The Boeing Company (Boeing)
delivered to Loral Skynet a termination notice pursuant to which
all the transponders leased by it on our Estrela do Sul
satellite were to be terminated by December 31, 2006. On
September 29, 2006, an affiliate of Boeing signed an
agreement with Loral Skynet to lease transponder capacity on
Estrela do Sul for a period of 20 months beginning January
2007 and ending August 2008, with an option to renew the
contract for two consecutive one year periods. To exercise the
termination option, Boeing paid a termination fee of
$14.9 million on September 29, 2006. This termination
fee has been recognized as Revenue from Satellite Services in
our consolidated statement of operations in 2006. In addition,
Boeing prepaid $4.0 million for future services under the
September 2006 agreement.
F-20
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Investments
in Affiliates
|
Investments in affiliates consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Telesat Holdings
Inc.(1)
|
|
$
|
|
|
|
$
|
479,579
|
|
XTAR, LLC
|
|
|
70,547
|
|
|
|
86,617
|
|
Other
|
|
|
2,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,642
|
|
|
$
|
566,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2008 our investment in Telesat Canada
has been reduced to zero as a result of recording our interest
in Telesat Canadas losses. Equity in losses of affiliates
is not recognized after the carrying value of an investment,
including advances and loans, has been reduced to zero, unless
guarantees or other funding obligations exist. |
Equity in net losses of affiliates consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Telesat Holdings Inc.
|
|
$
|
(479,579
|
)
|
|
$
|
(1,792
|
)
|
|
$
|
|
|
XTAR, LLC
|
|
|
(16,070
|
)
|
|
|
(10,585
|
)
|
|
|
(7,413
|
)
|
Globalstar, L.P. and Globalstar service provider partnerships
|
|
|
|
|
|
|
(9,053
|
)
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(495,649
|
)
|
|
$
|
(21,430
|
)
|
|
$
|
(7,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The consolidated statements of operations reflect the effects of
the following amounts related to transactions with or
investments in affiliates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
83,974
|
|
|
$
|
21,968
|
|
|
$
|
11,262
|
|
Elimination of Lorals proportionate share of (profits)
losses relating to affiliate transactions
|
|
|
(4,969
|
)
|
|
|
1,935
|
|
|
|
412
|
|
Profits (losses) relating to affiliate transactions not
eliminated
|
|
|
2,808
|
|
|
|
(1,082
|
)
|
|
|
(324
|
)
|
Telesat
Canada
On December 16, 2006, a subsidiary of Telesat Holdco, a
joint venture formed by Loral and its Canadian partner, PSP
entered into a definitive agreement (the Share Purchase
Agreement) with BCE and Telesat Canada to acquire 100% of
the stock of Telesat Canada from BCE for CAD 3.25 billion.
We hold equity interests in Telesat Holdco representing 64% of
the economic interests and
331/3%
of the voting interests. Our Canadian partner, PSP, holds 36% of
the economic interests and
662/3%
of the voting interests in Telesat Holdco (except with respect
to the election of directors as to which it holds a 30% voting
interest).
Contribution
of Loral Skynet
In connection with the transactions contemplated under the Share
Purchase Agreement, on August 7, 2007, we and Loral Skynet
entered into an asset transfer agreement (the Asset
Transfer Agreement) with Telesat Holdco, and an asset
purchase agreement (the Asset Purchase Agreement)
with a subsidiary of Telesat Canada. Pursuant to the Asset
Transfer Agreement, we agreed, subject to certain exceptions, to
transfer substantially all of Loral Skynets assets and
related liabilities to Telesat Canada in return for an equity
interest in Telesat Holdco. In
F-21
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
addition, pursuant to the Asset Purchase Agreement, we agreed to
transfer certain of Loral Skynets assets located in the
U.S. and related liabilities to the Telesat Canada
subsidiary in exchange for $25.5 million in marketable
securities. On August 7, 2007, we, Loral Skynet, PSP,
Telesat Holdco and a subsidiary of Telesat Holdco also entered
into an Ancillary Agreement providing, among other things, for
the settlement of payments by and among us, PSP and Telesat
Holdco in connection with the Telesat Canada acquisition, the
transactions contemplated under the Asset Transfer Agreement,
and related transactions. As a result, we received
true-up
payments of $45.6 million from PSP in 2007 to bring the
equity contributions into the required economic positions. As
part of the Telesat Canada transaction, a final adjustment
payment of approximately $9.2 million was made by Loral to
PSP on April 4, 2008 and is included as a payable in our
financial statements as of December 31, 2007.
The Telesat Canada transaction closed on October 31, 2007.
Summary balance sheet information for the assets and liabilities
of Loral Skynet contributed to Telesat Canada on
October 31, 2007 is as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
25,360
|
|
Property, plant and equipment, net
|
|
|
443,776
|
|
Foreign currency contracts
|
|
|
83,614
|
|
Goodwill
|
|
|
42,246
|
|
Intangible assets, net
|
|
|
50,404
|
|
Other assets
|
|
|
3,183
|
|
|
|
|
|
|
Total assets
|
|
$
|
648,583
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
181,045
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
27,000
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
208,045
|
|
|
|
|
|
|
The following summarizes the gain on the contribution of
substantially all of the Loral Skynet assets and related
liabilities on October 31, 2007:
|
|
|
|
|
Consideration received for the contribution of Loral Skynet to
Telesat Holdco:
|
|
|
|
|
Cash and marketable securities
|
|
$
|
61,480
|
|
Fair value of equity in Telesat Holdco
|
|
|
670,562
|
|
|
|
|
|
|
Total consideration
|
|
|
732,042
|
|
Book value of contributed net assets of Loral Skynet
|
|
|
440,538
|
|
|
|
|
|
|
Consideration in excess of book value
|
|
$
|
291,504
|
|
|
|
|
|
|
Gain recognized
|
|
$
|
104,942
|
|
|
|
|
|
|
The consideration we received for the contribution of
substantially all of the Loral Skynet assets and related
liabilities was $291.5 million greater than the carrying
value of those assets and liabilities. In accordance with
EITF 01-2,
Interpretations of APB Opinion No. 29, we recognized
a gain of $104.9 million, representing the gain
attributable to PSPs economic interest in the contributed
assets and liabilities of Loral Skynet through their 36%
ownership interest in Telesat Canada. Loral has a significant
continuing interest in Telesat Canada and could only recognize a
gain to the extent of PSPs economic interest in the
contributed assets and liabilities of Loral Skynet. The amount
recorded as our investment in Telesat Canada is based on our
retained interest in the historical book value of the
contributed assets and liabilities of Loral Skynet and the gain
recognized.
F-22
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following the transfer of the assets of Loral Skynets
fixed satellite services business pursuant to the Asset Transfer
Agreement and Asset Purchase Agreement, Telesat Canada now
operates a fleet of twelve in-orbit satellites. In addition, one
satellite was launched in February 2009 and will enter service
in the second quarter of 2009, while one satellite which is 100%
leased is under construction at SS/L. Telesat Canada provides
fixed satellite services (FSS) on a global basis, including
video distribution and direct-to-home (DTH) video, as well as
end-to-end communications services using both satellite and
hybrid satellite-ground networks.
The following table presents summary financial data for Telesat
Canada in accordance with U.S. GAAP, as of
December 31, 2008 and 2007 and for the year ended
December 31, 2008 and the period October 31, 2007 to
December 31, 2007, subsequent to the acquisition by Loral
and PSP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
October 31,
|
|
|
|
For the Year Ended
|
|
|
2007
|
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
685,187
|
|
|
$
|
117,767
|
|
Operating expenses
|
|
|
(258,010
|
)
|
|
|
(52,484
|
)
|
Impairment of long-lived and intangible assets
|
|
|
(454,896
|
)
|
|
|
|
|
Depreciation, amortization and stock-based compensation
|
|
|
(225,949
|
)
|
|
|
(41,200
|
)
|
Operating income
|
|
|
(253,668
|
)
|
|
|
24,083
|
|
Interest expense
|
|
|
(231,062
|
)
|
|
|
(41,375
|
)
|
Other expense, net
|
|
|
(403,102
|
)
|
|
|
(45,550
|
)
|
Income tax benefit
|
|
|
139,872
|
|
|
|
61,520
|
|
Net loss
|
|
|
(747,960
|
)
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
179,769
|
|
|
$
|
143,656
|
|
Total assets
|
|
|
4,273,162
|
|
|
|
5,610,047
|
|
Current liabilities
|
|
|
171,423
|
|
|
|
229,540
|
|
Long-term debt, including current portion
|
|
|
2,901,620
|
|
|
|
2,828,017
|
|
Total liabilities
|
|
|
3,760,164
|
|
|
|
4,156,720
|
|
Redeemable preferred stock
|
|
|
116,044
|
|
|
|
143,138
|
|
Shareholders equity
|
|
|
396,954
|
|
|
|
1,310,189
|
|
Impairment of long-lived and intangible assets consists
primarily of an impairment charge to reduce orbital slot assets
to fair value. Other expense, net includes non-cash foreign
exchange losses of $654.2 million and $121.4 million and
non-cash gains on financial instruments of $254.7 million
and $78.1 million in 2008 and 2007, respectively.
We use the equity method of accounting for our investment in
Telesat Canada because we own
331/3%
of the voting stock, and do not exercise control via other
means. Lorals equity in net loss of Telesat Canada is
based on our proportionate share of its results in accordance
with U.S. GAAP and in U.S. dollars. Our proportionate
share of Telesat Canadas net loss is based on our 64%
economic interest as our holdings consist of common stock and
non-voting participating preferred shares that have all the
rights of common stock with respect to dividends, return of
capital and surplus distributions but have no voting rights.
F-23
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The contribution of Loral Skynet to Telesat Canada has been
recorded by Loral at historical book value of our retained
interest combined with the gain as described above. However, the
contribution has been recorded by Telesat Canada at fair value.
Accordingly, the amortization of fair value adjustments
applicable to the Loral Skynet assets and liabilities have been
proportionately eliminated in determining our share of the
earnings of Telesat Canada. Our equity in the net loss of
Telesat Canada also reflects the elimination of our profit, to
the extent of our economic interest, on satellites we are
constructing for them.
XTAR
We own 56% of XTAR, a joint venture between us and Hisdesat
Servicios Estrategicos, S.A. (Hisdesat) of Spain. We
account for our investment in XTAR under the equity method of
accounting because we do not control certain of its significant
operating decisions. Our interest in XTAR has been retained by
Loral and was not transferred to Telesat Canada as part of the
Telesat Canada transaction.
XTAR owns and operates an X-band satellite, XTAR-EUR, located at
29° E.L., which entered service in March 2005. The
satellite is designed to provide X-band communications services
exclusively to United States, Spanish and allied government
users throughout the satellites coverage area, including
Europe, the Middle East and Asia. The government of Spain
granted XTAR rights to an X-band license, normally reserved for
government and military use, to develop a commercial business
model for supplying X-band capacity in support of military,
diplomatic and security communications requirements. XTAR also
leases 7.2 72MHz X-band transponders on the Spainsat satellite
located 30° W.L., owned by Hisdesat, which entered
commercial service in April 2006. These transponders, designated
as
XTAR-LANT,
provide capacity to XTAR for additional X-band services and
greater coverage and flexibility.
In January 2005, Hisdesat provided XTAR with a convertible loan
in the amount of $10.8 million due 2011, for which Hisdesat
received enhanced governance rights in XTAR. If Hisdesat were to
convert the loan into XTAR equity, our equity interest in XTAR
would be reduced to 51%.
XTARs lease obligation to Hisdesat for the
XTAR-LANT
transponders was $23.1 million in 2008, with increases
thereafter to a maximum of $28 million per year through the
end of the useful life of the satellite. Under this lease
agreement, Hisdesat may also be entitled under certain
circumstances to a share of the revenues generated on the
XTAR-LANT
transponders. For 2008, XTAR agreed with Hisdesat that
XTARs excess cash balance (as defined) would be applied
towards making limited payments on these lease obligations, as
well as payments of other amounts owed to Hisdesat, Telesat
Canada and Loral in respect of services provided by them to
XTAR. XTAR is currently making payments in accordance with this
agreement. During the first quarter of 2008, we also agreed with
Hisdesat that interest on XTARs outstanding lease
obligations to Hisdesat will be paid through the issuance of a
class of non-voting membership interests in XTAR, which would
enjoy priority rights with respect to dividends and
distributions over the ordinary membership interests currently
held by us and Hisdesat. As of December 31, 2008,
$4.2 million of lease interest has been converted into
non-voting member interests in XTAR.
XTAR-EUR was launched on Arianespace, S.A.s Ariane ECA
launch vehicle in 2005. The price for this launch had two
components the first, consisting of a
$15.8 million 10% interest
paid-in-kind
loan provided by Arianespace, was repaid in full by XTAR on
July 6, 2007. The second component of the launch price
consists of a revenue-based fee to be paid to Arianespace over
XTAR-EURs 15 year in-orbit operations. This fee, also
referred to as an incentive fee, equals 3.5% of XTARs
annual operating revenues, subject to a maximum threshold (the
Incentive Cap). On February 29, 2008, XTAR paid
Arianespace $1.5 million representing the incentive fee
through December 31, 2007. On January 27, 2009,
Arianespace agreed to eliminate the incentive portion of the
Launch Services Agreement in exchange for $8.0 million
payable in three installments. The first payment of
$4.0 million was made in February 2009. The second and
third payments, each $2.0 million are due on April 15,
2009 and June 30, 2009. Upon the final payment on
June 30, 2009, XTAR shall have satisfied in full all of its
obligations under the Launch Services Agreement and the Launch
Services Agreement shall then be terminated.
F-24
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
To enable XTAR to make these settlement payments to Arianespace,
XTAR has issued a capital call to its LLC members. The capital
call required Loral to increase its investment in XTAR by
approximately $4.5 million in the first quarter of 2009,
representing Lorals 56% share of the $8 million
capital call.
The following table presents summary financial data for XTAR as
of December 31, 2008 and 2007 and for each of the three
years in the period ended December 31, 2008 (in thousands):
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
20,405
|
|
|
$
|
19,339
|
|
|
$
|
15,334
|
|
Operating expenses
|
|
|
(34,500
|
)
|
|
|
(24,015
|
)
|
|
|
(14,262
|
)
|
Depreciation and amortization
|
|
|
(9,650
|
)
|
|
|
(9,747
|
)
|
|
|
(9,681
|
)
|
Operating loss
|
|
|
(23,751
|
)
|
|
|
(14,423
|
)
|
|
|
(8,633
|
)
|
Net loss
|
|
|
(28,597
|
)
|
|
|
(18,421
|
)
|
|
|
(12,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
9,107
|
|
|
$
|
8,899
|
|
Total assets
|
|
|
115,437
|
|
|
|
124,898
|
|
Current liabilities
|
|
|
41,314
|
|
|
|
29,650
|
|
Total liabilities
|
|
|
79,386
|
|
|
|
64,440
|
|
Members equity
|
|
|
36,051
|
|
|
|
60,458
|
|
Satmex
In 1997, in connection with the privatization of Satelites
Mexicanos, S.A. de C.V. (Satmex) by the Mexican
Government, Loral acquired a 49% indirect economic interest in
Satmex, which we accounted for using the equity method.
On August 11, 2006, Satmex filed a voluntary petition for
reorganization under Chapter 11 in the U.S. Bankruptcy
Court to implement its restructuring plan. Satmex emerged from
Chapter 11 on November 30, 2006. As a result of the
restructuring that was implemented in its reorganization
proceeding, our equity interest in Satmex was reduced to 1.33%.
Satmex is accounted for as a cost basis investment subsequent to
November 30, 2006.
In connection with Satmexs restructuring, and as a
settlement of certain liabilities owed by Satmex to SS/L
pursuant to the June 14, 2005 settlement agreement, we
received on November 30, 2006, a usufructo to four
transponders on Satmex 6. A usufructo is a property right
under Mexican law which grants the holder a right to use the
subject property. SS/L assigned its rights to the usufructo
to Loral Skynet in consideration of a cash payment equal to
the fair value of the four Satmex 6 transponders. As a result of
the finalization of Satmexs restructuring plan in the
fourth quarter of 2006, we recorded satellite transponder rights
of $20.0 million representing the fair value of the four
Satmex 6 transponders, a $18.6 million reduction to cost of
satellite manufacturing and deferred revenue of
$1.4 million.
At the same time that we received the usufructo to the
Satmex 6 transponders, Loral Skynets end of life lease for
three transponders on Satmex 5 was also converted to a
usufructo. The Satmex 5 and Satmex 6 usufructo
rights have been transferred to Telesat Canada as part of
the Telesat Canada transaction. The equity interest in Satmex is
retained by Loral.
F-25
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
As of December 31, 2007, the Company held various indirect
ownership interests in three foreign companies that currently
serve as exclusive service providers for Globalstar service in
Brazil, Mexico and Russia. The Company accounts for these
ownership interests using the equity method of accounting. Loral
had written-off its investments in these companies, and, because
we have no future funding requirements relating to these
investments, there is no requirement for us to provide for our
allocated share of these companies net losses. For the year
ended December 31, 2007, the Company recognized earnings of
$3.0 million from our Globalstar investment partnerships
which were attributable to a cash distribution received from one
of our investments.
On December 21, 2007, Loral and certain of its subsidiaries
and DASA Globalstar LLC entered into an agreement to sell their
respective interests in Globalstar do Brasil S.A.
(GdB), the Globalstar Brazilian service provider, to
Globalstar Inc. Closing of the transaction occurred on
March 25, 2008. Pursuant to the sale agreement, Loral
received 883,393 shares of common stock of Globalstar Inc.
in consideration for the sale of its interest. The shares have
been registered under the Securities Act of 1933 and may be sold
by Loral without restriction. In addition, Loral agreed to
indemnify Globalstar Inc. for certain GdB pre-closing
liabilities, primarily related to Brazilian taxes. Loral has
agreed that proceeds from the sale of the Globalstar Inc. stock
received in the transaction will be kept in a segregated account
and may be used only for payment of the indemnified liabilities.
As a result of the sale and taking into account our estimate of
the indemnified liabilities, we recorded a loss of
$11.3 million during the year ended December 31, 2007.
As of December 31, 2008, remaining indemnified liabilities
of $8.8 million are included in current liabilities and
$1.4 million are included in long-term liabilities in the
consolidated balance sheet.
As of December 31, 2008, we owned 984,173 shares of
Globalstar Inc. common stock, which are accounted for as
available-for-sale securities, with a fair value of
$0.2 million. During 2008, management determined that there
has been an other-than-temporary impairment in the fair value of
the Globalstar Inc. stock obtained in the sale of GdB.
Accordingly, in accordance with SFAS 115, impairment
charges of $5.8 million were included in our consolidated
statements of operations for the year ended December 31,
2008. Unrealized gains on other Globalstar shares were
$0.1 million, net of taxes for the year ended
December 31, 2008.
|
|
7.
|
Goodwill
and Intangible Assets
|
Goodwill
Goodwill represents the amount by which the Companys
reorganization equity value exceeded the fair value of its
tangible assets and identified intangible assets less its
liabilities, as of October 1, 2005, the date we adopted
fresh-start accounting. Pursuant to the provisions of
SFAS No. 142, goodwill is not amortized. Goodwill is
subject to an annual impairment test, or if events and
circumstances change and indicators of impairment are present,
goodwill will be tested for impairment between annual tests. As
a result of the decline of Lorals stock price and the
decline in comparable company values, we performed an interim
impairment test as of June 30, 2008 and updated our annual
impairment test through November 30, 2008. This most recent
impairment test resulted in the recording of an impairment
charge in 2008 for the entire goodwill balance of
$187.9 million. The Companys estimate of the fair
value of SS/L employed both a comparable public company
analysis, which considered the valuation multiples of companies
deemed comparable, in whole or in part, to the Company and a
discounted cash flow analysis that calculated a present value of
the projected future cash flows of SS/L. The Company considered
both quantitative and qualitative factors in assessing the
reasonableness of the underlying assumptions used in the
valuation process. Testing goodwill for impairment requires
significant subjective judgments by management.
F-26
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the changes in the carrying
amount of goodwill for the period December 31, 2006 to
December 31, 2008 (in thousands):
|
|
|
|
|
Goodwill January 1, 2007
|
|
$
|
305,691
|
|
Cumulative effect of adopting FIN 48
|
|
|
7,542
|
|
Settlement of FIN 48 liabilities
|
|
|
(2,000
|
)
|
Reversal of excess valuation allowance on deferred tax assets
|
|
|
(35,088
|
)
|
Reversal of Old Loral deferred state tax liabilities
|
|
|
(6,840
|
)
|
Contribution of Loral Skynet to Telesat Canada
|
|
|
(42,247
|
)
|
|
|
|
|
|
Goodwill December 31, 2007
|
|
|
227,058
|
|
Reversal of FIN 48 liabilities for statute expiration
|
|
|
(531
|
)
|
Reversal of excess valuation allowance on deferred tax assets
|
|
|
(38,587
|
)
|
Goodwill impairment charge
|
|
|
(187,940
|
)
|
|
|
|
|
|
Goodwill December 31, 2008
|
|
$
|
|
|
|
|
|
|
|
Intangible
Assets
Intangible Assets were established in connection with our
adoption of fresh-start accounting and consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Amortization Period
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Internally developed software and technology
|
|
|
3
|
|
|
$
|
59,027
|
|
|
$
|
(35,154
|
)
|
|
$
|
59,027
|
|
|
$
|
(24,338
|
)
|
Trade names
|
|
|
17
|
|
|
|
9,200
|
|
|
|
(1,495
|
)
|
|
|
9,200
|
|
|
|
(1,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
68,227
|
|
|
$
|
(36,649
|
)
|
|
$
|
68,227
|
|
|
$
|
(25,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for intangible assets was
$11.3 million, $18.5 million and $21.1 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. Annual amortization expense for intangible assets
for the five years ended December 31, 2013 is estimated to
be as follows (in thousands):
|
|
|
|
|
2009
|
|
$
|
11,276
|
|
2010
|
|
|
9,192
|
|
2011
|
|
|
2,931
|
|
2012
|
|
|
2,315
|
|
2013
|
|
|
460
|
|
Long-term debt consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Space Systems/Loral, Inc Revolving Credit Facility
|
|
$
|
55,000
|
|
|
$
|
|
|
F-27
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SS/L
Credit Agreement
On October 16, 2008, SS/L entered into a Credit Agreement
(the Credit Agreement) with several banks and other
financial institutions. The Credit Agreement provides for a
$100.0 million senior secured revolving credit facility
(the Revolving Facility). The Revolving Facility
includes a $50.0 million letter of credit sublimit. The
Credit Agreement is for a term of three years, maturing on
October 16, 2011 (the Maturity Date).
The Credit Agreement also includes a feature that will allow
SS/L, on a one-time basis, to increase the available commitment
by $25.0 million, subject to securing additional
commitments from the current lenders or other lending
institutions. In addition, the Credit Agreement contains
customary conditions precedent to each borrowing, including
absence of defaults and accuracy of representations and
warranties. The Revolving Facility is available to finance the
working capital needs and general corporate purposes of SS/L.
The obligations under the Credit Agreement are secured by
(i) a first mortgage on certain real property owned by
SS/L, (ii) a first priority security interest in certain
tangible and intangible assets of SS/L and certain of its
subsidiaries and (iii) a pledge of all issued and
outstanding common stock of SS/L and certain of its
subsidiaries. As part of the transaction, Loral entered into an
agreement (the Parent Guarantee) guaranteeing loans
under the Credit Agreement and SS/Ls other monetary
obligations thereunder. The Parent Guarantee contains a covenant
that limits the amount of dividends or other distributions to
our stockholders that can be made by Loral from the disposition
of any capital stock of Telesat Holdings to the greater of
(i) 662/3%
of the proceeds and (ii) the amount by which the proceeds
exceed $200 million.
At SS/Ls election, outstanding indebtedness under the
Revolving Facility bears interest at an annual rate equal to
either: (a) 2.75% plus the greater of (1) the Prime
Rate then in effect and (2) the Federal Funds Rate then in
effect plus 0.5% (the ABR Rate) or (b) the
Eurodollar Rate plus 3.75%. Interest on an ABR loan is paid
quarterly and interest on a Eurodollar loan is paid either on
the last day of the interest period or quarterly, whichever is
shorter. In addition, the Credit Agreement requires the Company
to pay certain customary fees, costs and expenses of the lenders.
The Credit Agreement contains certain covenants which, among
other things, limit the incurrence of additional indebtedness,
capital expenditures, investments, dividends or stock
repurchases, asset sales, mergers and consolidations, liens,
changes to the line of business and other matters customarily
restricted in such agreements. The material financial covenants,
ratios or tests contained in the Credit Facility are:
|
|
|
|
|
SS/L must not permit its consolidated leverage ratio as of
(i) the last day of any period of four consecutive fiscal
quarters or (ii) the date of incurrence of certain
indebtedness to exceed 3.50 to 1.00 from October 16, 2008
to September 29, 2009, 3.25 to 1.00 from September 30,
2009 through December 30, 2009 and 3.00 to 1.00 from
December 31, 2009 and thereafter until the Maturity Date.
|
|
|
|
SS/L must maintain a minimum consolidated interest coverage
ratio of at least 3.50 to 1.00 as of the last day of any fiscal
quarter for the period of four consecutive fiscal quarters
ending on such day.
|
SS/L may prepay outstanding principal in whole or in part,
together with accrued interest, without premium or penalty. The
Credit Agreement requires SS/L to prepay outstanding principal
and accrued interest upon certain events, including certain
asset sales. If an event of default shall occur and be
continuing, the commitments of all Lenders under the Credit
Agreement may be terminated and the principal amount
outstanding, together with all accrued and unpaid interest, may
be declared immediately due and payable. Under the Credit
Agreement, events of default include, among other things,
non-payment of amounts due under the Credit Agreement, default
in payment of certain other indebtedness, breach of certain
covenants, bankruptcy, violations under ERISA, violations under
certain United States export control laws and regulations, a
change of control of SS/L and if certain liens on the collateral
securing the obligations under the Credit Agreement fail to be
perfected. All outstanding principal is payable in full upon the
Maturity Date.
F-28
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2008, SS/L had outstanding borrowings of
$55.0 million under the revolving credit facility and had
$4.9 million in outstanding letters of credit under the
$50.0 million letter of credit sublimit. The interest rate
on the revolver borrowings at December 31, 2008 was
4.2575%. Interest expense related to the Credit Agreement was
$0.3 million for the year ended December 31, 2008.
The Company incurred debt issuance costs of $2.6 million,
which have been recorded on the accompanying consolidated
balance sheet. Such amount is being amortized over the life of
the revolving credit facility and is reflected as a component of
interest expense on the accompanying consolidated statements of
operations. Amortization of issuance costs for the year ended
December 31, 2008 was $0.2 million.
SS/L
Letter of Credit Facility
On November 30, 2007, SS/L entered into a second amendment
to its amended and restated letter of credit agreement with JP
Morgan Chase Bank extending the maturity of the
$15.0 million facility to December 31, 2008. This
facility was terminated on October 16, 2008 with the
closing of the SS/L Credit Agreement. Letters of credit
outstanding under this facility at that time were transferred to
the Credit Agreement.
Loan
Payable Valley National Bank
On September 4, 2007, Loral Skynet entered into a Loan and
Security Agreement (the Loan Agreement) with Valley
National Bank (Valley National). The purpose of the
Loan Agreement was to make available to Loral Skynet a loan (the
Loan) to fund the redemption (the Note
Redemption) of Loral Skynets 14% Senior Secured
Cash/PIK Notes due 2015. Pursuant to the Loan Agreement, Valley
National made the Loan in a single advance of
$141.1 million, which Loral Skynet used to fund the Note
Redemption on September 5, 2007.
As security for repayment of the Loan, Loral Skynet granted
security interests in certain of its assets. The repayment of
the Loan was guaranteed by Loral (the Guaranty) with
the Companys obligations under the Guaranty being secured
pursuant to a pledge agreement (the Pledge
Agreement) executed by the Company. Loral purchased a
certificate of deposit (the CD) from Valley National
in the initial principal amount of $142,720,659, such amount
being equal to the sum of the principal of the Loan and accrued
interest thereon from and including September 4, 2007
through, but not including, December 17, 2007. The CD
accrued interest at a rate of 3.85% per annum. Pursuant to the
terms of the Pledge Agreement, the money on deposit under the CD
secured the obligations of Loral Skynet under the Loan Agreement
and the Company under the Guaranty.
The interest rate on the Loan was 4.10% per annum. Interest
expense related to the Loan was $0.9 million for the year
ended December 31, 2007. On October 31, 2007, the loan
was assumed by Telesat Canada as part of the Telesat Canada
transaction and was repaid in full that same day by Telesat
Canada. Also on October 31, 2007, the cash collateral CD
was released and the cash was returned to Loral.
Loral
Skynet Notes
On November 21, 2005, pursuant to the Plan of
Reorganization, Loral Skynet issued $126.0 million
principal amount of 14% Senior Secured Cash/PIK Notes due
2015 under an Indenture, dated as of November 21, 2005 (the
Indenture), which notes were guaranteed on a senior
secured basis by our subsidiary Loral Asia Pacific Satellite
(HK) Limited and all of Loral Skynets existing domestic,
wholly-owned subsidiaries. On September 5, 2007 Loral
Skynet paid $141.1 million in the aggregate to redeem the
notes at a redemption price of 110% including accrued and unpaid
interest from July 15, 2007 of $2.5 million.
Interest expense related to these notes was $12.1 million
and $17.8 million for the years ended December 31,
2007 and 2006, respectively. In addition to the
$2.5 million of cash interest paid on the redemption of the
notes discussed above, Loral Skynet made cash interest payments
of $8.8 million on the Loral Skynet Notes on each of
January 15 and July 16, 2007.
F-29
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result of the redemption of the Loral Skynet Notes, we
incurred a loss on the early extinguishment of debt of
$16.2 million, which is comprised of the redemption premium
of $12.6 million and a $3.6 million write-off of
deferred financing costs.
Litigation with respect to the redemption of the Loral Skynet
Notes brought by certain holders of Loral Skynet Notes has been
decided in favor of the Company.
The provision for income taxes on the (loss) income before
income taxes, equity in net losses of affiliates and minority
interest consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(21,213
|
)
|
|
$
|
31,142
|
|
|
$
|
4,018
|
|
State and local
|
|
|
37,572
|
|
|
|
19,712
|
|
|
|
2,467
|
|
Foreign
|
|
|
|
|
|
|
398
|
|
|
|
5,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
16,359
|
|
|
$
|
51,252
|
|
|
$
|
11,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(137,102
|
)
|
|
|
47,209
|
|
|
|
7,342
|
|
State and local
|
|
|
(36,023
|
)
|
|
|
(31,291
|
)
|
|
|
1,763
|
|
Valuation allowance
|
|
|
202,510
|
|
|
|
16,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
29,385
|
|
|
|
32,205
|
|
|
|
9,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
45,744
|
|
|
$
|
83,457
|
|
|
$
|
20,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our income tax provision can be summarized as follows:
(i) for 2008, we recorded a current tax provision of
$16.3 million, which included a provision of
$41.6 million to increase our liability for uncertain tax
positions and a current tax benefit of $25.4 million
derived from tax strategies and a deferred tax provision of
$29.4 million, resulting in a total provision of
$45.7 million on a pre-tax loss of $151.5 million;
(ii) for 2007, we recorded a current tax provision of
$51.3 million, including a provision of $17.1 million
to increase our liability for uncertain tax positions, and a
deferred tax provision of $32.2 million, resulting in a
total provision of $83.5 million on pre-tax income of
$157.8 million; and (iii) for 2006, we recorded a
current tax provision of $11.8 million and a deferred tax
provision of $9.1 million, resulting in a total provision
of $20.9 million on pre-tax income of $30.1 million.
For the year ended December 31, 2008, we continued to
maintain the 100% valuation allowance that had been established
at December 31, 2002 against our net deferred tax assets,
with the exception of our $12.5 million deferred tax asset
relating to AMT credit carryforwards.
F-30
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of our FIN 48 provision for uncertain tax
positions included in the current provision were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Unrecognized tax benefits
|
|
$
|
25,962
|
|
|
$
|
12,652
|
|
Interest expense
|
|
|
6,169
|
|
|
|
4,186
|
|
Interest income
|
|
|
|
|
|
|
(41
|
)
|
Penalties
|
|
|
9,427
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,558
|
|
|
$
|
17,100
|
|
|
|
|
|
|
|
|
|
|
For 2008, the deferred income tax provision of
$29.4 million related primarily to (i) a provision of
$38.6 million recorded as a result of having utilized
deferred tax benefits from Old Loral to reduce our tax liability
derived from tax strategies (where the excess valuation
allowance was recorded as a reduction to goodwill offset by
(ii) a benefit of $9.2 million for the increase to our
deferred tax asset for federal and state AMT credits.
For 2007, the deferred income tax provision of
$32.2 million related primarily to (i) a provision of
$35.1 million on current year income to the extent the
taxes imposed on such income were reduced by deferred tax
benefits from Old Loral (where the excess valuation allowance
was recorded as a reduction to goodwill), (ii) a provision
of $2.2 million for the decrease to our deferred tax asset
for federal and state AMT credits (which excludes an increase to
AMT credits of $2.2 million upon adoption of FIN 48),
(iii) an additional valuation allowance of
$3.0 million required against a net deferred tax asset
created when we reduced the deferred tax credits in accumulated
other comprehensive income by $3.0 million, offset by
(iv) a benefit of $9.0 million relating to current
activity.
For 2006, the deferred income tax provision of $9.1 million
related to (i) a provision of $10.4 million on current
year income to the extent the taxes imposed on such income were
reduced by deferred tax benefits from Old Loral (where the
valuation allowance was recorded as a reduction to goodwill)
(ii) offset by a benefit of $1.3 million for the
increase to our deferred tax asset for additional federal and
state AMT credits.
The provision for income taxes presented above excludes the
following items for 2007 and 2006: (i) a deferred tax
benefit of $6.3 million related to the initial adoption of
FIN 48, effective January 1, 2007, which was adjusted
by $4.1 million during 2007 for a change to our FIN 48
liability, resulting in a $2.2 million increase to our AMT
credits upon adoption of FIN 48; (ii) a deferred tax
benefit of $6.5 million and a deferred tax provision of
$6.4 million for the years ended December 31, 2007 and
2006, respectively, related to the unrealized gain on
available-for-sale securities recorded in accumulated other
comprehensive income; (iii) a deferred tax provision of
$3.5 million and $19.6 million for the years ended
December 31, 2007 and 2006, respectively, related to
pension actuarial gains and prior service credits and the
initial adoption of SFAS 158 recorded in accumulated other
comprehensive income; and (iv) a deferred tax benefit of
$6.8 million related to the reversal of Old Loral deferred
state tax liabilities recorded as a reduction to goodwill for
the year ended December 31, 2007. There were no items
excluded for 2008.
F-31
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes on the (loss) income before
income taxes, equity in net losses of affiliates and minority
interest differs from the amount computed by applying the
statutory U.S. Federal income tax rate because of the
effect of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Tax provision( benefit) at U.S. Statutory Rate of 35%
|
|
$
|
(53,033
|
)
|
|
$
|
55,225
|
|
|
$
|
10,541
|
|
Permanent adjustments which change statutory amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal income tax
|
|
|
1,496
|
|
|
|
(5,101
|
)
|
|
|
2,749
|
|
Additional tax imposed on foreign source income
|
|
|
21
|
|
|
|
94
|
|
|
|
3,438
|
|
Equity in net losses of affiliates
|
|
|
(173,477
|
)
|
|
|
(7,162
|
)
|
|
|
(2,585
|
)
|
Impairment of goodwill
|
|
|
65,779
|
|
|
|
|
|
|
|
|
|
Losses in litigation
|
|
|
6,815
|
|
|
|
|
|
|
|
|
|
Tax gain on transfer of Loral Skynet assets to Telesat Canada
|
|
|
|
|
|
|
16,419
|
|
|
|
|
|
Provision for unrecognized tax benefits
|
|
|
(5,811
|
)
|
|
|
8,370
|
|
|
|
|
|
Nondeductible expenses
|
|
|
1,501
|
|
|
|
2,682
|
|
|
|
3,065
|
|
Change in valuation allowance
|
|
|
202,510
|
|
|
|
16,287
|
|
|
|
|
|
Other, net
|
|
|
(57
|
)
|
|
|
( 3,357
|
)
|
|
|
3,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
45,744
|
|
|
$
|
83,457
|
|
|
$
|
20,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2007, we adopted the provisions of
FIN 48 with unrecognized tax benefits relating to uncertain
tax positions of $42.5 million and also recorded the
cumulative effect of adopting FIN 48 as an increase of
$6.2 million to accumulated deficit, an increase of
$7.5 million to goodwill, a decrease of $6.3 million
to deferred income tax liabilities and an increase of
$20.0 million to long-term liabilities.
The Company recognizes accrued interest and penalties related to
uncertain tax positions in income tax expense. As of
January 1, 2007 in connection with the adoption, we
recorded approximately $5.7 million and $12.6 million
for the payment of tax-related interest and penalties,
respectively. In 2007 we recognized additional interest charges
of $4.1 million. Interest and penalties of
$1.5 million and $0.1 million, respectively, were
transferred to Telesat Canada in connection with the Telesat
Canada transaction.
In 2008, we recognized additional charges of $6.8 million
and $9.4 million for the payment of tax-related interest
and penalties, respectively. During 2008, the statute of
limitations for assessment of additional tax expired with regard
to our federal income tax return filed for 2004, resulting in
the reversal of $0.7 million and $0.4 million for
accrued interest and penalties, respectively. At
December 31, 2008, we have accrued $14.4 million and
$21.5 million for the payment of tax-related interest and
penalties, respectively.
F-32
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity related to our
unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
59,903
|
|
|
$
|
42,484
|
|
Increases related to prior year tax positions
|
|
|
5,312
|
|
|
|
157
|
|
Decreases related to prior year tax positions
|
|
|
(1,225
|
)
|
|
|
(342
|
)
|
Decrease as a result of statute expirations
|
|
|
(1,832
|
)
|
|
|
|
|
Decrease as a result of tax settlements
|
|
|
|
|
|
|
(1,508
|
)
|
Increases related to current year tax positions
|
|
|
46,434
|
|
|
|
21,707
|
|
Decrease for indemnified liabilities transferred to Telesat
Canada and recorded in other long term liabilities
|
|
|
|
|
|
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
108,592
|
|
|
$
|
59,903
|
|
|
|
|
|
|
|
|
|
|
With few exceptions, the Company is no longer subject to
U.S. federal, state or local income tax examinations by tax
authorities for years prior to 2004. Earlier years related to
certain foreign jurisdictions remain subject to examination.
Various state and foreign income tax returns are currently under
examination. While we intend to contest any future tax
assessments for uncertain tax positions, no assurance can be
provided that we would ultimately prevail. During the next
twelve months, the statute of limitations for assessment of
additional tax will expire with regard to several of our
state income tax returns filed for 2004 and federal and
state income tax returns filed for 2005, potentially resulting
in a $3.2 million reduction to our unrecognized tax
benefits.
The liability for uncertain tax positions (FIN 48
Liability) is included in long-term liabilities in the
consolidated balance sheets. For 2008, we increased our
FIN 48 Liability for uncertain tax positions from
$68.0 million to $109.0 million. The net increase of
$41.0 million related to (i) an increase of
$27.7 million to our current provision for tax positions
derived from tax strategies adopted in 2008, (ii) an
increase of $16.2 million to our current provision for
potential additional interest and penalties, offset by
(iii) a decrease of $2.9 million from the reversal of
FIN 48 liabilities due to the expiration of the statute of
limitations for the assessment of additional federal tax for
2004, of which $0.5 million was recorded as a reduction to
goodwill, $0.6 million was treated as current income tax
benefit and $1.8 million reduced our deferred tax assets.
For 2007, we increased our FIN 48 Liability for uncertain
tax positions from $61.1 million to $68.0 million. The
net increase of $6.9 million related to (i) current
year provisions of $17.5 million for tax positions and
potential additional interest and penalties, offset by
(ii) the settlement of liabilities with certain tax
authorities totaling $2.4 million, of which
$2.0 million was recorded as a reduction to goodwill and
$0.4 million was treated as a current income tax benefit,
(iii) a reduction of $4.1 million to the deferred tax
asset established at adoption, and (iv) the transfer of
$4.1 million of uncertain tax positions to Telesat Canada
in the Telesat Canada transaction offset by a contractual
indemnification.
Prior to adopting FIN 48, our policy was to establish tax
contingency liabilities for potential audit issues. The tax
contingency liabilities were based on our estimate of the
probable amount of additional taxes that may be due in the
future. Any additional taxes due would be determined only upon
completion of current and future federal, state and
international tax audits. At December 31, 2006, we had
$42.6 million of tax contingency liabilities included in
long-term liabilities. During 2006, we had increased the tax
contingency liabilities by $5.0 million through the current
income tax provision, settled $0.4 million with payment and
reversed $4.2 million of the opening balance as of
October 1, 2005 to goodwill for issues where the statute of
limitations on assessment of tax had expired during 2006.
After the adoption of SFAS 141 (R) on January 1, 2009,
if our positions are sustained by the taxing authorities,
approximately $108.2 million of the FIN 48 Liability
will reduce the Companys income tax provision
F-33
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and $0.8 million will reduce deferred tax assets. Other
than as described above, there were no significant changes to
our unrecognized tax benefits during the twelve months ended
December 31, 2008, and we do not anticipate any other
significant increases or decreases to our unrecognized tax
benefits during the next twelve months.
In connection with the Telesat Canada transaction, Loral
provided a contractual indemnification to Telesat Canada for
Loral Skynet tax liabilities, offset by tax deposits, relating
to periods preceding 2007. The unrecognized tax benefits related
to the Loral Skynet subsidiaries were transferred to Telesat
Canada subject to the tax indemnification provided by Loral.
Lorals net indemnified liability at December 31, 2008
is not material.
At December 31, 2008, we had federal NOL and capital loss
carryforwards of approximately $525 million and state
carryforwards of various amounts representing deferred tax
assets of approximately $169.5 million and
$15.5 million for federal and state, respectively, (before
reduction for the valuation allowance) and federal research
credits of $2.0 million, which expire from 2022 to 2028, as
well as AMT credit carryforwards of approximately
$12.5 million that may be carried forward indefinitely.
The reorganization of the Company on the Effective Date
constituted an ownership change under section 382 of the
Internal Revenue Code. Accordingly, use of our tax attributes,
such as NOLs and tax credits generated prior to the ownership
change, are subject to an annual limitation of approximately
$32.6 million, subject to increase or decrease based on
certain factors. Our annual limitation was increased
significantly during 2006, 2007 and 2008 for the additional
benefit from the recognition of our net unrealized
built-in gains, (i.e., the excess of fair market value
over tax basis for our assets) as of the Effective Date.
We assess the recoverability of our NOLs and other deferred tax
assets and based upon this analysis, record a valuation
allowance to the extent recoverability does not satisfy the
more likely than not recognition criteria in
SFAS No. 109. Based upon this analysis, we concluded
during the fourth quarter of 2002 that, due to insufficient
positive evidence substantiating recoverability, a 100%
valuation allowance should be established for our net deferred
tax assets.
As of December 31, 2008, we had valuation allowances
totaling $487.8 million, which included a balance of
$185.9 million relating to Old Loral periods preceding our
adoption of fresh-start accounting on October 1, 2005.
We will continue to maintain the valuation allowance until
sufficient positive evidence exists to support full or partial
reversal. In the future, if we were to determine that we will be
able to realize all or a part of the benefit from our deferred
tax assets, under SFAS 141 (R) any reduction to the
valuation allowance balance at October 1, 2005 will be
recorded as a reduction to the income tax provision.
During 2008, our valuation allowance increased by
$246.5 million. The net change consisted primarily of
(i) an increase of $202.5 million charged to
continuing operations, (ii) a decrease of
$38.6 million relating to the reversal of an excess
valuation allowance recorded as a reduction to goodwill,
(iii) an increase of $35.6 million charged to
accumulated other comprehensive income and (iv) an increase
of $47.0 million offset by a corresponding increase to the
deferred tax asset.
During 2007 our valuation allowance decreased by
$63.7 million. The net change consisted primarily of
(i) a decrease of $35.1 million relating to the
reversal of an excess valuation allowance recorded as a
reduction to goodwill, (ii) a decrease of
$45.2 million offset by a corresponding decrease to the
deferred tax asset, (iii) an increase of $0.3 million
as part of the cumulative effect of adopting FIN 48, and
(iv) an increase of $16.3 million charged to
continuing operations.
During 2006, our valuation allowance decreased by
$32.4 million to a balance of $304.9 million. The net
change consisted primarily of a decrease of $36.4 million
relating to an excess valuation allowance, the reversal of which
was recorded as a reduction to goodwill and an increase of
$4.0 million to provide an additional valuation allowance
against Old Loral deferred tax assets recorded to goodwill.
F-34
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The significant components of the net deferred income tax assets
are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Postretirement benefits other than pensions
|
|
$
|
28,321
|
|
|
$
|
31,591
|
|
Inventoried costs
|
|
|
19,456
|
|
|
|
17,943
|
|
Net operating loss and tax credit carryforwards
|
|
|
199,460
|
|
|
|
205,209
|
|
Compensation and benefits
|
|
|
20,663
|
|
|
|
22,802
|
|
Deferred research & development costs
|
|
|
14,126
|
|
|
|
18,948
|
|
Income recognition on long-term contracts
|
|
|
13,382
|
|
|
|
26,707
|
|
Investments in and advances to affiliates
|
|
|
138,524
|
|
|
|
|
|
Other, net
|
|
|
7,370
|
|
|
|
7,086
|
|
Federal benefit of uncertain tax positions
|
|
|
21,431
|
|
|
|
3,610
|
|
Pension costs
|
|
|
69,772
|
|
|
|
35,612
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets before valuation allowance
|
|
|
532,505
|
|
|
|
369,508
|
|
Less valuation allowance
|
|
|
(487,762
|
)
|
|
|
(241,228
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
44,743
|
|
|
|
128,280
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(18,637
|
)
|
|
|
(18,653
|
)
|
Intangible assets
|
|
|
(13,582
|
)
|
|
|
(18,569
|
)
|
Investments in and advances to affiliates
|
|
|
|
|
|
|
(87,704
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
(32,219
|
)
|
|
|
(124,926
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
12,524
|
|
|
$
|
3,354
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 the Company had $4.0 million of
net current deferred tax assets included in other current assets
and $8.5 million of net non-current deferred tax assets
included in other assets. At December 31, 2007 the Company
had $17.5 million of net current deferred tax assets
included in other current assets and $14.1 million of net
non-current deferred tax liabilities included in long-term
liabilities.
|
|
10.
|
Shareholders
Equity and Minority Interest
|
Common
Stock
In accordance with the Plan of Reorganization, Loral issued
20 million shares of voting common stock, par value $0.01
per share (the Voting Common Stock), which shares
were distributed in accordance with the Plan of Reorganization.
On November 10, 2008, the Court of Chancery of the State of
Delaware (the Court) issued an Implementing Order
(the Implementing Order) in the In re: Loral
Space & Communications Consolidated Litigation.
The Implementing Order provided that it would become effective
upon entry of a further order of the Court resolving
plaintiffs attorneys applications for
attorneys fees and expenses (the Attorneys
Fees Application). On December 22, 2008, the Court
entered an order (the Attorneys Fees Order)
resolving the Attorneys Fees Application and, therefore,
the Implementing Order became effective on that date.
Pursuant to the Implementing Order, the Securities Purchase
Agreement by and between Loral and MHR Fund Management LLC
(together with its affiliates, MHR), as amended and
restated on February 27, 2007 (the SPA), was
reformed to provide for MHR to have purchased
9,505,673 shares of Loral Non-Voting Common
F-35
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock, which are in all respects identical to and treated
equally with shares of Loral Voting Common Stock except for the
absence of voting rights (other than as provided in the New
Charter (defined below) or as provided by law), in exchange for
the net payment of $293.3 million made by MHR to Loral on
February 27, 2007 in connection with the SPA. Pursuant to
the Implementing Order, all other terms of the SPA are of no
further force or effect.
Pursuant to the Implementing Order, on December 23, 2008,
Loral and MHR entered into an Amended and Restated Registration
Rights Agreement, (the New Registration Rights
Agreement). The New Registration Rights Agreement provides
for registration rights for the shares of Non-Voting Common
Stock, in addition and substantially similar to, the
registration rights provided for the shares of Common Stock held
by MHR. In addition, in the New Registration Rights Agreement,
Loral has agreed, subject to certain exceptions, to file on or
before June 1, 2009 a shelf registration statement covering
shares of Common Stock and Non-Voting Common Stock held by MHR.
Pursuant to the Implementing Order, on December 23, 2008,
Loral filed an Amended and Restated Certificate of Incorporation
(the New Charter). The New Charter has been accepted
by the Secretary of State of Delaware and is the operative
certificate of incorporation of Loral.
The New Charter is substantially the same as the Restated
Certificate of Incorporation of Loral previously in effect,
except that the New Charter provides that the total authorized
capital stock of the Company is fifty million (50,000,000)
shares consisting of two classes: (i) forty million
(40,000,000) shares of Common Stock, $0.01 par value per
share divided into two series, of which 30,494,327 shares
are Voting Common Stock and 9,505,673 shares are Non-Voting
Common Stock, and (ii) ten million (10,000,000) shares of
Preferred Stock, $0.01 par value per share. The New Charter
further provides that each share of Voting Common Stock and each
share of Non-Voting Common Stock shall be identical and treated
equally in all respects, except that the Non-Voting Common Stock
shall not have voting rights except for certain situations as
noted in the New Charter and as otherwise provided by law. The
New Charter provides for, among other things, the equal
treatment of the Non-Voting Common Stock with the Voting Common
Stock, shall not be amended, altered or repealed without the
affirmative vote of holders of a majority of the outstanding
shares of the Non-Voting Common Stock, voting as a separate
class.
As a result of the cancellation of the Loral Series-1 Preferred
Stock and the issuance of the Non-Voting Common Stock on
December 23, 2008, shareholders equity in our
consolidated balance sheet has been adjusted to include the
Non-Voting Common Stock at its fair value on December 23,
2008 and remove the Loral Series-1 Preferred Stock balances.
Fair value was determined based on the closing market price per
share of Loral common stock on December 23, 2008. The
difference between the fair value of the 9,505,673 shares
of Non-Voting Common Stock and the carrying value of the Loral
Series-1 Preferred Stock including accrued dividends thereon has
been reflected as an increase to paid-in capital.
In addition, the Certificates of Designation of the
Series A Preferred Stock and Series B Preferred Stock
were eliminated and are of no further force and effect.
Also, pursuant to the Implementing Order, upon effectiveness of
the Implementing Order, the Amended and Restated Bylaws of Loral
dated February 27, 2007 (the Old Bylaws) were
rescinded and are of no further force and effect, and the
operative bylaws of Loral are the Amended and Restated Bylaws of
Loral dated December 23, 2008 (the New Bylaws).
The New Bylaws are substantially the same as the Old Bylaws
previously in effect, except that the provision authorizing
holders of record of Series A Preferred Stock and
Series B Preferred Stock to request that a special meeting
of stockholders be convened to exercise certain voting rights
that such holders had has been removed.
In connection with a stipulation entered into with certain
directors and officers of Old Loral, certain claims aggregating
$30 million may result in the distribution of our Common
Stock in addition to the 20 million shares distributed
under the Plan of Reorganization (see Note 14).
F-36
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Stock
On February 27, 2007 (the Issuance Date), Loral
completed a $300.0 million preferred stock financing
pursuant to the SPA, under which Loral sold 136,526 shares
of its
Series A-1
cumulative 7.5% convertible preferred stock (the
Series A-1
Preferred Stock) and 858,486 shares of its
Series B-1
cumulative 7.5% convertible preferred stock (the
Series B-1
Preferred Stock and, together with the
Series A-1
Preferred Stock, the Loral Series-1 Preferred Stock)
at a purchase price of $301.504 per share to various funds
affiliated with MHR (the MHR Funds).
Prior to the conversion of the Loral Series-1 Preferred Stock to
Non-Voting Common Stock, the Loral Series-1 Preferred Stock had,
among others, the following terms:
Each share of the
Series A-1
Preferred Stock was convertible, at the option of the holder,
into ten shares of Loral common stock at a conversion price of
$30.1504 per share. The conversion price reflected a premium of
12% to the closing price of Lorals common stock on
October 16, 2006. The conversion price was subject to
customary adjustments. Dividends on the Loral Series-1 Preferred
Stock were paid in kind (i.e., in additional shares of Loral
Series-1 Preferred Stock).
The Company paid dividends of $24.2 million through the
issuance of 2,725 shares and 77,698 shares of
Series A-1
and
Series B-1
Preferred Stock, respectively, during the year ended
December 31, 2008. During the year ended December 31,
2007, the Company paid dividends of $14.4 million through
the issuance of 5,427 shares of
Series A-1
Preferred Stock and 42,335 shares of
Series B-1
Preferred Stock. Accrued dividends at the date of conversion of
the Loral Series-1 Preferred Stock were $4.8 million.
The price of Lorals common stock on October 16, 2006,
the day before we signed the SPA, was $26.92 and the conversion
price was $30.1504. The price of Lorals common stock on
February 27, 2007, when the financing closed was $47.40.
Because of the difference between the fair value of the common
stock on the date the financing closed, as compared to the
conversion price, the Company was required to reflect a
beneficial conversion feature of the Loral
Series A-1
Preferred Stock as a component of its net loss applicable to
common shareholders for the year ended December 31, 2007.
This beneficial conversion feature was recorded as an increase
to net loss applicable to common shareholders and resulted in a
reduction of both basic and diluted loss per share. For the year
ended December 31, 2007, we recorded an increase to net
loss applicable to common shareholders of $25.7 million.
Due to the fact that the fair value of Lorals common stock
on the ending date of all four quarters of 2008 was less than
the conversion price, we did not record any beneficial
conversion feature for the year ended December 31, 2008.
Loral incurred issuance costs of $8.9 million in connection
with this preferred stock financing. In addition, Loral paid MHR
a placement fee of $6.8 million upon closing of the
financing.
Loral
Skynet Series A Preferred Stock
On November 21, 2005, Loral Skynet Corporation issued
1.0 million of its 2.0 million authorized shares of
Series A 12% non-convertible preferred stock,
$0.01 par value per share (the Loral Skynet Preferred
Stock), which were distributed in accordance with the Plan
of Reorganization. The issued shares were distributed to holders
of allowed claims in Orion Class 4, as such term is used in
the Plan of Reorganization. Dividends on the Loral Skynet
Preferred Stock (if not paid or accrued as permitted under
certain circumstances) were payable in kind (in additional
shares of Loral Skynet Preferred Stock) if the amount of any
dividend payment would exceed certain thresholds.
Dividend expense of $23.2 million and $24.8 million
for the years ended December 31, 2007 and 2006,
respectively, related to the Loral Skynet Preferred Stock and is
reflected as minority interest on our consolidated statements of
operations.
F-37
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Dividends paid on Loral Skynet Preferred Stock are as follows
(in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
PIK Dividends
|
|
|
Total
|
|
Payment Date
|
|
Dividend Period
|
|
|
Dividends
|
|
|
Shares
|
|
|
Amount
|
|
|
Dividends
|
|
|
November 5, 2007
|
|
|
7/14/07 to 11/05/07
|
|
|
$
|
8,790
|
|
|
|
|
|
|
$
|
|
|
|
$
|
8,790
|
|
July 13, 2007
|
|
|
1/14/07 to 7/13/07
|
|
|
|
1,260
|
|
|
|
61,282
|
|
|
|
12,260
|
|
|
|
13,520
|
|
January 12, 2007
|
|
|
7/14/06 to 1/13/07
|
|
|
|
1,770
|
|
|
|
55,434
|
|
|
|
11,090
|
|
|
|
12,860
|
|
July 14, 2006
|
|
|
11/21/05 to 7/13/06
|
|
|
|
1,270
|
|
|
|
71,281
|
|
|
|
14,260
|
|
|
|
15,530
|
|
On November 5, 2007, in connection with the completion of
the Telesat Canada transaction, all issued and outstanding
shares of Loral Skynet Preferred Stock were redeemed.
Stock
Plans
On November 21, 2005, the Loral 2005 stock incentive plan
(the Stock Incentive Plan) became effective pursuant
to the Plan of Reorganization. The Stock Incentive Plan allows
for the grant of several forms of stock-based compensation
awards including stock options, stock appreciation rights,
restricted stock, restricted stock units, stock bonuses and
other stock-based awards (collectively, the Awards).
The total number of shares of Common Stock initially reserved
and available for issuance under the Stock Incentive Plan was
1,390,452 shares. In addition, shares of Common Stock that
are issuable under awards that expire, are forfeited or
canceled, or withheld in payment of the exercise price or taxes
relating to an Award, will again be available for Awards under
the Stock Incentive Plan. Options issued on December 21,
2005, totaling 1,390,452 shares, have an exercise price
equal to the fair market value of our stock, as defined, vest
over a four year period and have a seven year life. However,
because communications to certain employees with options
totaling 643,500 shares were made on January 9, 2006,
recognition of the grant of these options was delayed to such
date. The Awards provide for accelerated vesting if there is a
change in control, as defined in the Stock Incentive Plan.
On May 22, 2007, at our annual meeting of stockholders, our
stockholders approved the Companys Amended and Restated
2005 Stock Incentive Plan (the Plan) to increase by
1,582,000 the number of shares available for grant thereunder.
These amendments covered the following grants that were all
subject to stockholder approval of the plan amendments:
(a) the grant in March 2006 of options to purchase
825,000 shares to our Chief Executive Officer in connection
with his entering into an employment agreement with us (the
CEO March 2006 Option Grant), (b) the grant in
June 2006 of options to purchase 20,000 shares to our
former Chief Financial Officer in connection with his entering
into an amendment to his employment agreement, (c) the
grant in June 2006 of options to purchase 120,000 shares to
a former director in connection with his entering into a
consulting agreement and (d) grants of approximately
175,700 shares of restricted stock, to employees of SS/L
and others. In addition, these amendments covered
31,000 shares of restricted stock granted to our directors
as part of their compensation. These grants were recognized and
measured upon stockholder approval of the amendments. As a
result of the approval of the amendments, we recorded
compensation cost related to the first three grants of
$3.8 million and $17.7 million for 2008 and 2007,
respectively, based on the estimated fair value of these grants
and stock compensation costs of $2.4 million and
$3.8 million were recorded for 2008 and 2007, respectively,
for the grant of restricted shares.
The above-mentioned grant to a former director in connection
with his entering into a consulting agreement has been accounted
for in accordance with
EITF 96-18
as a non-employee grant and resulted in compensation expense of
$2.6 million in 2007 (see Notes 2 and 16).
F-38
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of employee and non-employee awards granted in
2007 and 2006 was estimated using the Black-Scholes-Merton model
based on the assumptions below for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk free interest rate
|
|
|
4.5
|
%
|
|
|
4.3
|
%
|
Expected life (years)
|
|
|
2.80
|
|
|
|
4.75
|
%
|
Estimated volatility
|
|
|
32.8
|
%
|
|
|
27.4
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
A summary of the status of stock options awarded under the Stock
Incentive Plan as of December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
(In thousands)
|
|
|
Outstanding at January 1, 2006
|
|
|
746,952
|
|
|
$
|
28.44
|
|
|
|
7 years
|
|
|
|
|
|
Granted (weighted average grant date fair value $7.66 per share)
|
|
|
643,500
|
|
|
$
|
28.44
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(80,000
|
)
|
|
$
|
28.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,310,452
|
|
|
$
|
28.44
|
|
|
|
5.8 years
|
|
|
$
|
16,091
|
|
Granted (weighted average grant date fair value $23.46 per share)
|
|
|
965,000
|
|
|
$
|
26.95
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(208,750
|
)
|
|
$
|
27.82
|
|
|
|
|
|
|
$
|
2,930
|
|
Forfeited
|
|
|
(15,000
|
)
|
|
$
|
27.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
2,051,702
|
|
|
$
|
27.81
|
|
|
|
4.2 years
|
|
|
$
|
13,216
|
|
Forfeited
|
|
|
(17,500
|
)
|
|
$
|
27.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
2,034,202
|
|
|
$
|
27.81
|
|
|
|
3.2 years
|
|
|
$
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008
|
|
|
2,031,936
|
|
|
$
|
27.81
|
|
|
|
3.2 years
|
|
|
$
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
1,806,077
|
|
|
$
|
27.85
|
|
|
|
3.3 years
|
|
|
$
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of non-vested restricted stock as of December 31,
2008 is presented below (restricted stock generally vests over a
two to four year period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant- Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested restricted stock at January 1, 2007
|
|
|
|
|
|
|
|
|
Granted
|
|
|
206,700
|
|
|
$
|
46.65
|
|
Vested (intrinsic value of $3.0 million)
|
|
|
(62,777
|
)
|
|
$
|
46.65
|
|
Forfeited
|
|
|
(1,919
|
)
|
|
$
|
46.65
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2007
|
|
|
142,004
|
|
|
$
|
46.65
|
|
Granted
|
|
|
15,000
|
|
|
$
|
19.70
|
|
Vested (intrinsic value of $1.1 million)
|
|
|
(57,463
|
)
|
|
$
|
46.65
|
|
Forfeited
|
|
|
(3,836
|
)
|
|
$
|
46.65
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2008
|
|
|
95,705
|
|
|
$
|
42.43
|
|
|
|
|
|
|
|
|
|
|
The total fair value of options vested was $9.4 million,
$21.6 million and $2.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
In connection with the Telesat Canada transaction, pursuant to
change of control provisions in certain stock option agreements,
vesting on 503,113 shares was accelerated and resulted in
stock compensation cost of $6.1 million charged to expense
in 2007. Total compensation cost charged to expense, net of
estimated forfeitures, for stock options and restricted stock
was $7.6 million, $26.3 million and $3.0 million
in 2008, 2007 and 2006, respectively. The tax benefit recognized
in our statement of operations for this compensation cost was
$0.6 million, $10.3 million and $1.1 million in
2008, 2007 and 2006, respectively. As of December 31, 2008,
there was $4.7 million of total unrecognized compensation
cost related to non-vested stock options and restricted stock
which is expected to be recognized over the next year.
As of December 31, 2008, there were 651,258 shares of
Loral common stock available for future grant under the Stock
Incentive Plan.
On March 5, 2009, the Compensation Committee approved
awards of restricted stock units (the RSUs) for
certain executives of the Company. Each RSU has a value equal to
one share of Voting Common Stock and generally provides the
recipient with the right to receive one share of Voting Common
Stock or cash equal to the value of one share of Voting Common
Stock, at the option of the Company, on the settlement date.
Michael B. Targoff, Chief Executive Officer of Loral, was
awarded 85,000 RSUs (the Initial Grant) on
March 5, 2009. In addition, the Company agreed to grant to
Mr. Targoff 50,000 RSUs on the first anniversary of the
grant date and 40,000 RSUs on the second anniversary of the
grant date (the Subsequent Grants). Vesting of the
Initial Grant requires the satisfaction of two conditions: a
time-based vesting condition and a stock price vesting
condition. Vesting of the Subsequent Grants is subject only to
the stock-price vesting condition. The time-based vesting
condition for the Initial Grant will be satisfied upon
Mr. Targoffs continued employment through
March 5, 2010, the first anniversary of the grant date. The
stock price vesting condition, which applies to both the Initial
Grant and the Subsequent Grants, will be satisfied only when the
average closing price of the Voting Common Stock over a period
of 20 consecutive trading days is at or above $25 during the
period commencing on the grant date and ending on March 31,
2013.
C. Patrick DeWitt, Senior Vice President of Loral and Chief
Executive Officer of SS/L, was awarded 25,000 RSUs on
March 5, 2009, of which 66.67% vest on March 5, 2010,
with the remainder vesting ratably over the subsequent two years.
F-40
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Earnings
(Loss) Per Share
|
Basic earnings (loss) per share is computed based upon the
weighted average number of shares of Voting and Non-Voting
Common Stock outstanding. For the years ended December 31,
2008, 2007 and 2006, the effect of approximately 2,034,202,
2,051,702 and 1,310,452, stock options outstanding, which would
be calculated using the treasury stock method, were excluded
from the calculation of diluted loss per share, as the effect
would have been antidilutive. In addition, for the years ended
December 31, 2008 and 2007, the effect of 95,705 and
142,004 shares of non-vested restricted stock was excluded
from the calculation of diluted loss per share as the effect
would have been antidilutive.
|
|
12.
|
Pensions
and Other Employee Benefits
|
Pensions
We maintain a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans, and members may
contribute to the pension plan in order to receive enhanced
benefits. Benefits are based primarily on members
compensation
and/or years
of service. Our funding policy is to fund the pension plan in
accordance with the Internal Revenue Code and regulations
thereon and to fund the supplemental retirement plan on a
discretionary basis. Plan assets are generally invested in
equity investments and fixed income investments. Pension plan
assets are managed by Russell Investment Corp.
(Russell), which allocates the assets into specified
Russell-designed funds as we direct.
We recognize the long term nature of pension liabilities, the
benefits of diversification across asset classes and the effects
of inflation. Lorals diversified pension portfolio is
designed to maximize returns consistent with levels of liquidity
and investment risk that are prudent and reasonable. The assets
are invested using specified Russell-designed funds as directed
by the plans investment committee. Russell uses a
multi-asset, multi-style, multi-manager investment approach in
designing its funds. Portfolio risk is controlled through this
diversification process and Russells constant monitoring
of money managers. Performance results and fund accounting are
provided to the Company on a monthly basis. Periodic reviews of
the portfolio are done with Russell and the plans
investment committee. The performance of the pension plans are
reported to the board of directors at the quarterly board
meetings. The portfolio includes holdings of domestic,
non-U.S. and
private equities, fixed income investments and alternative
investments.
Effective July 1, 2006, we amended our pension plan to
standardize the future benefits earned at all company locations
for eligible employees. These amendments did not change any
benefits earned through June 30, 2006. As a result of the
amendments, all locations now have a career average plan that
requires an employee contribution in order to receive the
highest level of benefits. All current participants now earn
future benefits under the same formula and have the same early
retirement provisions. The amendments did not apply to certain
employees under a bargaining unit arrangement. Additionally,
employees hired after June 30, 2006, do not participate in
the defined benefit pension plan, but participate in our defined
contribution savings plan with an additional Company
contribution. As a result of these amendments, our ongoing
pension expense and cash funding requirement has been reduced
commencing July 1, 2006.
Other
Benefits
In addition to providing pension benefits, we provide certain
health care and life insurance benefits for retired employees
and dependents. Participants are eligible for these benefits
generally when they retire from active service and meet the
eligibility requirements for our pension plan. These benefits
are funded primarily on a pay-as-you-go basis, with the retiree
generally paying a portion of the cost through contributions,
deductibles and coinsurance provisions.
F-41
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Curtailment
In connection with the Telesat Canada transaction, the pension
benefits of Loral Skynet employees have been frozen and they
will no longer earn additional benefits under the pension plans.
Unvested pension plan participants will receive credit for
Telesat Canada service for vesting purposes only. In addition,
only service prior to the date of the Telesat Canada transaction
will be considered to determine eligibility for retiree, medical
and life insurance benefits. As a result, and because of other
related employee actions, a curtailment gain has been recorded
upon completion of the Telesat Canada transaction and is
reflected in the tables below. The net pension liability has
been excluded from the Telesat Canada transaction and retained
by Loral.
Funded
Status
The following tables provide a reconciliation of the changes in
the plans benefit obligations and fair value of assets for
2008 and 2007, and a statement of the funded status as of
December 31, 2008 and, 2007, respectively. We use a
December 31 measurement date for the pension plans and other
post retirement benefit plans. The effect of the curtailment on
2007 was measured as of October 31, 2007, the date of the
Telesat Canada transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
Year Ended
|
|
|
Other Benefits
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Reconciliation of benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at beginning of period
|
|
$
|
367,870
|
|
|
$
|
371,883
|
|
|
$
|
73,788
|
|
|
$
|
85,652
|
|
Service cost
|
|
|
9,214
|
|
|
|
10,145
|
|
|
|
1,056
|
|
|
|
1,607
|
|
Interest cost
|
|
|
23,367
|
|
|
|
22,455
|
|
|
|
4,108
|
|
|
|
4,995
|
|
Participant contributions
|
|
|
1,385
|
|
|
|
1,612
|
|
|
|
1,792
|
|
|
|
1,827
|
|
Amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,815
|
)
|
Actuarial loss (gain)
|
|
|
2,146
|
|
|
|
(15,492
|
)
|
|
|
(9,393
|
)
|
|
|
(3,125
|
)
|
Benefit payments
|
|
|
(22,630
|
)
|
|
|
(21,382
|
)
|
|
|
(4,764
|
)
|
|
|
(5,008
|
)
|
Curtailment gain
|
|
|
(433
|
)
|
|
|
(1,351
|
)
|
|
|
|
|
|
|
(1,169
|
)
|
Transfer of liability due to Telesat Canada transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at December 31,
|
|
$
|
380,919
|
|
|
$
|
367,870
|
|
|
$
|
66,587
|
|
|
$
|
73,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
284,283
|
|
|
$
|
284,275
|
|
|
$
|
955
|
|
|
$
|
866
|
|
Actual return on plan assets
|
|
|
(80,059
|
)
|
|
|
18,936
|
|
|
|
27
|
|
|
|
89
|
|
Employer contributions
|
|
|
27,904
|
|
|
|
|
|
|
|
2,732
|
|
|
|
3,181
|
|
Participant contributions
|
|
|
1,385
|
|
|
|
1,612
|
|
|
|
1,792
|
|
|
|
1,827
|
|
Benefit payments
|
|
|
(21,531
|
)
|
|
|
(20,540
|
)
|
|
|
(4,764
|
)
|
|
|
(5,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31,
|
|
$
|
211,982
|
|
|
$
|
284,283
|
|
|
$
|
742
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period
|
|
$
|
(168,937
|
)
|
|
$
|
(83,587
|
)
|
|
$
|
(65,845
|
)
|
|
$
|
(72,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit obligations for pensions and other employee benefits
exceeded the fair value of plan assets by $234.8 million at
December 31, 2008, (the unfunded benefit
obligations). The unfunded benefit obligations were
measured using a discount rate of 6.5% at December 31, 2008
and 2007. Lowering the discount rate by 0.5% would have
increased the unfunded benefit obligations by approximately
$24.7 million and $27.8 million as of
F-42
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008 and 2007, respectively. Market conditions
and interest rates will significantly affect future assets and
liabilities of Lorals pension and other employee benefits
plans.
Plan assets decreased from December 31, 2007 to
December 31, 2008 primarily due to current economic
conditions.
In connection with our adoption of Statement of Financial
Accounting Standards No. 158, Employers Accounting
For Defined Benefit Pension and Other Postretirement Plans,
(SFAS 158), as of December 31, 2006, we
were required to recognize the funded status of a benefit plan
on our balance sheet. As a result, as of December 31, 2006,
we reduced our recorded liability for pensions by
$50.5 million, with a corresponding credit to accumulated
other comprehensive income, and increased our recorded liability
for other benefits by $1.0 million, with a corresponding
charge to accumulated other comprehensive income, to adjust to
our actual unfunded benefit obligations.
The pre-tax amounts recognized in accumulated other
comprehensive income (loss) as of December 31, 2008 and
2007 consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Actuarial (loss) gain
|
|
$
|
(80,213
|
)
|
|
$
|
26,477
|
|
|
$
|
7,216
|
|
|
$
|
(2,103
|
)
|
Amendments-prior service credit
|
|
|
28,111
|
|
|
|
30,829
|
|
|
|
2,966
|
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(52,102
|
)
|
|
$
|
57,306
|
|
|
$
|
10,182
|
|
|
$
|
1,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts recognized in other comprehensive income (loss)
during the year ended December 31, 2008 consist of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
Actuarial (loss) gain during the period
|
|
$
|
(106,672
|
)
|
|
$
|
9,349
|
|
Amortization of actuarial gain
|
|
|
(18
|
)
|
|
|
(30
|
)
|
Amortization of prior service credit
|
|
|
(2,718
|
)
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
(109,408
|
)
|
|
$
|
8,839
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consist of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Current Liabilities
|
|
$
|
1,070
|
|
|
$
|
892
|
|
|
$
|
3,051
|
|
|
$
|
3,187
|
|
Long-Term Liabilities
|
|
|
167,867
|
|
|
|
82,695
|
|
|
|
62,794
|
|
|
|
69,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
168,937
|
|
|
$
|
83,587
|
|
|
$
|
65,845
|
|
|
$
|
72,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated actuarial loss and prior service credit for the
pension benefits that will be amortized from accumulated other
comprehensive income into net periodic cost over the next fiscal
year is $3.6 million and $2.7 million, respectively.
The estimated actuarial gain and prior service credit for other
benefits that will be amortized from accumulated other
comprehensive income into net periodic cost over the next fiscal
year is $0.1 million and $0.5 million, respectively.
The accumulated pension benefit obligation was
$375.8 million and $364.3 million at December 31,
2008 and 2007, respectively.
F-43
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2008, we contributed $27.9 million to the qualified
pension plan and $2.7 million for other employee
post-retirement benefit plans. During 2009, based on current
estimates, we expect to contribute approximately
$24 million to the qualified pension plan and expect to
fund approximately $4 million for other employee
post-retirement benefit plans.
The following table provides the components of net periodic cost
for the plans for the years ended December 31, 2008, 2007
and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
9,214
|
|
|
$
|
10,145
|
|
|
$
|
10,926
|
|
|
$
|
1,056
|
|
|
$
|
1,607
|
|
|
$
|
1,482
|
|
Interest cost
|
|
|
23,367
|
|
|
|
22,455
|
|
|
|
21,835
|
|
|
|
4,108
|
|
|
|
4,995
|
|
|
|
4,834
|
|
Expected return on plan assets
|
|
|
(24,469
|
)
|
|
|
(23,768
|
)
|
|
|
(22,229
|
)
|
|
|
(72
|
)
|
|
|
(36
|
)
|
|
|
(52
|
)
|
Amortization of prior service credit
|
|
|
(2,718
|
)
|
|
|
(2,784
|
)
|
|
|
(1,399
|
)
|
|
|
(480
|
)
|
|
|
(553
|
)
|
|
|
(239
|
)
|
Amortization of net actuarial loss (gain)
|
|
|
(18
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
(30
|
)
|
|
|
111
|
|
|
|
127
|
|
Curtailment gain
|
|
|
(433
|
)
|
|
|
(2,345
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
4,943
|
|
|
$
|
3,644
|
|
|
$
|
9,133
|
|
|
$
|
4,582
|
|
|
$
|
4,262
|
|
|
$
|
6,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount rate used to determine net periodic pension cost
was 6.5% for the period ended December 31, 2008. The
discount rate used to determine net periodic pension cost was
6.0% for the period January 1, 2007 to October 31,
2007 and, as a result of the remeasurement for the curtailment
as of October 31, 2007, 6.5% for the period
November 1, 2007 to December 31, 2007. Assumptions
used to determine net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Discount rate
|
|
|
6.50%
|
|
|
6.00%/6.50%
|
|
|
5.75
|
%
|
Expected return on plan assets
|
|
|
8.50%
|
|
|
8.50%
|
|
|
9.00
|
%
|
Rate of compensation increase
|
|
|
4.25%
|
|
|
4.25%
|
|
|
4.25
|
%
|
Assumptions used to determine the benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.50
|
%
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
The expected long-term rate of return on pension plan assets is
selected by taking into account the expected duration of the
projected benefit obligation for the plans, the asset mix of the
plans and the fact that the plan assets are actively managed to
mitigate risk. Allowable investment types include equity
investments and fixed income investments. Pension plan assets
are managed by Russell, which allocates the assets into
specified Russell designed funds as per our directed asset
allocation. Each specified Russell fund is then managed by
investment managers chosen by Russell. The targeted long-term
allocation of our pension plan assets is 60% in equity
investments and 40% in fixed income investments. Based on this
target allocation, the twenty five year historical return of our
investment managers has been 9.0%. The expected long-term rate
of return on plan assets determined on this basis was 8.5% for
the years ended December 31, 2008 and 2007 and 9.0% for the
year ended December 31, 2006. As of January 1, 2009 we
changed our expected long-term rate of return on plan assets to
8.0% from 8.5%.
F-44
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our pension and other employee benefits plan asset allocations
by asset category as of December 31, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Equity investments
|
|
|
51
|
%
|
|
|
54
|
%
|
Fixed income investments
|
|
|
49
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions to determine the benefit obligation for
other benefits as of December 31, 2008, used a health care
cost trend rate of 10% decreasing gradually to 5% by 2018.
Actuarial assumptions to determine the benefit obligation for
other benefits as of December 31, 2007, used a health care
cost trend rate of 9.5% decreasing gradually to 4.5% by 2014.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A 1% change
in assumed health care cost trend rates for 2008 would have the
following effects (in thousands):
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
|
1% Decrease
|
|
|
Effect on total of service and interest cost components of net
periodic postretirement health care benefit cost
|
|
$
|
421
|
|
|
$
|
(342
|
)
|
Effect on the health care component of the accumulated
postretirement benefit obligation
|
|
$
|
5,300
|
|
|
$
|
(4,408
|
)
|
The following benefit payments, which reflect future services,
as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
|
|
|
Gross
|
|
|
Medicare
|
|
|
|
Pension
|
|
|
Benefit
|
|
|
Subsidy
|
|
|
|
Benefits
|
|
|
Payments
|
|
|
Receipts
|
|
|
2009
|
|
$
|
24,640
|
|
|
$
|
4,209
|
|
|
$
|
295
|
|
2010
|
|
|
25,385
|
|
|
|
4,496
|
|
|
|
324
|
|
2011
|
|
|
26,053
|
|
|
|
4,771
|
|
|
|
357
|
|
2012
|
|
|
26,170
|
|
|
|
5,017
|
|
|
|
393
|
|
2013
|
|
|
26,508
|
|
|
|
5,219
|
|
|
|
426
|
|
2014 to 2018
|
|
|
143,117
|
|
|
|
28,685
|
|
|
|
2,671
|
|
Assets designated to fund the obligations of our supplementary
retirement plan are held in a trust. Such assets amounting to
$3.5 million and $6.0 million as of December 31,
2008 and 2007, respectively, are not available for general
corporate use; however, these assets would be available to
general creditors in the event of bankruptcy and, therefore, do
not qualify as plan assets. Accordingly, other current assets
included $0.8 million of these assets as of
December 31, 2008 and 2007, and other assets included
$2.7 million and $5.2 million of these assets as of
December 31, 2008 and 2007, respectively.
Employee
Savings (401k) Plan
We have an employee savings (401k) plan, to which the Company
provides contributions which match up to 6% of a
participants base salary at a rate of
66 2/3%,
and retirement contributions. Retirement contributions represent
contributions made by the Company to provide added retirement
benefits to employees hired on or after July 1, 2006, as
they are not eligible to participate in our defined benefit
pension plan. Retirement contributions are provided regardless
of an employees contribution to the savings (401k) plan.
Matching contributions and retirement contributions are
collectively known as Company contributions. Company
contributions are made in cash and placed in each
participants age appropriate life cycle fund.
For the years ended December 2008, 2007,
F-45
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2006, Company contributions were $8.3 million,
$7.7 million, and $5.5 million, respectively.
Participants of the savings (401k) plan are able to redirect
Company contributions to any available fund within the plan.
Participants are also able to direct their contributions to any
available fund.
|
|
13.
|
Financial
Instruments, Derivative Instruments and Hedging
|
Financial
Instruments
The carrying amount of cash equivalents and restricted cash
approximates fair value because of the short maturity of those
instruments. The fair value of short-term investments,
investments in available-for-sale securities and supplemental
retirement plan assets is based on market quotations. The
carrying value of our debt of $55.0 million at
December 31, 2008 approximates fair value.
Foreign
Currency
The Company, in the normal course of business, is subject to the
risks associated with fluctuations in foreign currency exchange
rates. To limit this foreign exchange rate exposure, the Company
seeks to denominate its contracts in U.S. dollars. If we
are unable to enter into a contract in U.S. dollars, we
review our foreign exchange exposure and, where appropriate,
enter into foreign exchange contracts to hedge fluctuations in
exchange rates that can impact our operating results and cash
flows.
As of December 31, 2008, SS/L had the following amounts
denominated in Japanese Yen and EUROs (which have been
translated into U.S. dollars based on the December 31,
2008 exchange rates) that were unhedged (in thousands):
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
U.S. $
|
|
|
Future revenues Japanese Yen
|
|
¥ 64,874
|
|
$
|
718
|
|
Future expenditures Japanese Yen
|
|
¥ 3,491,204
|
|
$
|
38,637
|
|
Contracts-in-process,
unbilled receivables Japanese Yen
|
|
¥ 10,374
|
|
$
|
115
|
|
Future expenditures EUROs
|
|
6,270
|
|
$
|
8,839
|
|
Derivatives
Hedges of foreign currency denominated contract revenues and
related purchases are designated as cash flow hedges and
evaluated for effectiveness at least quarterly. Effectiveness is
tested using regression analysis. The effective portion of the
gain or loss on a cash flow hedge is recorded as a component of
other comprehensive income and reclassified to income in the
same period or periods in which the hedged transaction affects
income. Any remaining gain or loss on the hedge is included in
income.
On July 9, 2008, SS/L was awarded a satellite contract
denominated in EUROs and entered into a series of foreign
exchange forward contracts with maturities through 2011 to hedge
the associated foreign currency exchange risk. These foreign
exchange forward contracts have been designated as cash flow
hedges of future Euro denominated receivables.
For the year ended December 31, 2008, losses of
$2.5 million were excluded from the assessment of hedge
effectiveness and were recorded as a reduction of revenue, and
unrealized gains of $18.2 million were included in
accumulated other comprehensive income.
The fair value of the cash flow hedges at December 31, 2008
was $14.6 million of which $8.9 million is included in
other current assets and $5.7 million is included in other
assets.
We estimate that $9.2 million of net derivative gain
included in accumulated other comprehensive income will be
reclassified into earnings within the next 12 months.
F-46
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The maturity of foreign currency exchange contracts held as of
December 31, 2008 is consistent with the contractual or
expected timing of the transactions being hedged, principally
receipt of customer payments under long-term contracts. These
foreign exchange contracts mature as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Sell
|
|
|
|
|
|
|
At
|
|
|
At
|
|
|
|
Euro
|
|
|
Contract
|
|
|
Market
|
|
Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
2009
|
|
|
65,540
|
|
|
$
|
99,793
|
|
|
$
|
91,376
|
|
2010
|
|
|
19,210
|
|
|
|
29,388
|
|
|
|
26,734
|
|
2011
|
|
|
23,493
|
|
|
|
35,663
|
|
|
|
32,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,243
|
|
|
$
|
164,844
|
|
|
$
|
150,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Buy
|
|
|
|
|
|
|
At
|
|
|
At
|
|
|
|
Euro
|
|
|
Contract
|
|
|
Market
|
|
Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
2009
|
|
|
4,520
|
|
|
$
|
6,294
|
|
|
$
|
6,315
|
|
The Company is exposed to credit-related losses in the event of
non-performance by counter parties to these financial
instruments, but does not expect any counter party to fail to
meet its obligation because we execute foreign exchange
contracts only with what we believe are well capitalized
financial institutions. Loral does not enter into foreign
currency transactions for trading and speculative purposes.
On June 20, 2008, in anticipation of receiving the
July 9, 2008 satellite contract described above, Loral
entered into a currency option transaction that allowed Loral to
convert 97.7 million into $149.5 million. Loral
paid a premium of $0.5 million for this option. For the
year ended December 31, 2008, Loral recorded charges of
$0.5 million as the options expired unexercised on
July 10, 2008.
As part of the Telesat Canada transaction, Telesat Holdco
received financing commitments from a syndicate of banks for
$2.279 billion (based on an exchange rate of $1.00/CAD
0.9429 as of October 31, 2007) of senior secured
credit facilities, $692.8 million of a senior unsecured
bridge facility and $217.2 million of a senior subordinated
unsecured bridge facility. The purchase price of Telesat Canada
was in Canadian dollars, while most of the debt financing was in
U.S. dollars. Accordingly, to insulate themselves from
Canadian dollar versus U.S. dollar fluctuations, Loral,
through Loral Skynet, and PSP, entered into financial
commitments to lock in exchange rates to convert some of the
U.S. dollar denominated debt proceeds to Canadian dollars.
On October 23, 2007, Loral Skynet transferred its financial
commitments under these contracts to Telesat Holdco.
A summary of these transactions is as follows:
1) In December 2006, Loral Skynet entered into a currency
basis swap with a single bank counterparty effectively
converting $1.054 billion of U.S. debt into CAD
1.224 billion of Canadian debt for a seven year period
beginning December 17, 2007. This debt amortizes 1% per
year with a final maturity of December 17, 2014. No cash
payment was made by Loral Skynet for entering into this
transaction. Loral Skynet recognized cumulative losses of
$39.0 million through the date of transfer of the swap to
Telesat Holdco on October 23, 2007.
2) In December 2006, Loral Skynet entered into forward
foreign currency contracts with a single bank counterparty
selling $497.4 million for CAD 570.1 million
($1.00/CAD 1.1461) with a settlement date of December 17,
2007. In January 2007, Loral Skynet entered into additional
forward foreign currency contracts with the same single bank
counterparty selling $200.0 million for CAD
232.8 million ($1.00/CAD 1.1512) with a settlement date of
December 17, 2007. No cash payments were made by Loral
Skynet to the counterparty for entering into these transactions.
Skynet recognized cumulative gains of $122.6 million
through the date of transfer of the foreign currency contracts
to Telesat Holdco on October 23, 2007.
F-47
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Commitments
and Contingencies
|
Financial
Matters
As of December 31, 2008, SS/L has a Credit Agreement which
provides for a $100.0 million senior secured revolving
credit facility. As of December 31, 2008, SS/L had
outstanding borrowings of $55.0 million and letters of
credit of $4.9 million (see Note 8).
Due to the long lead times required to produce purchased parts,
we have entered into various purchase commitments with
suppliers. These commitments aggregated approximately
$508 million as of December 31, 2008 and primarily
relate to Satellite Manufacturing backlog.
We paid $1.7 million in January 2008 and in January 2009 to
the U.S. Department of State pursuant to a consent
agreement entered into by Old Loral and SS/L.
SS/L has deferred revenue and accrued liabilities for
performance warranty obligations relating to satellites sold to
customers, which could be affected by future performance of the
satellites. These reserves for expected costs for warranty
reimbursement and support are based on historical failure rates.
However, in the event of a catastrophic failure of a satellite,
which cannot be predicted, these reserves likely will not be
sufficient. SS/L periodically reviews and adjusts the deferred
revenue and accrued liabilities for warranty reserves based on
the actual performance of each satellite and remaining warranty
period. A reconciliation of such deferred amounts for the years
ended December 31, 2008, 2007 and 2006, is as follows (in
thousands):
|
|
|
|
|
Balance of deferred amounts at January 1, 2006
|
|
$
|
41,692
|
|
Accruals for deferred amounts issued during the period
|
|
|
4,800
|
|
Accruals relating to pre-existing contracts (including changes
in estimates)
|
|
|
7,380
|
|
|
|
|
|
|
Balance of deferred amounts at December 31, 2006
|
|
|
53,872
|
|
Warranty costs incurred including payments
|
|
|
(10,790
|
)
|
Accruals relating to pre-existing contracts (including changes
in estimates)
|
|
|
(8,056
|
)
|
|
|
|
|
|
Balance of deferred amounts at December 31, 2007
|
|
|
35,026
|
|
Warranty costs incurred including payments
|
|
|
(956
|
)
|
Accruals relating to pre-existing contracts (including changes
in estimates)
|
|
|
2,185
|
|
|
|
|
|
|
Balance of deferred amounts at December 31, 2008
|
|
$
|
36,255
|
|
|
|
|
|
|
The increase of the deferred amounts during the year ended
December 31, 2008 was primarily attributable to the
recognition of the warranty obligations on five satellites that
were launched during 2008. The reduction of the deferred amounts
during the year ended December 31, 2007, was primarily
attributable to a resolution of certain warranty obligations for
less than previously estimated amounts. In connection with the
reduction of the deferred amounts, interest expense was reduced
by $4.5 million for the year ended December 31, 2007.
In connection with the Telesat Canada transaction, Loral
initiated a restructuring of its corporate functions. Through
2008, Loral has reduced the number of employees at its
headquarters, consolidating some functions at
SS/L. In the
fourth quarter of 2007, Loral charged approximately
$7.0 million to selling, general and administrative
expenses, mainly for severance and related costs, and expects to
make cash payments related to the restructuring primarily during
2008 and 2009. Loral has paid restructuring costs of
approximately $5.5 million and $5.7 million for the
year ended December 31, 2008 and cumulative to date,
respectively. At December 31, 2008, the liability recorded
in the consolidated balance sheet for the restructuring was
$1.3 million.
Many of SS/Ls satellite contracts permit SS/Ls
customers to pay a portion of the purchase price for the
satellite over time subject to the continued performance of the
satellite (orbitals), and certain of SS/Ls
satellite contracts require SS/L to provide vendor financing to
its customers, or a combination of these contractual terms.
F-48
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Some of these arrangements are provided to customers that are
start-up
companies, companies in the early stages of building their
businesses or highly leveraged companies, including some with
near-term debt maturities. There can be no assurance that these
companies or their businesses will be successful and,
accordingly, that these customers will be able to fulfill their
payment obligations under their contracts with SS/L. We believe
that these provisions will not have a material adverse effect on
our consolidated financial position or our results of
operations, although no assurance can be provided. Moreover,
SS/Ls receipt of orbital payments is subject to the
continued performance of its satellites generally over the
contractually stipulated life of the satellites. Because these
orbital receivables could be affected by future satellite
performance, there can be no assurance that SS/L will be able to
collect all or a portion of these receivables. Orbital
receivables and vendor financing receivables included in our
consolidated balance sheet as of December 31, 2008 were
$181.4 million and $0, respectively.
On July 30, 2007, SS/L entered into an Amended and Restated
Customer Credit Agreement (the Sirius Credit
Agreement) with Sirius Satellite Radio Inc.
(Sirius). Under the Sirius Credit Agreement, SS/L
agreed, subject to the terms and conditions contained therein,
to make loans to Sirius up to an aggregate principal amount of
$100 million to make milestone payments under the Amended
and Restated Satellite Purchase Agreement between Sirius and
SS/L dated as of July 23, 2007 (the Satellite
Purchase Agreement) for the purchase of the Sirius FM-5
and FM-6 Satellites (the Sirius Satellites).
Pursuant to the Sirius Credit Agreement, on December 19,
2008, Sirius ability to borrow under the Sirius Credit
Agreement to reimburse itself for milestone payments it had
previously made with its own funds expired. Any loans made under
the Sirius Credit Agreement are secured by Sirius right,
title and interest in its rights under the Satellite Purchase
Agreement, including its rights in and to the Sirius Satellites.
The loans are also entitled to the benefits of a subsidiary
guarantee from Satellite CD Radio, Inc. and any future material
subsidiary that may be formed or acquired by Sirius, other than
XM Radio and any other subsidiary designated as an
unrestricted subsidiary under the indenture
governing Siriuss
95/8% senior
notes due 2013. The maturity date of the loans is the earliest
to occur of (i) June 10, 2010, (ii) 90 days
after the FM-6 Satellite becomes available for shipment and
(iii) 30 days prior to the scheduled launch of the
FM-6 Satellite. Loans made under the Sirius Credit Agreement
generally bear interest at a variable rate equal to three-month
LIBOR plus a margin. The Sirius Credit Agreement permits Sirius
to prepay all or a portion of the loans outstanding without
penalty. In addition, Sirius is required to prepay the loans in
certain circumstances, including loans in respect of the FM-5
Satellite upon the earliest to occur of (x) April 6,
2009, (y) 90 days after the FM-5 Satellite becomes
available for shipment and (z) 30 days prior to the
launch of the FM-5 Satellite. SS/L believes that, as of
March 10, 2009, Sirius is not eligible for any borrowings
on the FM-5 Satellite and, subject to satisfaction of the
conditions set forth in the Sirius Credit Agreement, would be
eligible to borrow up to $32 million under the Sirius
Credit Agreement upon incurrence of future milestone payments on
the FM-6 Satellite. SS/L believes that Sirius does not currently
meet all of the conditions precedent to draw under the Sirius
Credit Agreement, including the condition that Sirius have a
market capitalization of at least $1 billion. There can be
no assurance, however, that Sirius will not meet such conditions
in the future. As of December 31, 2008, no loans were
outstanding under the Sirius Credit Agreement.
SS/L and Sirius are disputing whether SS/L owes Sirius
$15 million in liquidated damages with respect to the
claimed late delivery of the FM-5 Satellite. SS/L believes that,
in accordance with the Satellite Purchase Agreement, SS/L is not
subject to the liquidated damages penalty because the Agreement
provides that penalties for delivery schedule delays are not
applicable when the delays were due solely to technical reasons
affecting SS/Ls subcontractors. SS/L is pursuing
resolution of this matter through arbitration pursuant to the
provisions of the Satellite Purchase Agreement. There can be no
assurance that SS/L will prevail in this dispute.
During the year ended December 31, 2008, we recorded income
of $9.3 million for cash received related to distributions
from a bankruptcy claim against a former customer of Loral
Skynet. The receivables underlying the claim had previously been
written-off or not recognized due to the customers
bankruptcy. Additional amounts which may be recovered in the
future have not been recognized in our statement of operations
as their realization has not been assured beyond a reasonable
doubt.
F-49
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
See Note 16 Related Party
Transactions Transactions with Affiliates
Telesat Canada for commitments and contingencies
relating to our agreement to indemnify Telesat Canada for
certain liabilities and our arrangements with ViaSat, Inc. and
Telesat Canada.
Satellite
Matters
Satellites are built with redundant components or additional
components to provide excess performance margins to permit their
continued operation in case of component failure, an event that
is not uncommon in complex satellites. Twenty-seven of the
satellites built by SS/L and launched since 1997 have
experienced some loss of power from their solar arrays. There
can be no assurance that one or more of the affected satellites
will not experience additional power loss. 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, the level of redundancy
built into the affected satellites design, when in the
life of the affected satellite the loss occurred, how many
transponders are then in service and how they are being used. It
is also possible that one or more transponders on a satellite
may need to be removed from service to accommodate the power
loss and to preserve full performance capabilities on the
remaining transponders. A complete or partial loss of a
satellites capacity could result in a loss of orbital
incentive payments to SS/L. SS/L has implemented remediation
measures that SS/L believes will prevent satellites launched
after June 2001 from experiencing similar anomalies. Based upon
information currently available relating to the power losses, we
believe that this matter will not have a material adverse effect
on our consolidated financial position or our results of
operations, although no assurance can be provided.
SS/L is building a satellite known as CMBStar under a contract
with EchoStar Corporation (EchoStar). Satellite
construction is substantially complete. EchoStar and SS/L have
agreed to suspend final construction of the satellite pending,
among other things, further analysis relating to efforts to meet
the satellite performance criteria
and/or
confirmation that alternative performance criteria would be
acceptable. EchoStar has also stated that it is currently
evaluating potential alternative uses for the CMBStar satellite.
There can be no assurance that a dispute will not arise as to
whether the satellite meets its technical performance
specifications or if such a dispute did arise that SS/L would
prevail. SS/L believes that it will not incur a material loss
with respect to this program.
In November 2004, Galaxy 27 (formerly Telstar
7) experienced an anomaly which caused it to completely
cease operations for several days before it was partially
recovered. In June 2008, Galaxy 26 (formerly Telstar
6) experienced a similar anomaly which caused the loss of
power to one of the satellites solar arrays. Three other
satellites manufactured by SS/L for other customers have designs
similar to Galaxy 27 and Galaxy 26 and, therefore, could be
susceptible to similar anomalies in the future. A partial or
complete loss of these satellites could result in the incurrence
of warranty payments by SS/L of up to $4.6 million, of
which $0.9 million has been accrued as of December 31,
2008.
SS/L relies, in part, on patents, trade secrets and know-how to
develop and maintain its competitive position. There can be no
assurance that infringement of existing third party patents has
not occurred or will not occur. In the event of infringement, we
could be required to pay royalties to obtain a license from the
patent holder, refund money to customers for components that are
not useable or redesign our products to avoid infringement, all
of which would increase our costs. We may also be required under
the terms of our customer contracts to indemnify our customers
for damages.
See Note 16 Related Party
Transactions Transactions with Affiliates
Telesat Canada for commitments and contingencies
relating to SS/Ls obligation to make payments to Telesat
Canada for transponders on Telstar 10.
Regulatory
Matters
SS/L is required to obtain licenses and enter into technical
assistance agreements, presently under the jurisdiction of the
State Department, in connection with the export of satellites
and related equipment, and with the
F-50
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
disclosure of technical data or provision of defense services to
foreign persons. Due to the relationship between launch
technology and missile technology, the U.S. government has
limited, and is likely in the future to limit, launches from
China and other foreign countries. Delays in obtaining the
necessary licenses and technical assistance agreements have in
the past resulted in, and may in the future result in, the delay
of SS/Ls performance on its contracts, which could result
in the cancellation of contracts by its customers, the
incurrence of penalties or the loss of incentive payments under
these contracts.
Lease
Arrangements
We lease certain facilities and equipment under agreements
expiring at various dates. Certain leases covering facilities
contain renewal
and/or
purchase options which may be exercised by us. Rent expense, net
of sublease income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Sublease
|
|
|
|
|
|
|
Rent
|
|
|
Income
|
|
|
Net Rent
|
|
|
Year ended December 31, 2008
|
|
$
|
12,154
|
|
|
$
|
(6
|
)
|
|
$
|
12,148
|
|
Year ended December 31, 2007
|
|
$
|
26,302
|
|
|
$
|
(76
|
)
|
|
$
|
26,226
|
|
Year ended December 31, 2006
|
|
$
|
27,317
|
|
|
$
|
(20
|
)
|
|
$
|
27,297
|
|
Future minimum payments, by year and in the aggregate under
operating leases with initial or remaining terms of one year or
more consisted of the following as of December 31, 2008 (in
thousands):
|
|
|
|
|
2009
|
|
$
|
9,723
|
|
2010
|
|
|
8,967
|
|
2011
|
|
|
6,328
|
|
2012
|
|
|
3,782
|
|
2013
|
|
|
2,122
|
|
Thereafter
|
|
|
7,089
|
|
|
|
|
|
|
|
|
$
|
38,011
|
|
|
|
|
|
|
Legal
Proceedings
Delaware
Shareholder Litigation
On or about May 14, 2007, the Court of Chancery of the
State of Delaware in and for New Castle County (the
Chancery Court) entered an order consolidating two
civil actions previously commenced by certain stockholders of
the Company against the Company, MHR and certain funds (the
MHR Funds) and other entities affiliated with MHR
(collectively, MHR, the MHR Funds and such other entities, the
MHR Entities) and the individual members of the
Companys board of directors under the caption In re:
Loral Space and Communications Inc. Consolidated Litigation.
The litigation arose out of the Companys sale of
$300 million of preferred stock to the MHR Funds pursuant
to the Securities Purchase Agreement dated October 17,
2006, as amended and restated on February 27, 2007 (the
Securities Purchase Agreement). The plaintiffs
alleged, among other things, that the sale was not fair to the
Company and resulted from breach of fiduciary duties by
Lorals directors.
On September 19, 2008, the Chancery Court issued an opinion
(the Opinion) finding that the sale of the preferred
stock to the MHR Funds did not meet the entire fairness standard
under Delaware law, and, on November 10, 2008, the Chancery
Court entered an implementing order (the Implementing
Order) providing for a remedy. Pursuant to the
Implementing Order, which became effective on December 22,
2008 upon entry of an order (the Attorneys Fees
Order) resolving plaintiffs attorneys
applications for attorneys fees and expenses discussed
below, the Securities Purchase Agreement was reformed to provide
for MHR to have purchased 9,505,673 shares of Loral
Non-Voting Common Stock, which are in all respects identical to
and treated equally
F-51
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with shares of Loral Common Stock except for the absence of
voting rights (other than as provided in Lorals amended
and restated certificate of incorporation or as provided by
law), in exchange for the net payment of $293.3 million
made by the MHR Funds to Loral on February 27, 2007 in
connection with the Securities Purchase Agreement. Pursuant to
the Implementing Order, all other terms of the Securities
Purchase Agreement are of no further force or effect (see
Note 10 Shareholders Equity and
Minority Interest). In the Implementing Order, the Chancery
Court also entered final judgment in favor of directors Olmstead
and Stenbit and resolving all claims against the other directors
on the basis set forth in its Opinion. The Chancery Court stated
in its Opinion that, because the remedy being entered is one
that can be effected as between the MHR Funds and Loral, it was
not necessary to make findings about the extent to which the
other individual director defendants would be subject to
liability for breach of fiduciary duty, if at all.
Pursuant to the Implementing Order, on December 23, 2008,
Loral filed an Amended and Restated Certificate of Incorporation
providing that its 40,000,000 authorized shares of Common Stock
be divided into two series, of which 30,494,327 shares are
Voting Common Stock and 9,505,673 shares are Non-Voting
Common Stock. The Amended and Restated Certificate of
Incorporation provides that the Common Stock and Non-Voting
Common Stock are identical and treated equally in all respects,
except for the absence of voting rights (other than as provided
in the Amended and Restated Certificate of Incorporation or as
provided by law). The Chancery Court also ordered that
Lorals Board of Directors ratify and recommend to
stockholders that they ratify the Amended and Restated
Certificate of Incorporation, that Loral include a proposal at
its next scheduled annual meeting of stockholders to consider
and vote upon the Amended and Restated Certificate of
Incorporation and that the named and representative parties vote
all of their shares in favor of ratification of the Amended and
Restated Certificate of Incorporation. Prior to the stockholder
meeting, any transfer of Loral Common Stock by a named or
representative party to the litigation or any subsequent
transferee may only be made subject to the transferee providing
an irrevocable and unconditional proxy to vote all such
transferred Common Stock in favor of the ratification of the
Amended and Restated Certificate of Incorporation. Furthermore,
the Chancery Court ordered that, upon request of the holders of
a majority of the then outstanding shares of Non-Voting Common
Stock, Loral shall apply for and use best efforts to obtain the
listing of the Non-Voting Common Stock on a national securities
exchange or automated quotation system as so requested by such
holders and register the Non-Voting Common Stock under all
applicable securities laws. Also, pursuant to the Implementing
Order, on December 23, 2008, Loral and the MHR Funds
entered into an Amended and Restated Registration Rights
Agreement, (the New Registration Rights Agreement).
The New Registration Rights Agreement provides for registration
rights for the shares of Non-Voting Common Stock, in addition
and substantially similar to, the registration rights provided
for the shares of Voting Common Stock held by the MHR Funds. In
addition, in the New Registration Rights Agreement, Loral has
agreed, subject to certain exceptions set forth therein, to file
on or before June 1, 2009 a shelf registration statement
covering shares of Voting Common Stock and Non-Voting Common
Stock held by the MHR Funds.
The time for appeal with respect to Opinion, the Implementing
Order and the Attorneys Fees Order expired on
January 21, 2009 without any of the plaintiffs or
defendants in the litigation having filed any appeals. The
Company has, however, filed an appeal with respect to the
Chancery Courts February 20, 2008 order granting
certification of the class of Loral shareholders and the
Attorneys Fee Order which awarded class counsel in the
litigation fees and expenses in the amount of $10.6 million
which Loral paid on December 31, 2008. In addition, in
January 2009, Loral paid counsel for the derivative plaintiffs
in the litigation a total amount of $8.8 million for fees
and expenses incurred in connection with the litigation (the
Derivative Fee Award and, together with the
Class Counsel Award, the Fee Awards) which was
accrued in other current liabilities on the consolidated balance
sheet at December 31, 2008.
New York
Shareholder Litigation
On or about November 3, 2006, plaintiff Maxine Babus,
derivatively on behalf of Loral Space & Communications
Inc., filed a shareholder derivative complaint in the Supreme
Court of the State of New York, County of New York, against all
the members of the Loral board of directors and against Loral as
a nominal defendant. On or
F-52
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
about April 4, 2007, the plaintiff filed an amended
shareholder class and derivative complaint against all members
of the Loral board of directors, the MHR Entities and Loral as a
nominal defendant. The litigation arose out of the
Companys sale of $300 million of preferred stock to
the MHR Funds pursuant to the Securities Purchase Agreement. The
plaintiff alleged, among other things, that the sale was not
fair to the Company and resulted from breach of fiduciary duties
by Lorals directors. By order dated December 5, 2007,
the court ordered that the Babus lawsuit be stayed
pending final resolution of the Delaware shareholder litigation
discussed above. The Company expects that, as a result of the
decision in the Delaware shareholder litigation discussed above,
the Babus case will be dismissed.
Insurance
Coverage Litigation
The Company has directors and officers liability insurance
coverage that provides the Company with coverage up to
$40 million, but the insurers have denied coverage of the
Fee Awards and, on or about December 19, 2008, commenced an
action against the Company in the Supreme Court of the State of
New York, County of New York, seeking a declaratory
judgment declaring that (x) the applicable insurance
policies do not provide coverage for the Fee Awards;
(y) Loral breached the cooperation clause of the policies
thereby relieving the insurers of any liability under the
policies; and (z) in the alternative, to the extent that
the court finds that Loral is entitled to coverage of the Fee
Awards, coverage is available only for a small portion of the
Derivative Fee Award. The Company believes that the Fee Awards
are covered by and reimbursable under its insurance and, on
February 27, 2009, the Company filed its answer and
counterclaims in which it asserted its rights to coverage. There
can be no assurance, however, that the Companys position
regarding coverage will prevail or, if it does prevail, that the
coverage limit will be adequate to cover the Fee Awards and all
defense costs for its directors.
The Company has received requests for indemnification and
advancement of expenses from its directors under their
indemnification agreements with the Company for any losses or
costs they may incur as a result of the In re: Loral Space
and Communications Inc. Consolidated Litigation and Babus
lawsuits. As of February 28, 2009, the insurers have
advanced approximately $9.0 million in defense costs for
the Companys directors who are not affiliated with MHR,
and the Company has received a request for indemnification from
its directors who are affiliated with MHR for defense costs in
the amount, as of November 30, 2008, of approximately
$18 million. The Company has referred this request for
indemnification to Mr. John Stenbit, a director of Loral,
who has been appointed by the Board of Directors to act as an
independent special committee of the Board with respect to
determination of the amount of defense costs properly allocable
to the MHR directors in their capacity as Loral directors and
for which they are entitled to indemnification. Since the
special committee has not yet made any determinations with
respect to its assignment, the Company cannot estimate how much,
if any, of the $18 million claimed by the directors
affiliated with MHR will be subject to indemnification and
whether such amount will fall within the limits of its insurance
coverage. The Company, therefore, has not accrued any
liabilities for this claim at this time.
Informal
SEC Inquiry
In June and July 2007, we received letters from the Staff of the
Division of Enforcement of the SEC informing the Company that it
is conducting an informal inquiry and requesting that the
Company provide certain documents and information relating
primarily to the Securities Purchase Agreement and activities
before and after its execution as well as documents and
information relating to the redemption of the Loral Skynet Notes
(see Note 8) and documents and information regarding
the directors and officers of Loral. The letter advised that the
informal inquiry should not be construed as an indication by the
SEC or its staff that any violations of law have occurred, or as
an adverse reflection upon any person or security. The Company
has fully cooperated with the SEC staff during the
investigation. There has been no activity with respect to the
investigation since November 2007. In addition, the Company has
received requests for indemnification and advancement of
expenses from certain of its advisors with respect to costs they
may incur as a result of compliance with SEC document requests.
F-53
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reorganization
Matters
On July 15, 2003, Old Loral and certain of its subsidiaries
(collectively with Old Loral, the Debtors) filed
voluntary petitions for reorganization under chapter 11 of
title 11 (Chapter 11) of the United States
Code (the Bankruptcy Code) in the
U.S. Bankruptcy Court for the Southern District of New York
(the Bankruptcy Court) (Lead Case
No. 03-41710
(RDD), Case Nos.
03-41709
(RDD) through
03-41728
(RDD)) (the Chapter 11 Cases). The Debtors
emerged from Chapter 11 on November 21, 2005 pursuant
to the terms of their fourth amended joint plan of
reorganization, as modified (the Plan of
Reorganization).
Appeals of Confirmation Order. Confirmation of
our Plan of Reorganization was opposed by the Official Committee
of Equity Security Holders (the Equity Committee)
appointed in our Chapter 11 Cases and by the self-styled
Loral Stockholders Protective Committee (LSPC).
Shortly before the hearing to consider confirmation of the Plan
of Reorganization, the Equity Committee also filed a motion
seeking authority to prosecute an action on behalf of the
estates of Old Loral and certain of its subsidiaries seeking to
unwind as fraudulent, a guarantee provided by Old Loral in 2001,
of certain indebtedness of Loral Orion, Inc. (the Motion
to Prosecute). By separate Orders dated August 1,
2005, the Bankruptcy Court confirmed the Plan of Reorganization
(the Confirmation Order) and denied the Motion to
Prosecute (the Denial Order). On or about
August 10, 2005, the LSPC appealed (the Confirmation
Appeal) to the United States District Court for the
Southern District of New York (the District Court)
the Confirmation Order and the Denial Order. On February 3,
2006, we filed with the District Court a motion to dismiss the
Confirmation Appeal. On May 26, 2006, the District Court
granted our motion to dismiss the Confirmation Appeal. The LSPC
subsequently filed a motion for reconsideration of such
dismissal, which the District Court denied on June 14, 2006
(the Reconsideration Order). On or about
July 12, 2006, a person purportedly affiliated with the
LSPC appealed the dismissal of the Confirmation Appeal and the
Reconsideration Order to the United States Court of Appeals for
the Second Circuit (the Second Circuit Confirmation
Appeal). On February 22, 2008, the Second Circuit
affirmed the District Courts judgment dismissing the
Confirmation Appeal and the Reconsideration Order, and, on
May 16, 2008, the Second Circuit denied such persons
petition for a rehearing. On October 14, 2008, such person
filed a petition for a writ of certiorari with the Supreme Court
of the United States, which petition was denied by the Supreme
Court on January 12, 2009. A petition for rehearing, filed
with the Supreme Court on February 6, 2009, was denied on
March 9, 2009.
Disputed Claims. In connection with our Plan
of Reorganization, certain claims were filed against Old Loral
and certain of its subsidiaries, the validity or amount of which
we disputed. To the extent any disputed claims become allowed
claims, the claimants would be entitled to distributions under
the Plan of Reorganization based upon the amount of the allowed
claim, payable either in cash for claims against SS/L or Loral
SpaceCom Corporation or in Loral common stock for all other
claims. As of December 31, 2008, except with respect to the
D&O Claims discussed below and a claim discussed below
related to our collection in July 2008 of a $58 million
judgment against Rainbow DBS Holdings, Inc.
(Rainbow), we have resolved all disputed claims. We
have reserved approximately 71,000 of the 20 million shares
of Loral common stock distributable under the Plan of
Reorganization for disputed claims that may ultimately be
payable in common stock. To the extent that disputed claims do
not become allowed claims, shares held in reserve on account of
such claims will be distributed pursuant to the Plan of
Reorganization pro rata to claimants with allowed claims. The
disputed claim relating to the Rainbow judgment arose from the
assertion by a third party of a prepetition claim against the
Company that it was entitled to receive $3 million of the
proceeds of the judgment, which the third party believed was
payable in full in cash with interest. The Company, however,
believed the claim was payable in common stock under its Plan of
Reorganization. After a hearing regarding this dispute before
the Bankruptcy Court, the Bankruptcy Court ruled in favor of the
Company and entered a final order to that effect on
November 3, 2008. The third party has appealed the
Bankruptcy Courts decision to, and the matter is pending
before, the District Court. The effect of the issuance of the
common stock attributable to this claim was recorded in
connection with our fresh-start accounting as of October 1,
2005.
Indemnification Claims of Directors and Officers of Old
Loral. Old Loral was obligated to indemnify its
directors and officers for any losses or costs they may incur as
a result of the lawsuits described below in
F-54
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Class Action Securities Litigations,
Class Action ERISA Litigation and Globalstar
Related Class Action Securities Litigations. The Plan
of Reorganization provides that the direct liability of Loral
post-emergence in respect of such indemnity obligation is
limited to the In re: Loral Space ERISA Litigation and
In re: Loral Space & Communications Ltd. Securities
Litigation cases and then only in an aggregate amount of
$2.5 million (the Direct Indemnity Liability).
In addition, most directors and officers have filed proofs of
claim (the D&O Claims) in unliquidated amounts
with respect to the prepetition indemnity obligations of the
Debtors. The Debtors and these directors and officers have
agreed that in no event will their indemnity claims against Old
Loral and Loral Orion, Inc. in the aggregate exceed
$25 million and $5 million, respectively. If any of
these claims ultimately becomes an allowed claim under the Plan
of Reorganization, the claimant would be entitled to a
distribution under the Plan of Reorganization of Loral common
stock based upon the amount of the allowed claim. Any such
distribution of stock would be in addition to the
20 million shares of Loral common stock distributed under
the Plan of Reorganization to other creditors. Instead of
issuing such additional shares, Loral may elect to satisfy any
allowed claim in cash in an amount equal to the number of shares
to which plaintiffs would have been entitled multiplied by
$27.75 or in a combination of additional shares and cash. We
believe, although no assurance can be given, that Loral will not
incur any substantial losses as a result of these claims.
Class Action
Securities Litigations
Beleson. In August 2003, plaintiffs Robert Beleson
and Harvey Matcovsky filed a purported class action complaint
against Bernard L. Schwartz, the former Chief Executive Officer
of Loral, in the United States District Court for the Southern
District of New York. The complaint seeks, among other things,
damages in an unspecified amount and reimbursement of
plaintiffs reasonable costs and expenses. The complaint
alleges (a) that Mr. Schwartz violated
Section 10(b) of the Securities Exchange Act of 1934 (the
Exchange Act) and
Rule 10b-5
promulgated thereunder, by making material misstatements or
failing to state material facts about our financial condition
relating to the sale of assets to Intelsat and our
chapter 11 filing and (b) that Mr. Schwartz is
secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as an alleged
controlling person of Old Loral. The class of
plaintiffs on whose behalf the lawsuit has been asserted
consists of all buyers of Old Loral common stock during the
period from September 30, 2003 through July 15, 2003,
excluding the defendant and certain persons related to or
affiliated with him. In November 2003, three other complaints
against Mr. Schwartz with substantially similar allegations
were consolidated into the Beleson case. The defendant
filed a motion for summary judgment in July 2008 and plaintiffs
filed a cross-motion for partial summary judgment in September
2008. On February 24, 2009, the court granted
defendants motion and denied plaintiffs cross
motion. Plaintiffs have until March 26, 2009 to file a
notice of appeal with respect to the courts decision.
Since this case was not brought against Old Loral, but only
against one of its officers, we believe, although no assurance
can be given, that, to the extent that any award is ultimately
granted to the plaintiffs in this action, the liability of
Loral, if any, with respect thereto is limited solely to the
D&O Claims as described above under Reorganization
Matters Indemnification Claims.
Christ. In November 2003, plaintiffs Tony Christ,
individually and as custodian for Brian and Katelyn Christ,
Casey Crawford, Thomas Orndorff and Marvin Rich, filed a
purported class action complaint against Bernard L. Schwartz and
Richard J. Townsend, the former Chief Financial Officer of
Loral, in the United States District Court for the Southern
District of New York. The complaint seeks, among other things,
damages in an unspecified amount and reimbursement of
plaintiffs reasonable costs and expenses. The complaint
alleges (a) that defendants violated Section 10(b) of
the Exchange Act and
Rule 10b-5
promulgated thereunder, by making material misstatements or
failing to state material facts about Old Lorals financial
condition relating to the restatement in 2003 of the financial
statements for the second and third quarters of 2002 to correct
accounting for certain general and administrative expenses and
the alleged improper accounting for a satellite transaction with
APT Satellite Company Ltd. and (b) that each of the
defendants is secondarily liable for these alleged misstatements
and omissions under Section 20(a) of the Exchange Act as an
alleged controlling person of Old Loral. The class
of plaintiffs on whose behalf the lawsuit has been asserted
consists of all buyers of Old Loral common stock during the
F-55
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
period from July 31, 2002 through June 29, 2003,
excluding the defendants and certain persons related to or
affiliated with them. On September 30, 2008, the parties
entered into an agreement to settle the case, pursuant to which
a settlement will be funded entirely by Old Lorals
directors and officers liability insurer, and Loral will not be
required to make any contribution toward the settlement. By
order dated February 26, 2009, the court finally approved
the settlement as fair, reasonable and adequate and in the best
interests of the class. Certain class members have objected to
the settlement, and they have until March 30, 2009 to file
a notice of appeal. In addition, certain objectors, who together
had class period purchases valued at approximately $550,000,
elected to opt out of the class action settlement and have
indicated that they may file individual lawsuits against the
defendants. Since this case was not brought against Old Loral,
but only against certain of its officers, we believe, although
no assurance can be given, that, should the settlement not be
consummated or should any objectors who opted out of the
settlement prevail in lawsuits they may bring, to the extent
that any award is ultimately granted to the plaintiffs or
objectors in this action, the liability of Loral, if any, with
respect thereto is limited solely to the D&O Claims as
described above under Reorganization
Matters Indemnification Claims.
Class Action
ERISA Litigation
In re: Loral Space ERISA Litigation. In
April 2004, two separate purported class action lawsuits filed
in the United States District Court for the Southern District of
New York by former employees of Old Loral and participants in
the Old Loral Savings Plan (the Savings Plan) were
consolidated into one action titled In re: Loral Space ERISA
Litigation. In July 2004, plaintiffs in the consolidated
action filed an amended consolidated complaint against the
members of the Loral Space & Communications Ltd.
Savings Plan Administrative Committee and certain existing and
former members of the Board of Directors of SS/L, including
Bernard L. Schwartz. The amended complaint sought, among other
things, damages in the amount of any losses suffered by the
Savings Plan to be allocated among the participants
individual accounts in proportion to the accounts losses,
an order compelling defendants to make good to the Savings Plan
all losses to the Savings Plan resulting from defendants
alleged breaches of their fiduciary duties and reimbursement of
costs and attorneys fees. The class of plaintiffs on whose
behalf the lawsuit was asserted consisted of all participants in
or beneficiaries of the Savings Plan at any time between
November 4, 1999 and the present and whose accounts
included investments in Old Loral stock. Plaintiffs also filed a
proof of claim against Old Loral with respect to this case and
agreed that in no event would their claim against Old Loral with
respect to this case exceed $22 million.
Insurance Coverage Litigation. In addition,
two insurers under Old Lorals directors and officers
liability insurance policies denied coverage with respect to the
case titled In re: Loral Space ERISA Litigation, each
claiming that coverage should have been provided under the
others policy. In December 2004, one of the defendants in
that case filed a lawsuit in the United States District Court
for the Southern District of New York seeking a declaratory
judgment as to his right to receive coverage under the policies.
After each of the two potentially responsible insurers moved
separately for judgment on the pleadings, seeking a court ruling
absolving it of liability to provide coverage of the ERISA
action, in March 2006, the court granted the motion of one of
the insurers and denied the motion of the other insurer.
In April 2008, the potentially responsible defendant insurer,
the plaintiffs and the Company agreed in principle, and, in
August 2008, the parties entered into definitive settlement
agreements, to settle both the insurance coverage litigation and
the In re: Loral Space ERISA Litigation case. By order
dated January 20, 2009, the court finally approved and
confirmed the settlement as fair, reasonable and adequate. The
deadline to appeal the settlement has passed without any notice
of appeal having been filed, and, accordingly, the settlement is
final. Pursuant to this settlement, the settlement was funded
entirely by the defendant insurer, and Loral was not required to
make any contribution toward the settlement. In addition, the
bankruptcy claim filed by plaintiffs against Old Loral with
respect to the In re: Loral Space ERISA Litigation case
has been deemed disallowed and expunged.
F-56
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Globalstar
Related Class Action Securities Litigations
In re: Globalstar Securities
Litigation. On September 26, 2001, the
nineteen separate purported class action lawsuits filed in the
United States District Court for the Southern District of New
York by various holders of securities of Globalstar
Telecommunications Limited (GTL) and Globalstar,
L.P. (Globalstar) against GTL, Old Loral, Bernard L.
Schwartz and other defendants were consolidated into one action
titled In re: Globalstar Securities Litigation. In
November 2001, plaintiffs in the consolidated action filed a
consolidated amended class action complaint against Globalstar,
GTL, Globalstar Capital Corporation, Old Loral and Bernard L.
Schwartz seeking, among other things, damages in an unspecified
amount and reimbursement of plaintiffs costs and expenses.
This case was settled by Mr. Schwartz in 2005 for
$20 million. Mr. Schwartz then commenced a lawsuit
against Globalstars directors and officers liability
insurers seeking to recover the full settlement amount plus
legal fees and expenses incurred in enforcing his rights under
Globalstars directors and officers liability insurance
policy. In January 2007, two of the four insurers settled with
Mr. Schwartz and paid him the remaining limits under their
policies and, after a jury trial, the jury returned a verdict
against the other two insurers in favor of Mr. Schwartz
awarding him the remaining $9.1 million balance of his
claim. The insurers motion to set aside the verdict or, in
the alternative, for a new trial, was denied, and, after an
appeal, in August 2008, the United States Court of Appeals for
the Second Circuit affirmed the District Courts judgment.
The insurers motion for a panel rehearing and a rehearing
en banc was denied by the Court of Appeals in October 2008, and
Mr. Schwartz has received payment of the balance of his
claim. Accordingly, Mr. Schwartzs proof of claim
against Old Loral asserting a general unsecured prepetition
claim for indemnification relating to this case is not likely to
be allowed, and, therefore, we believe, although no assurance
can be given, that Loral will not incur any material loss as a
result of this settlement.
In re: Loral Space & Communications Ltd.
Securities Litigation. On March 2, 2002, the
seven separate purported class action lawsuits filed in the
United States District Court for the Southern District of New
York by various holders of Old Loral common stock against Old
Loral, Bernard L. Schwartz and Richard J. Townsend were
consolidated into one action titled In re: Loral
Space & Communications Ltd. Securities Litigation.
On May 6, 2002, plaintiffs in the consolidated action filed
a consolidated amended class action complaint seeking, among
other things, damages in an unspecified amount and reimbursement
of plaintiffs costs and expenses. The complaint alleged
(a) that all defendants violated Section 10(b) of the
Exchange Act and
Rule 10b-5
promulgated thereunder, by making material misstatements or
failing to state material facts about Old Lorals financial
condition and its investment in Globalstar and (b) that
Mr. Schwartz is secondarily liable for these alleged
misstatements and omissions under Section 20(a) of the
Exchange Act as an alleged controlling person of Old
Loral. The class of plaintiffs on whose behalf the lawsuit has
been asserted consists of all buyers of Old Loral common stock
during the period from November 4, 1999 through
February 1, 2001, excluding the defendants and certain
persons related to or affiliated with them. After oral argument
on a motion to dismiss filed by Old Loral and
Messrs. Schwartz and Townsend, in June 2003, the plaintiffs
filed an amended complaint alleging essentially the same claims
as in the original amended complaint. In February 2004, a motion
to dismiss the amended complaint was granted by the court
insofar as Messrs. Schwartz and Townsend are concerned.
Pursuant to the Plan of Reorganization, plaintiffs received no
distribution with respect to their claims in this lawsuit.
Insurance Coverage Litigation. The primary
insurer under the directors and officers liability insurance
policy of Old Loral denied coverage under the policy for the
In re: Loral Space & Communications Ltd. Securities
Litigation case and, on March 24, 2003, filed a lawsuit
in the Supreme Court of New York County seeking a declaratory
judgment upholding its coverage position. In May 2003, Old Loral
and the other defendants served an answer and filed
counterclaims seeking a declaration that the insurer is
obligated to provide coverage and damages for breach of contract
and the implied covenant of good faith. In May 2003, Old Loral
and the other defendants also filed a third party complaint
against the excess insurers seeking a declaration that they are
obligated to provide coverage. In connection with the settlement
of the insurance coverage litigation relating to the In re:
Loral Space ERISA Litigation case described above, the
parties also agreed to the dismissal of this insurance coverage
litigation without prejudice. We believe, although no assurance
can be given, that the liability of Loral, if any, with respect
to the In re: Loral Space & Communications Ltd.
Securities Litigation case or with respect to the related
insurance
F-57
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
coverage litigation is limited solely to the Direct Indemnity
Liability and the D&O Claims as described above under
Reorganization Matters Indemnification
Claims.
Other and
Routine Litigation
We are subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course
of business. Although the outcome of these legal proceedings and
claims cannot be predicted with certainty, we do not believe
that any of these other existing legal matters will have a
material adverse effect on our consolidated financial position
or our results of operations.
Loral is organized into two operating segments: Satellite
Manufacturing and Satellite Services. Our segment reporting data
includes unconsolidated affiliates that meet the reportable
segment criteria of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The
satellite services segment includes 100% of the results reported
by Telesat Canada for the year ended December 31, 2008 and
for the period from October 31, 2007 to December 31,
2007. Although we analyze Telesat Canadas revenue and
expenses under the satellite services segment, we eliminate its
results in our consolidated financial statements, where we
report our 64% share of Telesat Canadas results as equity
in net losses of affiliates.
Our investment in XTAR, for which we use the equity method of
accounting, is included in Corporate in 2008 and 2007. XTAR was
owned by Loral Skynet until closing of the Telesat Canada
transaction, however, we retained our investment in XTAR, and it
was not transferred to Telesat Canada in connection with the
Telesat Canada transaction.
The common definition of EBITDA is Earnings Before
Interest, Taxes, Depreciation and Amortization. In
evaluating financial performance, we use revenues and operating
income (loss) before depreciation and amortization (including
amortization of stock-based compensation) (Adjusted
EBITDA) as the measure of a segments profit or loss.
Adjusted EBITDA is equivalent to the common definition of EBITDA
before: goodwill and other impairment charges; gain on foreign
exchange contracts; gains or losses on litigation not related to
our operations, impairment of available for sale securities;
loss on extinguishment of debt; other income (expense); equity
in net losses of affiliates; and minority interest.
Adjusted EBITDA allows us and investors to compare our operating
results with that of competitors exclusive of depreciation and
amortization, interest and investment income, interest expense,
goodwill and other impairment charges, gains or losses on
foreign exchange contracts, gains or losses on litigation not
related to our operations , impairments of available for sale
securities, other income (expense), equity in net losses of
affiliates and minority interest. Financial results of
competitors in our industry have significant variations that can
result from timing of capital expenditures, the amount of
intangible assets recorded, the differences in assets
lives, the timing and amount of investments, the effects of
other income (expense), which are typically for non-recurring
transactions not related to the on-going business, and effects
of investments not directly managed. The use of Adjusted EBITDA
allows us and investors to compare operating results exclusive
of these items. Competitors in our industry have significantly
different capital structures. The use of Adjusted EBITDA
maintains comparability of performance by excluding interest
expense.
We believe the use of Adjusted EBITDA along with U.S. GAAP
financial measures enhances the understanding of our operating
results and is useful to us and investors in comparing
performance with competitors, estimating enterprise value and
making investment decisions. Adjusted EBITDA as used here may
not be comparable to similarly titled measures reported by
competitors. We also use Adjusted EBITDA to evaluate operating
performance of our segments, to allocate resources and capital
to such segments, to measure performance for incentive
compensation programs and to evaluate future growth
opportunities. Adjusted EBITDA should be used in conjunction
with U.S. GAAP financial measures and is not presented as
an alternative to cash flow from operations as a measure of our
liquidity or as an alternative to net income as an indicator of
our operating performance.
F-58
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intersegment revenues primarily consists of satellites under
construction by Satellite Manufacturing for Satellite Services
and the leasing of transponder capacity by Satellite
Manufacturing from Satellite Services. Summarized financial
information concerning the reportable segments is as follows:
2008
Segment Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite
|
|
|
Satellite
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Services(1)
|
|
|
Corporate(2)
|
|
|
Total
|
|
|
Revenues and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
785,534
|
|
|
$
|
685,187
|
|
|
|
|
|
|
$
|
1,470,721
|
|
Intersegment
revenues(3)
|
|
|
95,913
|
|
|
|
|
|
|
|
|
|
|
|
95,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment revenues
|
|
$
|
881,447
|
|
|
|
685,187
|
|
|
|
|
|
|
|
1,566,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,049
|
)
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(685,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
869,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA before
eliminations(5)(6)
|
|
$
|
45,055
|
|
|
$
|
436,514
|
|
|
$
|
(14,875
|
)
|
|
$
|
466,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,569
|
)
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,949
|
|
Depreciation, amortization and stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,986
|
)
|
Impairment of
goodwill(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,977
|
)
|
Interest and investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,857
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,268
|
)
|
Gain on litigation, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,823
|
|
Impairment of available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,823
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,744
|
)
|
Equity loss in affiliates
|
|
|
|
|
|
$
|
(479,579
|
)
|
|
$
|
(16,070
|
)
|
|
|
(495,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(692,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation, amortization and stock-based compensation
|
|
$
|
38,646
|
|
|
$
|
220,843
|
|
|
$
|
5,342
|
|
|
$
|
264,831
|
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
(220,843
|
)
|
|
|
|
|
|
|
(220,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and stock-based compensation as
reported
|
|
$
|
38,646
|
|
|
$
|
|
|
|
$
|
5,342
|
|
|
$
|
43,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment capital
expenditures(7)
|
|
$
|
53,883
|
|
|
$
|
255,506
|
|
|
$
|
10,676
|
|
|
$
|
320,065
|
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
(255,506
|
)
|
|
|
|
|
|
|
(255,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures as reported
|
|
$
|
53,883
|
|
|
$
|
|
|
|
$
|
10,676
|
|
|
$
|
64,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total assets
|
|
$
|
799,476
|
|
|
$
|
4,273,162
|
|
|
$
|
196,391
|
|
|
$
|
5,269,029
|
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
(4,273,162
|
)
|
|
|
|
|
|
|
(4,273,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as
reported(7)
|
|
$
|
799,476
|
|
|
$
|
|
|
|
$
|
196,391
|
|
|
$
|
995,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007
Segment Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite
|
|
|
Satellite
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Services(1)
|
|
|
Corporate(2)
|
|
|
Total
|
|
|
Revenues and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
739,815
|
|
|
$
|
238,858
|
|
|
|
|
|
|
$
|
978,673
|
|
Intersegment
revenues(3)
|
|
|
74,500
|
|
|
|
2,298
|
|
|
|
|
|
|
|
76,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment revenues
|
|
$
|
814,315
|
|
|
$
|
241,156
|
|
|
|
|
|
|
|
1,055,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,250
|
)
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
882,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA before
eliminations(5)(6)
|
|
$
|
34,479
|
|
|
$
|
118,385
|
|
|
$
|
(37,935
|
)
|
|
$
|
114,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,075
|
)
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,571
|
|
Depreciation, amortization and stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,257
|
)
|
Gain on the contribution of Loral Skynet to Telesat Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,256
|
|
Interest and investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,279
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,312
|
)
|
Gain on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,364
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,155
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,457
|
)
|
Equity loss in affiliates
|
|
|
|
|
|
$
|
(1,792
|
)
|
|
$
|
(19,638
|
)
|
|
|
(21,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation, amortization and
stock-based
compensation
|
|
$
|
36,282
|
|
|
$
|
85,905
|
|
|
$
|
22,270
|
|
|
$
|
144,457
|
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
(41,200
|
)
|
|
|
|
|
|
|
(41,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and stock-based compensation as
reported
|
|
$
|
36,282
|
|
|
$
|
44,705
|
|
|
$
|
22,270
|
|
|
$
|
103,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment capital
expenditures(7)
|
|
$
|
37,477
|
|
|
$
|
88,647
|
|
|
$
|
39
|
|
|
$
|
126,163
|
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
(30,400
|
)
|
|
|
|
|
|
|
(30,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures as reported
|
|
$
|
37,477
|
|
|
$
|
58,247
|
|
|
$
|
39
|
|
|
$
|
95,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total assets
|
|
$
|
963,388
|
|
|
$
|
6,221,408
|
|
|
$
|
128,190
|
|
|
$
|
7,312,986
|
|
Affiliate
eliminations(1)
|
|
|
|
|
|
|
(5,610,047
|
)
|
|
|
|
|
|
|
(5,610,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as
reported(7)
|
|
$
|
963,388
|
|
|
$
|
611,361
|
|
|
$
|
128,190
|
|
|
$
|
1,702,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006
Segment Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite
|
|
|
Satellite
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Services
|
|
|
Corporate(2)
|
|
|
Total
|
|
|
Revenues and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
636,632
|
|
|
$
|
160,701
|
|
|
|
|
|
|
$
|
797,333
|
|
Intersegment revenues
|
|
|
59,894
|
|
|
|
3,085
|
|
|
|
|
|
|
|
62,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment revenues
|
|
$
|
696,526
|
|
|
$
|
163,786
|
|
|
|
|
|
|
|
860,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
797,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA before
eliminations(5)(6)
|
|
$
|
65,884
|
|
|
$
|
67,956
|
|
|
$
|
(26,784
|
)
|
|
$
|
107,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,115
|
|
Depreciation, amortization and stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,818
|
|
Interest and investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,526
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,449
|
)
|
Loss on foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,750
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,028
|
)
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,880
|
)
|
Equity loss in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,163
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(22,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and stock-based compensation as
reported
|
|
$
|
23,284
|
|
|
$
|
45,881
|
|
|
$
|
2,132
|
|
|
$
|
71,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures as reported
|
|
$
|
18,411
|
|
|
$
|
63,617
|
|
|
$
|
129
|
|
|
$
|
82,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as
reported(7)
|
|
$
|
944,630
|
|
|
$
|
750,412
|
|
|
$
|
34,869
|
|
|
$
|
1,729,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Satellite Services for 2008
represents Telesat Canada. Satellite Services for 2007 include
Loral Skynet for the period January 1, 2007 to
October 30, 2007 and Telesat Canada for the period
October 31, 2007 to December 31, 2007. Affiliate
eliminations represent the elimination of amounts attributable
to Telesat Canada whose results are reported in our consolidated
statements of operations as equity in net losses of affiliates
and in our consolidated balance sheet as investment in
affiliates.
|
|
(2)
|
|
Includes corporate expenses
incurred in support of our operations. Corporate for 2008 and
2007 includes our equity investments in XTAR and Globalstar
service providers.
|
|
(3)
|
|
Intersegment revenues includes
$84.0 million and $22.0 million for the years ended
December 31, 2008 and 2007, respectively, of revenue from
affiliates.
|
|
(4)
|
|
Represents the elimination of
intercompany sales and intercompany Adjusted EBITDA, primarily
for satellites under construction by SS/L for Loral and its
wholly owned subsidiaries and for satellite services leasing
transponder capacity at SS/L.
|
|
(5)
|
|
Satellite manufacturing includes
(in thousands):
|
F-61
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Adjusted EBITDA before specific identified charges
|
|
$
|
44,684
|
|
|
$
|
27,167
|
|
|
$
|
57,139
|
|
Transponders rights provided to SS/L in the Satmex settlement
agreement
|
|
|
|
|
|
|
|
|
|
|
18,605
|
|
Accrued warranty obligations
|
|
|
371
|
|
|
|
6,769
|
|
|
|
(8,182
|
)
|
Provisions for inventory obsolescence
|
|
|
|
|
|
|
543
|
|
|
|
(1,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite manufacturing segment Adjusted EBITDA before
eliminations
|
|
$
|
45,055
|
|
|
$
|
34,479
|
|
|
$
|
65,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
|
Satellite Services Revenue and
EBITDA include $14.9 million resulting from receipt of a
customer termination payment for the year ended
December 31, 2006.
|
|
(7)
|
|
Amounts are presented after the
elimination of intercompany profit and include goodwill of
$227 million and $306 million for Satellite
Manufacturing, as of December 31, 2007 and 2006,
respectively. During 2008, we determined that the implied fair
value of SS/L goodwill had decreased below its carrying value,
and we recorded an impairment charge for the entire goodwill
balance of $187.9 million to reflect this impairment. In
addition, total assets as reported excludes $2.0 billion
and $2.5 billion of satellite services goodwill related to
Telesat Canada as of December 31, 2008 and 2007,
respectively.
|
Revenue
by Customer Location
The following table presents our revenues by country based on
customer location for the years ended December 31, 2008,
2007 and 2006, (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
612,282
|
|
|
$
|
702,605
|
|
|
$
|
691,986
|
|
Peoples Republic of China (including Hong Kong)
|
|
|
13,236
|
|
|
|
47,591
|
|
|
|
26,607
|
|
United Kingdom
|
|
|
68,956
|
|
|
|
45,596
|
|
|
|
11,943
|
|
Canada
|
|
|
83,767
|
|
|
|
43,552
|
|
|
|
252
|
|
Luxembourg
|
|
|
11,398
|
|
|
|
|
|
|
|
|
|
Spain
|
|
|
25,506
|
|
|
|
385
|
|
|
|
5,682
|
|
The Netherlands
|
|
|
50,110
|
|
|
|
6,849
|
|
|
|
8,941
|
|
Other
|
|
|
4,143
|
|
|
|
35,876
|
|
|
|
51,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
869,398
|
|
|
$
|
882,454
|
|
|
$
|
797,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, four of our customers accounted for approximately
20.4%, 15.0%, 14.0% and 10.9% of our consolidated revenues.
During 2007, two of our customers accounted for approximately
20% and 16% of our consolidated revenues. During 2006, four of
our customers accounted for approximately 17%, 15%, 11% and 11%
of our consolidated revenues. With the exception of our
satellites in-orbit through October 31, 2007, our
long-lived assets are primarily located in the United States.
|
|
16.
|
Related
Party Transactions
|
Transactions
with Affiliates
Telesat
Canada
As described in Note 6, we own 64% of Telesat Canada and
account for our investment under the equity method of accounting.
F-62
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the Telesat Canada transaction, Loral and
certain of its subsidiaries, PSP and one of its subsidiaries,
Telesat Holdco and certain of its subsidiaries, including
Telesat Canada, and MHR entered into a Shareholders Agreement
(the Shareholders Agreement). The Shareholders
Agreement provides for, among other things, the manner in which
the affairs of Telesat Holdco and its subsidiaries will be
conducted and the relationships among the parties thereto and
future shareholders of Telesat Holdco. The Shareholders
Agreement also contains an agreement by Loral not to engage in a
competing satellite communications business and agreements by
the parties to the Shareholders Agreement not to solicit
employees of Telesat Holdco or any of its subsidiaries.
Additionally, the Shareholders Agreement details the matters
requiring the approval of the shareholders of Telesat Holdco
(including veto rights for Loral over certain extraordinary
actions), provides for preemptive rights for certain
shareholders upon the issuance of certain capital shares of
Telesat Holdco and provides for either PSP or Loral to cause
Telesat Holdco to conduct an initial public offering of its
equity shares if an initial public offering is not completed by
the fourth anniversary of the Telesat Canada transaction. The
Shareholders Agreement also restricts the ability of holders of
certain shares of Telesat Holdco to transfer such shares unless
certain conditions are met or approval of the transfer is
granted by the directors of Telesat Holdco, provides for a right
of first offer to certain Telesat Holdco shareholders if a
holder of equity shares of Telesat Holdco wishes to sell any
such shares to a third party, provides for, in certain
circumstances, tag-along rights in favor of shareholders that
are not affiliated with Loral if Loral sells equity shares and
drag-along rights in favor of Loral in case Loral or its
affiliate enters into an agreement to sell all of its Telesat
Holdco equity securities.
Under the Shareholders Agreement, in the event that either
(i) ownership or control, directly or indirectly, by
Dr. Rachesky, President of MHR, of Lorals voting
stock falls below certain levels or (ii) there is a change
in the composition of a majority of the members of the Loral
Board of Directors over a consecutive two-year period, Loral
will lose its veto rights relating to certain extraordinary
actions by Telesat Holdco and its subsidiaries. In addition,
after either of these events, PSP will have certain rights to
enable it to exit from its investment in Telesat Holdco,
including a right to cause Telesat Holdco to conduct an initial
public offering in which PSPs shares would be the first
shares offered or, if no such offering has occurred within one
year due to a lack of cooperation from Loral or Telesat Holdco,
to cause the sale of Telesat Holdco and to drag along the other
shareholders in such sale, subject to Lorals right to call
PSPs shares at fair market value.
The Shareholders Agreement provides for a board of directors of
each of Telesat Holdco and certain of its subsidiaries,
including Telesat Canada, consisting of 10 directors, three
nominated by Loral, three nominated by PSP and four independent
directors to be selected by a nominating committee comprised of
one PSP nominee, one nominee of Loral and one of the independent
directors then in office. Each party to the Shareholders
Agreement is obligated to vote all of its Telesat Holdco shares
for the election of the directors nominated by the nominating
committee. Pursuant to action by the board of directors taken on
October 31, 2007, Dr. Rachesky, who is non-executive
Chairman of the Board of Directors of Loral, was appointed
non-executive Chairman of the Board of Directors of Telesat
Holdco and certain of its subsidiaries, including Telesat
Canada. In addition, Michael B. Targoff, Lorals Vice
Chairman, Chief Executive Officer and President serves on the
board of directors of Telesat Holdco and certain of its
subsidiaries, including Telesat Canada.
As of December 31, 2008, SS/L had contracts with Telesat
Canada for the construction of the Nimiq 5 and Telstar 11N
satellites. SS/L also procured a launch vehicle on behalf of
Telesat Canada for Telstar 11N. SS/L recorded revenues from
Telesat Canada of $84.0 million and $22.0 million for
the years ended December 31, 2008 and 2007, respectively.
SS/L received milestone payments from Telesat Canada totaling
$79.1 million for the year ended December 31, 2008.
Amounts receivable by SS/L from Telesat Canada as of
December 31, 2008 and 2007, were $3.2 million and
$2.5 million, respectively, related to the construction of
these satellites.
On October 31, 2007, Loral and Telesat Canada entered into
a consulting services agreement (the Consulting
Agreement). Pursuant to the terms of the Consulting
Agreement, Loral provides to Telesat Canada certain
non-exclusive consulting services in relation to the business of
Loral Skynet which was transferred to Telesat Canada as part of
the Telesat Canada transaction as well as with respect to
certain aspects of the satellite
F-63
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
communications business of Telesat Canada. The Consulting
Agreement has a term of seven years with an automatic renewal
for an additional seven year term if certain conditions are met.
In exchange for Lorals services under the Consulting
Agreement, Telesat Canada will pay Loral an annual fee of US
$5.0 million payable quarterly in arrears on the last day
of March, June, September and December of each year during the
term of the Consulting Agreement. If the terms of Telesat
Canadas bank or bridge facilities or certain other debt
obligations prevent Telesat Canada from paying such fees in
cash, Telesat Canada can issue junior subordinated promissory
notes to Loral in the amount of such payment, with interest on
such promissory notes payable at the rate of 7% per annum,
compounded quarterly, from the date of issue of such promissory
note to the date of payment thereof. Our selling, general and
administrative expenses for the year ended December 31,
2008 and 2007, included income of $5.0 million and
$0.8 million, respectively, related to the Consulting
Agreement. We also have a long-term receivable related to the
Consulting Agreement from Telesat Canada of $6.0 million as
of December 31, 2008.
In connection with the Telesat Canada transaction, Loral has
indemnified Telesat Canada for certain liabilities including
Loral Skynets tax liabilities arising prior to
January 1, 2007. As of December 31, 2008 and 2007 we
had recognized liabilities of approximately $6.9 million
representing our estimate of the probable outcome of these
matters. These liabilities are offset by tax deposit assets of
$7.0 million relating to periods prior to January 1,
2007. There can be no assurance, however, that the eventual
payments required by us will not exceed the liabilities
established.
In connection with an agreement entered into between SS/L and
ViaSat, Inc. (ViaSat) for the construction by SS/L
for ViaSat of a high capacity broadband satellite called
ViaSat-1, on January 11, 2008, we entered into certain
agreements, described below, pursuant to which we are investing
in the Canadian coverage portion of the ViaSat-1 satellite and
granting to Telesat Canada an option to acquire our rights to
the Canadian payload. Michael B. Targoff and another Loral
director serve as members of the ViaSat Board of Directors.
A Beam Sharing Agreement between us and ViaSat provides for,
among other things, (i) the purchase by us of a portion of
the ViaSat-1 satellite payload providing coverage into Canada
(the Loral Payload) and (ii) payment by us of
15% of the actual costs of launch and associated services,
launch insurance and telemetry, tracking and control services
for the ViaSat-1 satellite. The aggregate cost to us for the
foregoing is estimated to be approximately $60.0 million.
An Option Agreement between us and Telesat Canada gives Telesat
Canada the option to cause us to assign to Telesat Canada our
rights and obligations with respect to the Loral Payload and all
of our rights and obligations under the Beam Sharing Agreement
upon payment by Telesat Canada to us of (i) all amounts
paid by us with respect to the Loral Payload and pursuant to the
Beam Sharing Agreement on or prior to the date Telesat Canada
exercises its option plus (ii) an option premium of between
$6.0 million and $13.0 million depending on the date
of exercise. Telesat Canadas option under the Option
Agreement expires on October 31, 2009 (the Expiration
Date). In consideration for the grant of the option,
Telesat Canada (i) agreed in a Cooperation Agreement with
us and ViaSat (the Cooperation Agreement) to
relinquish certain rights Telesat Canada has to the 115 degree
W.L. orbital position (the Orbital Slot) so as to
make those rights available to ViaSat pursuant to a license (the
ViaSat License) to be granted by Mansat Limited
(Mansat) to ViaSat and (ii) agreed to provide
tracking, telemetry and control services to ViaSat for the
ViaSat-1 Satellite and to pay us all of the recurring fees
Telesat Canada receives for providing such services. We have
agreed to reimburse ViaSat for fees due to Mansat as well as
certain other regulatory fees due under the ViaSat License for
the life of the ViaSat-1 Satellite. If Telesat Canada does not
exercise its option on or prior to the Expiration Date, then
Telesat Canada shall, at our request, transfer to us Telesat
Canadas remaining rights from Mansat with respect to the
Orbital Slot, and assign to us Telesat Canadas related
rights and obligations under the Cooperation Agreement. SS/L has
commenced construction of the ViaSat-1 satellite. For the year
ended December 31, 2008 we recorded sales to ViaSat under
this contract of $68.3 million. Lorals share of costs
incurred by SS/L on the ViaSat-1 satellite was
$10.5 million as of December 31, 2008 which is
reflected as satellite capacity under construction in property,
plant and equipment.
F-64
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with an agreement reached in 1999 and an overall
settlement reached in February 2005 with ChinaSat relating to
the delayed delivery of ChinaSat 8, SS/L has provided ChinaSat
with usage rights to two Ku-band transponders on Telesat
Canadas Telstar 10 for the life of such transponders
(subject to certain restoration rights) and to one Ku-band
transponder on Telesat Canadas Telstar 18 for the life of
the Telstar 10 satellite plus two years, or the life of such
transponder (subject to certain restoration rights), whichever
is shorter. Under the agreement, SS/L makes monthly payments to
Telesat Canada for the transponders allocated to ChinaSat. As of
December 31, 2008 and 2007, our consolidated balance sheet
included a liability of $9.8 million and
$11.5 million, respectively, for the future use of these
transponders. During the year ended December 31, 2008, we
made payments of $2.7 million to Telesat Canada pursuant to
the agreement.
Costs of satellite manufacturing for sales to related parties
were $135.5 million and $22.1 million for the years
ended December 31, 2008 and 2007, respectively.
XTAR
As described in Note 6, we own 56% of XTAR, a joint venture
between us and Hisdesat and account for our investment in XTAR
under the equity method of accounting. We constructed
XTARs satellite, which was successfully launched in
February 2005. XTAR and Loral have entered into a management
agreement whereby Loral provides general and specific services
of a technical, financial, and administrative nature to XTAR.
For the services provided by Loral, XTAR is charged a quarterly
management fee equal to 3.7% of XTARs quarterly gross
revenues. Amounts due to Loral under the management agreement as
of December 31, 2008 and 2007 were $1.3 million and
$1.6 million, respectively. During the quarter ended
March 31, 2008, Loral and XTAR agreed to defer amounts owed
to Loral under this agreement and XTAR has agreed that its
excess cash balance (as defined), if any, will be applied at
least quarterly towards repayment of receivables owed to Loral,
as well as to Hisdesat and Telesat Canada. Our selling, general
and administrative expenses included income to the extent of
cash received of $1.1 million under this agreement for the
year ended December 31, 2008, and no amounts for the year
ended December 31, 2007.
Other
Equity Investments
In 2007, we recognized $9.1 million of equity losses in
affiliates from our other equity investments, which was
primarily attributable to a loss of $11.3 million due to an
agreement to sell our Globalstar investment partnership in
Brazil, offset by a $3.4 million cash distribution from one
of our Globalstar investment partnerships (see Note 6).
MHR
Fund Management LLC
Three of the managing principals of MHR, Mark H. Rachesky, Hal
Goldstein and Sai S. Devabhaktuni, are members of Lorals
board of directors. As of December 31, 2007, various funds
affiliated with MHR held all issued and outstanding shares of
LoralSeries-1 Preferred Stock which was issued in February 2007.
Pursuant to the Delaware Chancery Court Order, on
December 23, 2008, we issued to the MHR Funds
9,505,673 shares of Non-Voting Common Stock, and all shares
of Preferred Stock (including all PIK dividends) previously
issued to the MHR Funds pursuant to the Securities Purchase
Agreement were cancelled.
Also pursuant to the Delaware Chancery Court Order, on
December 23, 2008, Loral and the MHR Funds entered into the
New Registration Rights Agreement which provides for
registration rights for the shares of Non-Voting Common Stock,
in addition and substantially similar to, the registration
rights provided for the shares of Voting Common Stock held by
the MHR Funds. In addition, in the New Registration Rights
Agreement, Loral has agreed, subject to certain exceptions set
forth therein, to file on or before June 1, 2009 a shelf
registration statement covering shares of Voting Common Stock
and Non-Voting Common Stock held by the MHR Funds. Various funds
affiliated with MHR held, as of December 31, 2008 and 2007,
approximately 39.3% and 35.4%, respectively of the outstanding
Voting Common stock and as of December 31, 2008 held a
combined 58.7% of Voting and Non-Voting
F-65
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common Stock of Loral. These funds also held shares of Loral
Skynet Preferred Stock which were redeemed on November 5,
2007 for $90.8 million and Loral Skynet Notes, which were
redeemed on September 5, 2007 for $61.9 million.
Information on dividends and interest paid to the funds
affiliated with MHR, with respect to their holdings of the Loral
Skynet Preferred Stock, Loral Skynet Notes and Loral Series-1
Preferred Stock for the years ended December 31, 2008, 2007
and 2006, is as follows (in thousands, except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loral Series-1 Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid in the form of additional shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
80,423
|
|
|
|
47,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
24,248
|
|
|
$
|
14,400
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loral Skynet Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid in cash
|
|
$
|
|
|
|
$
|
4,513
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid in the form of additional shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
44,539
|
|
|
|
27,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
|
|
|
$
|
8,908
|
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loral Skynet Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments paid in cash
|
|
$
|
|
|
|
$
|
8,967
|
|
|
$
|
5,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption premium paid in cash
|
|
$
|
|
|
|
$
|
5,624
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds affiliated with MHR Fund Management own preferred
stock convertible currently into approximately 18.6% of the
common stock of Protostar Ltd. (Protostar) assuming
the conversion of all issued and outstanding shares of preferred
stock, including the shares owned by the MHR funds. These MHR
funds also hold Protostar warrants exercisable upon the
occurrence of certain events. Upon conversion of such preferred
stock and warrants, such funds would own 7.8% of the common
stock of Protostar on a fully-diluted basis assuming the
exercise or conversion, as the case may be, of all currently
outstanding shares of preferred stock, convertible notes,
options and warrants, including the shares of preferred stock
and warrants owned by such funds. MHR Fund Management has
the right (which has not yet been exercised) to nominate one of
nine directors to Protostars board of directors. The
information set forth in this paragraph is as of
December 31, 2008 and the share percentages have been
calculated based on information provided by Protostar.
These MHR funds are also participants in Protostars
$200 million credit facility, dated March 19, 2008,
with an aggregate participation of $6.0 million. Protostar
acquired the Chinasat 8 satellite from China Telecommunications
Broadcast Satellite Corporation and China National Postal and
Telecommunications Appliances Corporation under an agreement
reached in 2006, and, pursuant to a contract with Protostar
valued at $26.0 million, SS/L has modified the satellite to
meet Protostars needs. This satellite, renamed
Protostar I, was launched on July 8, 2008 from the
European Spaceport in Kourou, French Guiana.
As of December 31, 2008, funds affiliated with MHR hold
$83.7 million in principal amount of Telesat Canada 11% Senior
Notes and $29.75 million in principal amount of Telesat
Canada 12.5% Senior Subordinated Notes.
In connection with the $300.0 million preferred stock
financing in 2007, with affiliated funds of MHR, we paid MHR a
placement fee of $6.8 million and paid $4.4 million in
legal and financial advisory fees and out-of-pocket expenses
incurred by MHR (see Note 10).
F-66
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Relationships
In the ordinary course of business, SS/L has entered into
satellite construction contracts and Loral Skynet had entered
into telemetry, tracking and control agreements and transponder
lease agreements with affiliates of EchoStar Communications
Corporation, a corporation that owns more than 6% of our common
stock. The Loral Skynet agreements have been assigned to Telesat
Canada in connection with the Telesat Canada transaction.
Mr. Targoff serves on the board of directors of Leap
Wireless International, Inc., a company of which
Dr. Rachesky is the non-executive Chairman of the Board and
of which another Loral director is a board member.
In 2006, Loral entered into a consulting agreement with a
director, Dean A. Olmstead. Pursuant to this agreement,
Mr. Olmstead provided consulting services to the Company
relating generally to exploration of strategic and growth
opportunities for Loral and achievement of efficiencies within
the Companys divisions. The Company granted to
Mr. Olmstead seven-year options to purchase
120,000 shares of common stock of the Company, with a
per-share exercise price equal to $27.135. Vesting of options
for 100,000 of these shares was based on performance, while
options for 20,000 shares were to vest over a four-year
period. Mr. Olmstead earned total compensation of
$0.5 million and $0.3 million for the years ended
December 31, 2007 and 2006, respectively, not including
stock-based compensation of $2.6 million recorded in 2007.
The consulting agreement was terminated effective as of
October 31, 2007, and Mr. Olmstead was paid a
termination fee of $0.3 million during the first quarter of
2008. On January 10, 2008, Mr. Olmstead resigned from
the Board of Directors of the Company. All of
Mr. Olmsteads 100,000 performance-based options to
purchase Loral common stock at $27.135 vested upon consummation
of the Telesat Canada transaction, and he exercised those
options in November 2007. 10,000 of Mr. Olmsteads
20,000 time-based options to purchase shares of Loral common
stock at $27.135 were fully vested as of the termination of
Mr. Olmsteads consulting agreement but expired
without having been exercised on January 31, 2008; the
remaining 10,000 options were cancelled upon termination of his
consulting agreement. In addition, Mr. Olmstead had
previously been granted 1,000 shares of restricted stock as
part of his compensation for services rendered as a director
prior to his becoming a consultant, 500 shares of which
were vested and 500 shares of which were forfeited upon his
resignation as a director.
|
|
17.
|
Selected
Quarterly Financial Information (unaudited, in thousands, except
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
218,537
|
|
|
$
|
208,061
|
|
|
$
|
212,519
|
|
|
$
|
230,281
|
|
Operating income (loss),
|
|
|
(10,810
|
)
|
|
|
4,536
|
|
|
|
(5,795
|
)
|
|
|
(181,908
|
)
|
Income (loss) before income taxes, equity in net income (losses)
of affiliates and minority interest
|
|
|
(4,904
|
)
|
|
|
60,755
|
|
|
|
(5,433
|
)
|
|
|
(201,941
|
)
|
Equity in net income (losses) of affiliates
|
|
|
(64,537
|
)
|
|
|
2,838
|
|
|
|
(39,353
|
)
|
|
|
(394,597
|
)
|
Net (loss) income
|
|
|
(71,217
|
)
|
|
|
51,950
|
|
|
|
(44,225
|
)
|
|
|
(629,424
|
)
|
Basic and diluted income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
|
(3.83
|
)
|
|
|
2.27
|
|
|
|
(2.50
|
)
|
|
|
(31.13
|
)
|
Diluted income (loss) per share
|
|
|
(3.83
|
)
|
|
|
2.16
|
|
|
|
(2.50
|
)
|
|
|
(31.13
|
)
|
F-67
LORAL
SPACE & COMMUNICATIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
220,532
|
|
|
$
|
226,000
|
|
|
$
|
235,640
|
|
|
$
|
200,282
|
|
Operating income (loss),
|
|
|
(11,798
|
)
|
|
|
(15,121
|
)
|
|
|
66
|
|
|
|
72,109
|
|
Income (loss) before income taxes, equity in net losses of
affiliates and minority interest
|
|
|
(4,011
|
)
|
|
|
54,990
|
|
|
|
58,441
|
|
|
|
48,366
|
|
Minority interest
|
|
|
(6,986
|
)
|
|
|
(6,487
|
)
|
|
|
(7,078
|
)
|
|
|
(2,689
|
)
|
Net income (loss)
|
|
|
(16,823
|
)
|
|
|
20,627
|
|
|
|
25,929
|
|
|
|
(74
|
)
|
Basic and diluted loss per
share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
|
(2.16
|
)
|
|
|
0.70
|
|
|
|
0.99
|
|
|
|
(0.30
|
)
|
Diluted income (loss) per share
|
|
|
(2.16
|
)
|
|
|
0.67
|
|
|
|
0.96
|
|
|
|
(0.30
|
)
|
|
|
|
(1)
|
|
The quarterly earnings per share
information is computed separately for each period. Therefore,
the sum of such quarterly per share amounts may differ from the
total for the year.
|
F-68
SCHEDULE II
LORAL
SPACE & COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2008, 2007 and 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
From
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts(1)
|
|
|
Reserves(2)
|
|
|
Period
|
|
|
Year ended 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for billed receivables
|
|
$
|
5,462
|
|
|
$
|
(307
|
)
|
|
$
|
1
|
|
|
$
|
(3,532
|
)
|
|
$
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory allowance
|
|
$
|
33,742
|
|
|
$
|
1,678
|
|
|
$
|
|
|
|
$
|
(5,822
|
)
|
|
$
|
29,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
337,346
|
|
|
$
|
|
|
|
$
|
3,905
|
|
|
$
|
(36,367
|
)
|
|
$
|
304,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for billed receivables
|
|
$
|
1,624
|
|
|
$
|
(397
|
)
|
|
$
|
20
|
|
|
$
|
(1,024
|
)
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory allowance
|
|
$
|
29,598
|
|
|
$
|
(543
|
)
|
|
$
|
|
|
|
$
|
(609
|
)
|
|
$
|
28,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
304,884
|
|
|
$
|
16,287
|
|
|
$
|
(34,749
|
)
|
|
$
|
(45,194
|
)
|
|
$
|
241,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for billed receivables
|
|
$
|
223
|
|
|
$
|
700
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory allowance
|
|
$
|
28,446
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,246
|
)
|
|
$
|
27,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
241,228
|
|
|
$
|
202,510
|
|
|
$
|
82,611
|
|
|
$
|
(38,587
|
)
|
|
$
|
487,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The allowance for long-term
receivables is recorded as a reduction to revenues. Changes in
the deferred tax valuation allowance which have been charged to
other accounts have been recorded in accumulated other
comprehensive income, goodwill and other deferred tax assets.
|
|
(2)
|
|
Deductions from reserves reflect
write-offs of uncollectible billed receivables, disposals of
inventory and reversal of excess deferred tax valuation
allowance recorded as a reduction to goodwill.
|
F-69
REPORT OF
INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Shareholders of Telesat Holdings Inc.
We have audited the consolidated balance sheets of Telesat
Holdings Inc. as at December 31, 2008 and 2007 and the
consolidated statements of (loss) earnings, comprehensive (loss)
income, shareholders equity and cash flow for the year
ended December 31, 2008 and for the period from October 31
to December 31, 2007 (Successor Entity operations), and for
the period from January 1 to October 30, 2007 and the year
ended December 31, 2006 (Predecessor Entity operations).
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). These
standards require that we plan and perform an audit to obtain
reasonable assurance 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, the Successor Entity consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Company as at
December 31, 2008 and 2007 and the results of its
operations and its cash flows for the year ended
December 31, 2008 and for the period from October 31 to
December 31, 2007 in accordance with Canadian generally
accepted accounting principles. Further, in our opinion, the
Predecessor Entity consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
results of the Companys operations and its cash flows for
the period from January 1 to October 30, 2007 and the year
ended December 31, 2006 in accordance with Canadian
generally accepted accounting principles.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. Independent Registered Chartered
Accountants Licensed Public Accountants Toronto, Canada
March 10, 2009
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 10, 2009
F-70
Comments by Independent Registered Chartered Accountants on
Canada-United States of America Reporting Difference
The standards of the Public Company Accounting Oversight Board
(United States) require the addition of an explanatory paragraph
when there are changes in accounting principles that have a
material effect on the comparability of the Companys
financial statements, such as the changes described in
Note 2 to the consolidated financial statements. Our report
to the Shareholders, dated March 10, 2009, is expressed in
accordance with Canadian reporting standards which do not
require a reference to such changes in accounting principles in
the auditors report when the change is properly accounted
for and adequately disclosed in the financial statements.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 10, 2009
F-71
TELESAT
HOLDINGS INC.
(In
thousands of Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31
|
|
|
|
January 1
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
to
|
|
|
|
to
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
Notes
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
|
|
|
|
|
680,791
|
|
|
|
103,509
|
|
|
|
|
384,428
|
|
|
|
435,123
|
|
Equipment sales revenues
|
|
|
|
|
|
|
30,584
|
|
|
|
7,907
|
|
|
|
|
40,760
|
|
|
|
41,280
|
|
Sales-type lease revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,599
|
|
|
|
2,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
(4
|
)
|
|
|
711,375
|
|
|
|
111,416
|
|
|
|
|
457,787
|
|
|
|
478,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
235,640
|
|
|
|
40,046
|
|
|
|
|
105,788
|
|
|
|
120,712
|
|
Operations and administration
|
|
|
|
|
|
|
247,550
|
|
|
|
43,276
|
|
|
|
|
144,307
|
|
|
|
183,388
|
|
Cost of equipment sales
|
|
|
|
|
|
|
24,368
|
|
|
|
6,485
|
|
|
|
|
34,723
|
|
|
|
33,625
|
|
Cost of sales-type lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,519
|
|
|
|
953
|
|
Impairment loss on long-lived assets
|
|
|
(11
|
)
|
|
|
2,373
|
|
|
|
|
|
|
|
|
2,116
|
|
|
|
|
|
Impairment loss on intangible assets
|
|
|
(12
|
)
|
|
|
483,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
992,931
|
|
|
|
89,807
|
|
|
|
|
302,453
|
|
|
|
338,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
|
|
|
|
(281,556
|
)
|
|
|
21,609
|
|
|
|
|
155,334
|
|
|
|
140,287
|
|
Interest expense
|
|
|
(5
|
)
|
|
|
(257,641
|
)
|
|
|
(43,861
|
)
|
|
|
|
(8,548
|
)
|
|
|
(12,459
|
)
|
Other expense
|
|
|
(6
|
)
|
|
|
(448,083
|
)
|
|
|
(43,969
|
)
|
|
|
|
(7,967
|
)
|
|
|
(2,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes
|
|
|
|
|
|
|
(987,280
|
)
|
|
|
(66,221
|
)
|
|
|
|
138,819
|
|
|
|
125,673
|
|
Income tax recovery (expense)
|
|
|
(7
|
)
|
|
|
164,879
|
|
|
|
62,170
|
|
|
|
|
(57,077
|
)
|
|
|
(21,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
|
|
|
|
(822,401
|
)
|
|
|
(4,051
|
)
|
|
|
|
81,742
|
|
|
|
103,985
|
|
Dividends on preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings applicable to common shares
|
|
|
|
|
|
|
(822,401
|
)
|
|
|
(4,051
|
)
|
|
|
|
81,742
|
|
|
|
102,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
TELESAT
HOLDINGS INC.
(In
thousands of Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
October 31
|
|
|
|
January 1
|
|
|
|
|
|
|
Year Ended
|
|
|
to
|
|
|
|
to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Net (loss) earnings
|
|
|
(822,401
|
)
|
|
|
(4,051
|
)
|
|
|
|
81,742
|
|
|
|
103,985
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on translation of financial statements of
self sustaining foreign operations
|
|
|
(5,053
|
)
|
|
|
(665
|
)
|
|
|
|
2,542
|
|
|
|
(526
|
)
|
Related tax
|
|
|
(2,090
|
)
|
|
|
66
|
|
|
|
|
(827
|
)
|
|
|
78
|
|
Loss on derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
(29,061
|
)
|
|
|
|
|
Related tax
|
|
|
|
|
|
|
|
|
|
|
|
9,242
|
|
|
|
|
|
Gain on derivatives designated as cash flow hedges in prior
periods transferred to net income in the current period
|
|
|
|
|
|
|
|
|
|
|
|
8,190
|
|
|
|
|
|
Related tax
|
|
|
|
|
|
|
|
|
|
|
|
(2,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
(829,544
|
)
|
|
|
(4,650
|
)
|
|
|
|
69,223
|
|
|
|
103,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-73
TELESAT
HOLDINGS INC.
(In
thousands of Canadian dollars)
FOR THE
YEAR ENDED DECEMBER 31, 2008 WITH COMPARATIVE FIGURES FOR THE
PERIODS ENDED DECEMBER 31, 2007, OCTOBER 30, 2007 AND DECEMBER
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit)
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common
|
|
|
Contributed
|
|
|
Preferred
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Notes
|
|
|
Shares
|
|
|
Surplus
|
|
|
Shares
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Predecessor entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2006
|
|
|
|
|
|
|
341,116
|
|
|
|
5,152
|
|
|
|
50,000
|
|
|
|
283,865
|
|
|
|
(1,835
|
)
|
|
|
282,030
|
|
|
|
678,298
|
|
Acquisition of 3652041 Canada Inc.
|
|
|
(3
|
)
|
|
|
|
|
|
|
(21,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,200
|
)
|
Sale of investment in TMI Telecommunications
|
|
|
(3
|
)
|
|
|
|
|
|
|
200,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,291
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,985
|
|
|
|
|
|
|
|
103,985
|
|
|
|
103,985
|
|
Dividends declared on preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,487
|
)
|
|
|
|
|
|
|
(1,487
|
)
|
|
|
(1,487
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
|
|
35
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(448
|
)
|
|
|
(448
|
)
|
|
|
(448
|
)
|
Redemption of preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
341,116
|
|
|
|
184,416
|
|
|
|
|
|
|
|
386,398
|
|
|
|
(2,283
|
)
|
|
|
384,115
|
|
|
|
909,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for changes in accounting policies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(401
|
)
|
|
|
1,239
|
|
|
|
838
|
|
|
|
838
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
617
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,742
|
|
|
|
|
|
|
|
81,742
|
|
|
|
81,742
|
|
Reorganization
|
|
|
(1
|
)
|
|
|
|
|
|
|
(185,033
|
)
|
|
|
|
|
|
|
(579,807
|
)
|
|
|
|
|
|
|
(579,807
|
)
|
|
|
(764,840
|
)
|
Unrealized gains on translation of financial statements of self
sustaining foreign operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,715
|
|
|
|
1,715
|
|
|
|
1,715
|
|
Gains and losses on derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,819
|
)
|
|
|
(19,819
|
)
|
|
|
(19,819
|
)
|
Gains and losses on derivatives designated as cash flow hedges
in prior periods transferred to net income in the current period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,585
|
|
|
|
5,585
|
|
|
|
5,585
|
|
Balance at October 30, 2007 (prior to acquisition
transactions)
|
|
|
|
|
|
|
341,116
|
|
|
|
|
|
|
|
|
|
|
|
(112,068
|
)
|
|
|
(13,563
|
)
|
|
|
(125,631
|
)
|
|
|
215,485
|
|
Telesat Holdings Inc. Acquisition Transactions and adjustments
|
|
|
|
|
|
|
(341,116
|
)
|
|
|
|
|
|
|
|
|
|
|
112,068
|
|
|
|
13,563
|
|
|
|
125,631
|
|
|
|
(215,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued as part of the sale transaction
|
|
|
(3
|
), (16)
|
|
|
756,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756,414
|
|
Preferred shares issued as part of the sale transaction
|
|
|
(3
|
), (16)
|
|
|
|
|
|
|
|
|
|
|
541,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
541,764
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,051
|
)
|
|
|
|
|
|
|
(4,051
|
)
|
|
|
(4,051
|
)
|
Unrealized losses on translation of financial statements of self
sustaining foreign operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(599
|
)
|
|
|
(599
|
)
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
756,414
|
|
|
|
|
|
|
|
541,764
|
|
|
|
(4,051
|
)
|
|
|
(599
|
)
|
|
|
(4,650
|
)
|
|
|
1,293,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(822,401
|
)
|
|
|
|
|
|
|
(822,401
|
)
|
|
|
(822,401
|
)
|
Unrealized losses on translation of financial statements of self
sustaining foreign operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,143
|
)
|
|
|
(7,143
|
)
|
|
|
(7,143
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
756,414
|
|
|
|
5,448
|
|
|
|
541,764
|
|
|
|
(826,452
|
)
|
|
|
(7,742
|
)
|
|
|
(834,194
|
)
|
|
|
469,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-74
TELESAT
HOLDINGS INC.
(In
thousands of Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Notes
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
98,539
|
|
|
|
42,203
|
|
Accounts receivable
|
|
(8)
|
|
|
61,933
|
|
|
|
53,875
|
|
Current future tax asset
|
|
(7)
|
|
|
2,581
|
|
|
|
2,594
|
|
Assets held for sale
|
|
(9)
|
|
|
|
|
|
|
4,037
|
|
Other current assets
|
|
(10)
|
|
|
49,187
|
|
|
|
57,777
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
212,240
|
|
|
|
160,486
|
|
Satellites, property and other equipment, net
|
|
(4), (11)
|
|
|
1,883,576
|
|
|
|
1,790,633
|
|
Other long-term assets
|
|
(10)
|
|
|
42,303
|
|
|
|
27,368
|
|
Intangible assets, net
|
|
(12)
|
|
|
582,035
|
|
|
|
1,120,338
|
|
Goodwill
|
|
(12)
|
|
|
2,446,603
|
|
|
|
2,446,603
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
5,166,757
|
|
|
|
5,545,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
48,792
|
|
|
|
61,599
|
|
Other current liabilities
|
|
(13)
|
|
|
138,095
|
|
|
|
152,375
|
|
Debt due within one year
|
|
(14)
|
|
|
23,272
|
|
|
|
18,419
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
210,159
|
|
|
|
232,393
|
|
Debt financing
|
|
(14)
|
|
|
3,513,223
|
|
|
|
2,775,944
|
|
Future tax liability
|
|
(7)
|
|
|
266,372
|
|
|
|
439,641
|
|
Other long-term liabilities
|
|
(13)
|
|
|
566,136
|
|
|
|
662,487
|
|
Senior preferred shares
|
|
(15)
|
|
|
141,435
|
|
|
|
141,435
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
4,697,325
|
|
|
|
4,251,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
Common shares (74,252,460 common shares issued and outstanding)
|
|
(16)
|
|
|
756,414
|
|
|
|
756,414
|
|
Preferred shares
|
|
(16)
|
|
|
541,764
|
|
|
|
541,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,298,178
|
|
|
|
1,298,178
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
(826,452
|
)
|
|
|
(4,051
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
(7,742
|
)
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(834,194
|
)
|
|
|
(4,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Contributed surplus
|
|
(20)
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
469,432
|
|
|
|
1,293,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
|
|
5,166,757
|
|
|
|
5,545,428
|
|
|
|
|
|
|
|
|
|
|
|
|
F-75
TELESAT
HOLDINGS INC.
(In
thousands of Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
Year Ended
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
December 31,
|
|
For The Period Ended
|
|
Notes
|
|
2008
|
|
|
December 31, 2007
|
|
|
|
October 30, 2007
|
|
|
2006
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
|
|
(822,401
|
)
|
|
|
(4,051
|
)
|
|
|
|
81,742
|
|
|
|
103,985
|
|
Adjustments to reconcile net earnings (loss) to cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales-type lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,881
|
)
|
|
|
(1,609
|
)
|
Amortization
|
|
|
|
|
235,640
|
|
|
|
40,046
|
|
|
|
|
105,788
|
|
|
|
120,712
|
|
Future income taxes
|
|
|
|
|
(175,951
|
)
|
|
|
(60,653
|
)
|
|
|
|
24,292
|
|
|
|
1,205
|
|
Unrealized foreign exchange loss
|
|
|
|
|
695,445
|
|
|
|
43,066
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivatives
|
|
|
|
|
(247,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred shares
|
|
(5)
|
|
|
9,855
|
|
|
|
1,695
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
(20)
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
(11), (12)
|
|
|
485,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
(43,867
|
)
|
|
|
(317
|
)
|
|
|
|
1,874
|
|
|
|
(18,954
|
)
|
Customer prepayments on future satellite services
|
|
|
|
|
88,587
|
|
|
|
|
|
|
|
|
17,721
|
|
|
|
12,322
|
|
Operating assets and liabilities
|
|
(17)
|
|
|
48,859
|
|
|
|
205,490
|
|
|
|
|
27,091
|
|
|
|
11,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279,057
|
|
|
|
225,276
|
|
|
|
|
252,627
|
|
|
|
229,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite programs
|
|
|
|
|
(263,763
|
)
|
|
|
(15,496
|
)
|
|
|
|
(183,494
|
)
|
|
|
(189,444
|
)
|
Property additions
|
|
|
|
|
(8,862
|
)
|
|
|
(14,019
|
)
|
|
|
|
(5,830
|
)
|
|
|
(15,963
|
)
|
Maturity of short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,312
|
|
|
|
48,997
|
|
Business acquisitions
|
|
(3)
|
|
|
|
|
|
|
(3,229,194
|
)
|
|
|
|
(180
|
)
|
|
|
(3,942
|
)
|
Proceeds on disposals of assets
|
|
|
|
|
5,120
|
|
|
|
25
|
|
|
|
|
159
|
|
|
|
178
|
|
Insurance proceeds
|
|
|
|
|
4,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(263,499
|
)
|
|
|
(3,258,684
|
)
|
|
|
|
(187,033
|
)
|
|
|
(160,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt financing and bank loans
|
|
|
|
|
186,687
|
|
|
|
2,767,716
|
|
|
|
|
73,000
|
|
|
|
83,862
|
|
Repayment of bank loans and debt financing
|
|
|
|
|
(91,560
|
)
|
|
|
(44,899
|
)
|
|
|
|
(84,090
|
)
|
|
|
(15,026
|
)
|
Capitalized debt issuance costs
|
|
|
|
|
(19,131
|
)
|
|
|
(83,585
|
)
|
|
|
|
|
|
|
|
|
|
Note repayment
|
|
|
|
|
|
|
|
|
(129,334
|
)
|
|
|
|
|
|
|
|
(150,000
|
)
|
Success fee payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,000
|
)
|
|
|
|
|
Common shares issued
|
|
|
|
|
|
|
|
|
311,124
|
|
|
|
|
|
|
|
|
|
|
Preferred shares issued (repurchased)
|
|
|
|
|
|
|
|
|
258,833
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
Capital lease payments
|
|
|
|
|
(30,954
|
)
|
|
|
(1,306
|
)
|
|
|
|
(7,713
|
)
|
|
|
(4,612
|
)
|
Satellite performance incentive payments
|
|
|
|
|
(3,524
|
)
|
|
|
(4,196
|
)
|
|
|
|
(2,022
|
)
|
|
|
(6,108
|
)
|
Preferred dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,518
|
|
|
|
3,074,353
|
|
|
|
|
(44,825
|
)
|
|
|
(143,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash and cash equivalents
|
|
|
|
|
(740
|
)
|
|
|
1,258
|
|
|
|
|
(1,676
|
)
|
|
|
(132
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
56,336
|
|
|
|
42,203
|
|
|
|
|
19,093
|
|
|
|
(74,844
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
42,203
|
|
|
|
|
|
|
|
|
38,661
|
|
|
|
113,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
(17)
|
|
|
98,539
|
|
|
|
42,203
|
|
|
|
|
57,754
|
|
|
|
38,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
286,784
|
|
|
|
18,339
|
|
|
|
|
18,139
|
|
|
|
30,661
|
|
Income taxes paid
|
|
|
|
|
8,866
|
|
|
|
343
|
|
|
|
|
21,347
|
|
|
|
34,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,650
|
|
|
|
18,682
|
|
|
|
|
39,486
|
|
|
|
64,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-76
TELESAT
HOLDINGS INC.
(All amounts in thousands of Canadian dollars, except for
per share amounts and where otherwise noted)
|
|
1.
|
Background
of the Company and Basis of Presentation
|
Telesat Holdings Inc. (the Company or
Telesat), formerly known as Telesat Canada, is the
worlds fourth largest provider of fixed satellite
services. Headquartered in Ottawa, Canada, with offices and
facilities around the world, Telesat provides voice, data, video
and Internet connectivity services using a global fleet of ten
owned and operated satellites and three leased satellites, with
two additional satellites under construction. Telesat offers a
broad suite of satellite services to more than 400 customers
worldwide, comprising some of the worlds leading
television broadcasters, cable programmers, DTH service
providers, ISPs, telecommunications carriers, corporations and
government agencies. In addition, the Company provides
satellite-related consulting and technical services and manages
the operations of 13 additional satellites for third parties.
On October 31, 2007 Canadas Public Sector Pension
Investment Board (PSP) and Loral Space &
Communications Inc. (Loral), through a newly formed
entity called Telesat Holdings Inc. completed the acquisition of
Telesat Canada from BCE Inc. (BCE). Loral and PSP
hold an economic interest in Telesat of 64% and 36%,
respectively, and a voting interest of
331/3%
and
662/3%
respectively.
As part of the same transaction, substantially all of the assets
of a Loral subsidiary, Loral Skynet Corporation
(Skynet), were transferred to Telesat, along with
the shares of all of the legacy Skynet subsidiaries. Skynet is a
satellite communications company with substantial activities in
satellite based communication services.
These consolidated financial statements reflect the financial
statements of Telesat Holdings Inc. and its subsidiaries on a
consolidated basis. The consolidated financial statements of
Telesat Canada presented for the year ended December 31,
2006 and the period January 1, 2007 to October 30,
2007, represent the Predecessor entity. The
consolidated financial statements of Telesat Holdings Inc. for
the two months ended December 31, 2007 and the year ended
December 31, 2008 represent the Successor
entity. The consolidated financial statements of Telesat
Holdings Inc. have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP) and
include the results of its wholly owned subsidiaries Telesat
Interco Inc., Telesat Canada, Infosat Communications Inc.
(Infosat), Telesat Brasil Limitada (Telesat
Brazil), The SpaceConnection, Inc.
(SpaceConnection), Telesat Satellite Holdings
Corporation and its wholly owned subsidiaries, and Telesat Asia
Pacific Satellite (HK) Limited. All transactions and balances
between these companies have been eliminated on consolidation.
As a result of the application of purchase accounting, the
financial statements of the Predecessor are not comparable with
the financial statements of the Successor, because they are, in
effect, those of a new entity. See note 3 Business
acquisitions.
Reorganization
of Predecessor
On January 1, 2007, Telesat Canada, its parent Alouette
Telecommunications Inc. (Alouette) and the Telesat
Canada subsidiary 4387678 Canada Inc. (4387678)
amalgamated. The name of the amalgamated entity was Telesat
Canada and its authorized share capital was an unlimited number
of common shares. The shares of Telesat Canada and 4387678 were
cancelled, and the class A, B, and C shares of Alouette
were converted into 100 common shares of the amalgamated entity.
The following significant non-cash adjustments were made to the
2007 comparative statement of shareholders equity as a
result of the continuity of interest accounting:
|
|
|
|
|
Decrease of $185.0 million to contributed surplus
|
|
|
|
Decrease of $579.8 million to retained earnings
|
Regulation
As an operator of a privately owned global satellite system,
Telesat is subject to: the regulatory authority of the Canadian
government and other countries which license its satellites; the
regulatory authority of other countries
F-77
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
in which it operates; and the frequency coordination process of
the International Telecommunication Union (ITU).
Telesats ability to provide satellite services in a
particular country or region is subject also to the technical
constraints of its satellites, international coordination,
constraints associated with local regulatory approval and any
limitation to those approvals.
The Company operates Canadas domestic fixed satellite
telecommunication system and is subject to regulation by the
Canadian Radio-television and Telecommunications Commission
(CRTC). Under the current regulatory regime, Telesat
has pricing flexibility subject to a price ceiling on certain
Full Period Fixed Satellite Services (FSS) offered
in Canada under minimum five-year lease arrangements.
Telesats Direct Broadcast Services offered within Canada
are also subject to CRTC regulation, but have been treated as
separate and distinct from Telesats FSS and facilities.
The CRTC has approved the specific customer agreements relating
to the sale of the capacity on the Nimiq satellites, including
the rates, terms and conditions of service set out therein.
Telesats ground network services have been forborne from
regulation since 1994. The CRTC has the right of examination of
the Companys accounting policies.
|
|
2.
|
Significant
Accounting Policies
|
These policies are consistent with those followed by the
Predecessor unless otherwise stated.
Use of
Estimates
When preparing financial statements according to GAAP,
management makes estimates and assumptions relating to the
reported amounts of revenues and expenses, assets and
liabilities and the disclosure of contingent assets and
liabilities. Telesat bases its estimates on a number of factors,
including historical experience, current events and actions that
the Company may undertake in the future, and other assumptions
that we believe are reasonable under the circumstances. Actual
results could differ from those estimates under different
assumptions or conditions. We use estimates when accounting for
certain items such as revenues, allowance for doubtful accounts,
useful lives of long-lived assets, capitalized interest, asset
impairments, inventory reserves, legal and tax contingencies,
employee compensation plans, employee benefit plans, evaluation
of minimum lease terms for operating leases, income taxes and
goodwill and intangible asset impairments. We also use estimates
when recording the fair values of assets acquired and
liabilities assumed in a business combination.
Revenue
Recognition
Telesat recognizes operating revenues when earned, as services
are rendered or as products are delivered to customers. There
must be clear proof that an arrangement exists, the amount of
revenue must be fixed or determinable and collectibility must be
reasonably assured. Consulting revenues for cost plus contracts
are recognized after the work has been completed and accepted by
the customer. The percentage of completion method is used for
fixed price consulting revenue contracts. Deferred revenues
consist of remuneration received in advance of the provision of
service and are recognized in income on a straight-line basis
over the term of the related customer contract. When it is
questionable whether or not Telesat is the principal in a
transaction, the transaction is evaluated to determine whether
it should be recorded on a gross or net basis.
Equipment sales revenues are recognized when the equipment is
delivered to and accepted by the customer. Only equipment sales
are subject to warranty or return and there is no general right
of return. Historically Telesat has not incurred significant
expense for warranties and consequently no provision for
warranty is recorded. When a transaction involves more than one
product or service, revenue is allocated to each deliverable
based on its relative fair value; otherwise, revenue is
recognized as services are provided over the term of the
customer contract.
Lease contracts that qualify for capital lease treatment are
accounted for as sales-type leases. Sales-type leases are those
where substantially all of the benefits and risks of ownership
are transferred to the customer. Sales
F-78
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
revenue recognized at the inception of the lease represents the
present value of the minimum lease payments net of any executory
costs, computed at the interest rate implicit in the lease.
Unearned finance income, effectively the difference between the
total minimum lease payments and the aggregate present value, is
deferred and recognized in earnings over the lease term to
produce a constant rate of return on the investment in the
lease. The net investment in the lease includes the minimum
lease payments receivable less the unearned finance income.
Cash and
Cash Equivalents
All highly liquid investments with an original maturity of
90 days or less are classified as cash and cash equivalents.
Inventories
Inventories are valued at the lower of cost or net realizable
value and consist of work in process and finished goods. Cost
for substantially all network equipment inventories is
determined on an average cost basis. Cost for work in process
and certain one-of-a-kind finished goods is determined using the
specific identification method.
Satellites,
Property and Other Equipment
On October 31, 2007 the existing satellites, property and
other equipment were recorded at their fair values in
conjunction with the allocation of the purchase price
(note 3) for the acquisition of Telesat and Skynet.
Satellites, property and other equipment, which are carried at
cost (equal to fair value for assets acquired on
October 31, 2007) less accumulated amortization,
include the contractual cost of equipment, capitalized
engineering and, with respect to satellites, the cost of launch
services, launch insurance and capitalized interest during
construction.
The Company shares equally with a developer, the ownership, cost
and debt of the Companys headquarters land and
building. The Company has leased the developers share of
the building which is accounted for as a capital lease.
Amortization is calculated using the straight line method over
the respective estimated service lives of the assets for the
Successor. The Predecessor used the straight line method over
the respective estimated service lives of the assets based on
equal life group procedures. The estimate of useful lives were
reviewed every year and adjusted if necessary. Below are the
estimated useful lives in years of satellites, property and
other equipment as of December 31, 2008.
|
|
|
|
|
|
|
Years
|
|
|
Satellites
|
|
|
6 to 15
|
|
Transponders under capital lease
|
|
|
6 to 14
|
|
Earth stations
|
|
|
5 to 30
|
|
Office buildings and other
|
|
|
3 to 30
|
|
The estimates of useful lives are reviewed every year and
adjusted if necessary.
Liabilities related to the legal obligation of retiring
property, plant and equipment are initially measured at fair
value and are adjusted for any changes resulting from the
passage of time and the amount of the current estimate of the
undiscounted cash flows. The liabilities recorded to date have
not been significant.
In the event of an unsuccessful launch or total in-orbit
satellite failure, all unamortized costs that are not
recoverable under launch or in-orbit insurance are recorded as
an operating expense.
The investment in each satellite will be removed from the
property accounts when the satellite has been fully amortized
and is no longer in service. When other property is retired from
operations at the end of its useful life, the amount of the
investment and accumulated amortization are removed from the
accounts. Earnings are credited with
F-79
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
the amount of any net salvage and charged with any net cost of
removal. When an item is sold prior to the end of its useful
life, the gain or loss is recognized in earnings immediately.
Impairment
of Long-Lived Assets
Long-lived assets, including finite life intangible assets and
satellites, property and other equipment, are assessed for
impairment when events or changes in circumstances indicate that
the carrying value exceeds the total undiscounted cash flows
expected from the use and disposition of the assets. If
impairment is indicated, the loss is determined by deducting the
assets fair value (based on discounted cash flows expected
from its use and disposition) from its carrying value and is
recorded as an operating expense.
Translation
of Foreign Currencies
Assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the exchange rates in effect
as of the balance sheet dates. Operating revenues and expenses,
and interest on debt transacted in foreign currencies are
reflected in the financial statements using the average exchange
rates during the period. The translation gains and losses are
included in other expense in the statement of earnings.
For those subsidiaries considered to be self-sustaining foreign
operations, assets and liabilities are translated at the
exchange rate in effect on the balance sheet date, and revenues
and expenses are translated at average exchange rates during the
year. The resulting unrealized gains or losses are reflected as
a component of other comprehensive income (OCI). For
those subsidiaries considered to be integrated foreign
operations, non-monetary assets and liabilities are translated
at their historical exchange rates and monetary assets and
liabilities are translated at the exchange rate in effect on the
balance sheet date, and revenues and expenses are translated at
average exchange rates during the year. The resulting unrealized
gains or losses are reflected as a component of net earnings.
Financial
Instruments
Transaction costs are expensed as incurred for financial
instruments classified or designated as held-for-trading
(HFT) or available-for-sale (AFS). For
other financial instruments, transaction costs are amortized to
net income in interest expense over the expected life of the
instrument using the effective interest method. Currently the
only transaction costs which Telesat has elected to capitalize
are related to debt and these costs are amortized to net income
as a component of interest expense.
Unrealized gains and losses on financial assets that are held as
available-for-sale are recorded in other comprehensive income
until realized, at which time they will be recorded in the
consolidated statement of earnings. Available-for-sale equity
securities which do not have a quoted market price will continue
to be recorded at cost.
Financial assets and financial liabilities that are classified
as held-for-trading and available-for-sale are measured at fair
value. The unrealized gains and losses relating to the
held-for-trading assets and liabilities are recorded in the
consolidated statement of earnings and in other comprehensive
income for the assets and liabilities which are classified as
available-for-sale. Loans and receivables and other liabilities
are recorded at amortized cost. Derivatives, including embedded
derivatives that must be separately accounted for, are recorded
at fair value on the consolidated balance sheet. Changes in the
fair values of derivative instruments are recognized in the
consolidated statement of earnings.
The Company has chosen to account for embedded foreign currency
derivatives in a host contract as a single instrument where the
contract requires payments denominated in the currency that is
commonly used in contracts to procure non-financial items in the
economic environment in which Telesat transacts.
F-80
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Telesat uses derivative financial instruments to manage its
exposure to foreign exchange rate risk associated with
anticipated purchases and with debt denominated in foreign
currencies, as well as to reduce its exposure to interest rate
risk associated with debt. The use of derivatives is expected to
generate enough cash flows and gains or incur losses to offset
these risks. The Companys risk management policy does not
permit the use of derivative financial instruments for
speculative purposes. Currently, Telesat does not designate any
of its derivative financial instruments as hedging instruments
for accounting purposes. All gains and losses on these
derivative financial instruments are recorded in the statement
of earnings.
The Predecessor documented all relationships between derivatives
and the items they hedged, and the risk management objective and
strategy for using various hedges. This process included linking
every derivative to a specific asset or liability on the balance
sheet, or to a specific firm commitment or to an anticipated
transaction. The effectiveness of the derivative in managing
risk was assessed when the hedge was put in place and on an
ongoing basis. Hedge accounting was stopped when a hedge was no
longer effective.
In a fair value hedging relationship, changes in both fair value
of the hedging instrument and the fair value of the hedged item
were recognized in net income. The changes in the fair value of
the hedged item were offset by changes in the fair value of the
hedging instrument to the extent that the hedging relationship
was effective. In a cash flow hedging relationship, the
effective portion of the change in the fair value of the hedging
instrument was recognized in OCI while the ineffective portion
was recognized in net income. Unrealized gains and losses in OCI
and Accumulated Other Comprehensive Income (AOCI)
were reclassified into net income and retained earnings on the
same basis that the hedged item affected net earnings.
Goodwill
and Other Intangible Assets
Goodwill and other intangible assets were recorded on the
acquisition of Telesat Canada and Skynet as described in
note 1. For goodwill and intangible assets with indefinite
useful lives, an assessment for impairment is undertaken on an
annual basis in the fourth quarter, or whenever events or
changes in circumstances indicate that the carrying amount of
these assets is likely to exceed their fair value. The Company
considers orbital slots and trade names to be indefinite lived
intangible assets. Finite-lived intangible assets consist of
revenue backlog, customer relationships, favourable leases,
transponder rights and patents, all of which were recorded in
connection with the acquisition of Telesat Canada and Skynet.
Intangible assets with finite useful lives are amortized over
their estimated useful lives using the straight-line method of
amortization. Below are the estimated useful lives of the
finite-lived intangible:
|
|
|
|
|
|
|
Years
|
|
|
Revenue backlog
|
|
|
4 to 17
|
|
Customer relationships
|
|
|
11 to 21
|
|
Favourable leases
|
|
|
3 to 4
|
|
Concession right
|
|
|
15
|
|
Transponder rights
|
|
|
6 to 14
|
|
Patents
|
|
|
18
|
|
The estimates of useful lives are reviewed every year and
adjusted if necessary.
Employee
Benefit Plans
Telesat maintains one contributory and three non-contributory
defined benefit pension plans which provide benefits based on
length of service and rate of pay. Telesat is responsible for
adequately funding these defined benefit pension plans.
Contributions are made based on various actuarial cost methods
that are permitted by pension regulatory bodies and reflect
assumptions about future investment returns, salary projections
and future service
F-81
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
benefits. Telesat also provides other post-employment and
retirement benefits, including health care and life insurance
benefits on retirement and various disability plans, workers
compensation and medical benefits to former or inactive
employees, their beneficiaries and covered dependents, after
employment but before retirement, under certain circumstances.
The Company accrues its obligations under employee benefit plans
and the related costs, net of plan assets. Pension costs and
other retirement benefits are determined using the projected
benefit method prorated on service and managements best
estimate of expected investment performance, salary escalation,
retirement ages of employees and expected health care costs.
Pension plan assets are valued at fair value which is also the
basis used for calculating the expected rate of return on plan
assets. The discount rate is based on the market interest rate
of high quality long-term bonds. Past service costs arising from
plan amendments are amortized on a straight-line basis over the
average remaining service period of the active employees at the
date of amendment. The Company deducts 10% of the benefit
obligation or the fair value of plan assets, whichever is
greater, from the net actuarial gain or loss and amortizes the
excess over the average remaining service period of active
employees. A valuation is performed at least every three years
to determine the present value of the accrued pension and other
retirement benefits. The 2008 and 2007 pension expense
calculations are extrapolated from a valuation performed as of
January 1, 2007. The accrued benefit obligation is
extrapolated from an actuarial valuation as of January 1,
2007. The most recent valuation of the pension plans for funding
purposes was as of January 1, 2007, and the next required
valuation is as of January 1, 2010.
In addition, Telesat provides certain health care and life
insurance benefits for retired employees and dependents of
Skynet. These benefits are funded primarily on a pay-as-go
basis, with the retiree generally paying a portion of the cost
through contributions, deductibles and co-insurance provisions.
Stock-Based
Compensation Plans
The Company introduced a stock incentive plan for certain key
employees in 2008 and has adopted the fair-value based method
for measuring the compensation cost of employee stock options
using the Black-Scholes pricing model.
Both Telesat Canada and Skynet offered stock-based compensation
plans to certain employees prior to being acquired by Telesat.
There were no further options granted under either of these
plans subsequent to October 30, 2007 as these plans were
discontinued with the acquisition of Telesat Canada and Skynet
by Telesat.
Income
Taxes
Current income tax expense is the estimated income taxes payable
for the current year after any refunds or the use of losses
incurred in previous years. The Company uses the liability
method to account for future income taxes. Future income taxes
reflect:
|
|
|
|
|
the temporary differences between the carrying amounts of assets
and liabilities for accounting purposes and the amounts used for
tax purposes
|
|
|
|
the benefit of unutilized tax losses that will more likely than
not be realized and carried forward to future years to reduce
income taxes.
|
The Company estimates future income taxes using the rates
enacted by tax law and those substantively enacted. The effect
of a change in tax rates on future income tax assets and
liabilities is included in earnings in the period when the
change is substantively enacted.
F-82
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Recent
Accounting Pronouncements
On January 1, 2008 the Company adopted the new accounting
standards that were issued by the Canadian Institute of
Chartered Accountants (CICA): Handbook
sections 1400 General Standards of Financial
Statement Presentation, 1535 Capital
Disclosures, 3031 Inventories, 3862
Financial Instruments Disclosures, and
3863 Financial Instruments Presentation.
Sections 1535, 3862 and 3863 have been applied
prospectively in note 18, Capital Disclosures, and
note 19, Financial Instruments. Sections 1400 and 3031
were also applied prospectively, however there was no impact on
these financial statements.
CICA Handbook Section 1400, General Standards of
Financial Statement Presentation, specifies that
Management is required to make an assessment of an entitys
ability to continue as a going concern and should take into
account all available information about the future, which is at
least but not limited to 12 months from the balance sheet
date. Disclosure is required of material uncertainties related
to events or conditions that may cast significant doubt upon the
entitys ability to continue as a going concern.
CICA Handbook Section 1535 Capital Disclosures
specifies the disclosure of an entitys objectives,
policies and processes for managing capital and how it is
meeting those objectives.
CICA Handbook Section 3031, Inventories,
replaced the old Section 3030, Inventories.
Under the new section, inventories are required to be measured
at the lower of cost and net realizable value, which
is different from the previous guidance of the lower of
cost and market. The new section also requires, when
applicable, the reversal of any write-downs previously
recognized.
CICA Handbook Section 3862, Financial
Instruments Disclosure
(Section 3862) and Section 3863, Financial
Instruments Presentation (Section 3863),
replaced Handbook Section 3861, Financial
Instruments Disclosure and Presentation. The
objective of the disclosure requirements of Section 3862 is
to provide information about the significance of financial
instruments to the Companys financial position and
performance, and the nature and extent of risks arising from
financial instruments to which the Company is exposed and how
the Company manages those risks. Section 3863 carries
forward standards for presentation of financial instruments and
non-financial derivatives and provides guidance for the
classification of financial instruments, from the perspective of
the issuer, between liabilities and equity, the classification
of related interest, dividends, losses and gains, and
circumstances in which financial assets and financial
liabilities are offset.
The Company is assessing the impact of the following standards
on its financial reporting.
In February 2008, the CICA issued handbook section 3064
Goodwill and Intangible Assets, which replaces
sections 3062 and 3450. Section 3064 applies to
goodwill and intangible assets subsequent to the initial
recognition in a business combination and establishes standards
for recognition, measurement, presentation and disclosure of
intangible assets. This new standard is effective for Telesat
beginning January 1, 2009.
In January 2009, the CICA issued handbook section 1582
Business Combinations which replaces
section 1581. This standard establishes the principles and
requirements of the acquisition method for business combination
and related disclosures and applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after January 2011 with earlier adoption permitted.
In January 2009, the CICA issued handbook section 1601
Consolidated Financial Statements and
section 1602 Non-controlling Interest which
replace section 1600. Section 1601 establishes
standards for the preparation of consolidated financial
statements. Section 1602 provides guidance on accounting
for a non-controlling interest in a subsidiary in consolidated
financial statements subsequent to a business combination. These
standards are effective on or after the beginning of the first
annual reporting period on or after January 2011 with earlier
adoption permitted.
F-83
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Fifth
Dimension Television Acquisition
On May 9, 2008, SpaceConnection completed the acquisition
of the assets of Fifth Dimension Television, with the effective
date of the agreement being April 1, 2008. The purchase
price is based on a profit-sharing arrangement for a percentage
of future monthly occasional use revenues collected, as well as
a percentage of future margins on certain space only customer
contracts, from the effective date of the acquisition until
December 31, 2010, and will not exceed $0.8 million.
Profit-sharing payments of $0.2 million have been expensed
as at December 31, 2008.
Telesat
Canada Acquisition
On October 31, 2007, PSP and Loral, through a newly formed
entity, Telesat, completed the acquisition of 100% of the common
shares of Telesat Canada from BCE Inc. Loral and PSP will hold
an economic interest in Telesat of 64% and 36%, respectively,
and a voting interest of
331/3%
and
662/3%
respectively. As part of the Telesat Canada acquisition,
substantially all of the assets of a Loral subsidiary, Loral
Skynet Corporation, were transferred to Telesat. In addition,
Telesat acquired the shares of the remaining Loral Skynet
subsidiaries. The aggregate fair value of the net assets
transferred by Loral Skynet was $773.7 million, of which
$24 million was paid using cash equivalents and the balance
in common shares and non-voting participating preferred shares
of Telesat. In addition, Loral Skynet transferred foreign
exchange forward contracts with a value of $119.9 million,
in exchange for non-voting participating preferred shares, which
were settled for cash on October 31, 2007 and have been
included in the balance of cash acquired. The Telesat Canada
purchase price was paid in cash. The shares issued as part of
the purchase transaction were valued based on the estimated fair
value of the assets contributed by Loral Skynet as agreed to by
the shareholders. The results of operations for Telesat Canada
and Skynet have been included in these consolidated financial
statements since October 31, 2007. The acquisition has been
accounted for as a purchase transaction.
The asset and liability values acquired are based on a purchase
price which was calculated as follows:
|
|
|
|
|
|
|
Total
|
|
|
Cash paid (net of cash acquired)
|
|
|
3,229,194
|
|
Shares issued (note 16)
|
|
|
869,656
|
|
Transaction costs
|
|
|
32,692
|
|
|
|
|
|
|
Purchase price
|
|
|
4,131,542
|
|
|
|
|
|
|
Other adjustments include severance costs and adjustments to the
pension plan as a result of the restructuring at both Telesat
Canada and Skynet. The plan to restructure both Telesat Canada
and Skynet was in place on October 31, 2007, for the most
part was executed on November 30, 2007 and is now fully
completed. Severance costs include payments to severed employees
in lieu of notice and benefits, as well as incentive bonus
payments that would have otherwise been received by the severed
employees had they remained with the Company. Of the total
severance costs included in the purchase price $5.0 million
was paid prior to December 31, 2007. The adjustments to the
pension plan include an increase in the benefit obligation as a
result of the early retirement program which was partially
offset by a curtailment gain due to the overall decrease in the
number of employees.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition. Telesat determined the fair value of the assets
acquired and liabilities assumed based on
F-84
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
information available as well as certain reasonable assumptions.
The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair values on
October 31, 2007:
|
|
|
|
|
Current assets
|
|
|
101,317
|
|
Satellites, property and other equipment
|
|
|
1,797,550
|
|
Other long term assets
|
|
|
19,219
|
|
Intangible assets
|
|
|
1,128,462
|
|
Assumed debt
|
|
|
(171,620
|
)
|
Current liabilities, less current portion of debt
|
|
|
(285,016
|
)
|
Future income tax liability
|
|
|
(497,419
|
)
|
Other long term liabilities
|
|
|
(407,554
|
)
|
|
|
|
|
|
Total net assets acquired
|
|
|
1,684,939
|
|
Goodwill
|
|
|
2,446,603
|
|
|
|
|
|
|
Purchase price
|
|
|
4,131,542
|
|
|
|
|
|
|
The goodwill is representative of the value attributed to the
present value of the expected future cash flows of the Company.
Of the $1,128.5 million of acquired intangible assets,
$596.3 million was assigned to orbital slots and
$17.0 million was assigned to trade names, both of which
are not subject to amortization. The remaining intangible assets
include revenue backlog of $274.5 million, customer
relationships of $207.7 million, transponder rights of
$28.5, favourable leases of $4.4 million, and patents of
$0.1 million all of which will be subject to amortization.
See note 12 for disclosure of amortization periods.
Goodwill of $331.3 million and intangible customer
relationships and backlog of $60.4 million are being
deducted for tax purposes.
Other long term liabilities assumed include severance costs of
$15.5 million and adjustments to the pension plan as a
result of the restructuring at both Telesat Canada and Skynet.
At December 31, 2007, the outstanding restructuring
liabilities were $10.5 million to be paid by December 2009.
During 2008, payments of $8.5 million were made resulting
in an outstanding restructuring liability of $2.0 million
included in accounts payable and accrued liabilities at
December 31, 2008. No new restructuring liabilities or
adjustments to existing liabilities were recorded in 2008.
Predecessor
Acquisitions
In October 2006, Telesat Canada acquired 100% of 3652041 Canada
Inc. from BCE, its shareholder, in return for a promissory note
payable of $21.2 million. The excess of the
$21.2 million cost over BCEs carrying value (a
nominal amount) has been recorded as a reduction of
$21.2 million in contributed surplus. Telesat Canada then
proceeded to amalgamate its wholly owned subsidiary 3484203
Canada Inc. with 3652041 Canada Inc., creating a new entity:
4387678 Canada Inc. 4387678 Canada Inc. then sold its
$0.7 million interest in the limited partnership units of
TMI Communications and Company, Limited Partnership (TMI) to BCE
and a numbered company owned by BCE in return for promissory
notes with a fair market value of $201 million. The excess
of the fair market value over the Telesat Canada carrying cost
was booked as an increase of $200.3 million in contributed
surplus.
Following the consummation of the Telesat Canada acquisition,
the Company operates in a single industry segment, in which it
provides satellite-based services to its broadcast, enterprise
and consulting customers around
F-85
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
the world. As such, segment disclosures are no longer required
and are therefore not included for any of the periods presented.
See note 3, Business Acquisitions.
The Company derives revenues from the following services:
|
|
|
|
|
Broadcast distribution or collection of
video and audio signals in the North American and International
markets which include television transmit and receive services,
occasional use, bundled Digital Video Compression and radio
services.
|
|
|
|
Enterprise provision of satellite capacity
and ground network services for voice, data, and image
transmission and internet access around the world.
|
|
|
|
Consulting and other all consulting
services related to space and earth segments, government
studies, satellite control services and R&D.
|
Revenues derived from the above service lines were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
Revenues
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Broadcast
|
|
|
345,382
|
|
|
|
52,771
|
|
|
|
|
254,276
|
|
|
|
249,692
|
|
Enterprise
|
|
|
333,834
|
|
|
|
53,758
|
|
|
|
|
178,888
|
|
|
|
199,617
|
|
Consulting and other
|
|
|
32,159
|
|
|
|
4,887
|
|
|
|
|
24,623
|
|
|
|
29,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
711,375
|
|
|
|
111,416
|
|
|
|
|
457,787
|
|
|
|
478,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information
Revenue by geographic region was based on the point of origin of
the revenues (destination of the billing invoice) and upon the
groupings of countries reviewed by the Chief Operating Decision
Maker, allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
Revenues
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Revenues Canada
|
|
|
357,937
|
|
|
|
60,085
|
|
|
|
|
315,200
|
|
|
|
329,838
|
|
Revenues United States
|
|
|
240,505
|
|
|
|
34,352
|
|
|
|
|
115,993
|
|
|
|
114,609
|
|
Revenues Europe, Middle East & Africa
|
|
|
47,014
|
|
|
|
6,403
|
|
|
|
|
6,549
|
|
|
|
8,578
|
|
Revenues Asia, Australia
|
|
|
33,768
|
|
|
|
5,940
|
|
|
|
|
5,550
|
|
|
|
2,639
|
|
Revenues Latin America & Caribbean
|
|
|
32,151
|
|
|
|
4,636
|
|
|
|
|
14,495
|
|
|
|
23,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
711,375
|
|
|
|
111,416
|
|
|
|
|
457,787
|
|
|
|
478,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill was not allocated to geographic regions in any of the
periods.
Telesats satellites are in geosynchronous orbit. For
disclosure purposes, the Anik and Nimiq satellites have been
classified as located in Canada, and the Telstar satellites have
been classified as located in the United States.
F-86
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Satellites, property and other equipment by geographic region,
based on the location of the asset, are allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Satellites, property and other equipment Canada
|
|
|
1,431,145
|
|
|
|
1,345,534
|
|
Satellites, property and other equipment United
States
|
|
|
441,809
|
|
|
|
434,596
|
|
Satellites, property and other equipment all others
|
|
|
10,622
|
|
|
|
10,503
|
|
|
|
|
|
|
|
|
|
|
Total satellites, property and other equipment
|
|
|
1,883,576
|
|
|
|
1,790,633
|
|
|
|
|
|
|
|
|
|
|
Major
Customers
For the year ended December 31, 2008, two customers
generating Broadcast revenues in Canada represented 18.18% and
10.94% respectively of consolidated revenues. The same two
customers represented 16.8% and 11.1% of consolidated revenues
for the two month period ended December 31, 2007, 28.5% and
13.6% for the ten months ended October 30, 2007,
predecessor entity, and 26.5% and 14.8% for the year ended
December 31, 2006, predecessor entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Debt service costs
|
|
|
286,794
|
|
|
|
47,535
|
|
|
|
|
18,060
|
|
|
|
24,643
|
|
Dividends on senior preferred shares
|
|
|
9,855
|
|
|
|
1,695
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
|
(39,008
|
)
|
|
|
(5,369
|
)
|
|
|
|
(9,512
|
)
|
|
|
(12,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,641
|
|
|
|
43,861
|
|
|
|
|
8,548
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Foreign exchange (loss)
|
|
|
(698,056
|
)
|
|
|
(118,034
|
)
|
|
|
|
(935
|
)
|
|
|
(581
|
)
|
Gain (loss) on financial
instruments(a)
|
|
|
251,686
|
|
|
|
75,098
|
|
|
|
|
(6,653
|
)
|
|
|
|
|
Interest income
|
|
|
1,888
|
|
|
|
301
|
|
|
|
|
3,130
|
|
|
|
4,504
|
|
Performance incentive payments and milestone interest expense
|
|
|
(4,057
|
)
|
|
|
(499
|
)
|
|
|
|
(4,078
|
)
|
|
|
(6,018
|
)
|
Other(b)
|
|
|
456
|
|
|
|
(835
|
)
|
|
|
|
569
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(448,083
|
)
|
|
|
(43,969
|
)
|
|
|
|
(7,967
|
)
|
|
|
(2,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The loss on financial instruments
at October 30, 2007, predecessor entity, includes a net
loss of $10.2 million related to derivatives not designated
as hedges, as well as a gain of $3.5 million related to a
fair value hedge.
|
|
(b) |
|
In May 2008, Skynet Satellite
Corporation, a wholly-owned subsidiary of Telesat, sold its
Hawley facility. Proceeds on this sale were $4.1 million
and the resulting loss on the sale of $0.1 million is
included in other expense. In February 2008, Infosat sold its
security division. Proceeds on this sale were $0.6 million
and the resulting gain on the sale of $0.4 million is
included in other expense.
|
F-87
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
|
Income tax expense (recovery)
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Future
|
|
|
(175,951
|
)
|
|
|
(60,653
|
)
|
|
|
|
24,292
|
|
|
|
1,205
|
|
|
|
|
|
Current
|
|
|
11,072
|
|
|
|
(1,517
|
)
|
|
|
|
32,785
|
|
|
|
20,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164,879
|
)
|
|
|
(62,170
|
)
|
|
|
|
57,077
|
|
|
|
21,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory income tax rate, which is a
composite of federal and provincial rates, to the effective
income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31 to
|
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Statutory income tax rate
|
|
|
33.0
|
%
|
|
|
35.3
|
%
|
|
|
|
35.3
|
%
|
|
|
35.4
|
%
|
Permanent differences
|
|
|
(5.9
|
)%
|
|
|
(22.1
|
)%
|
|
|
|
(15.4
|
)%
|
|
|
2.0
|
%
|
Adjustment for tax rate changes
|
|
|
(2.5
|
)%
|
|
|
109.1
|
%
|
|
|
|
(2.4
|
)%
|
|
|
(14.5
|
)%
|
Impact of acquisition (see note 3)
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
%
|
|
|
|
|
Valuation allowance
|
|
|
(6.8
|
)%
|
|
|
(38.3
|
)%
|
|
|
|
6.5
|
%
|
|
|
|
|
Future taxes related to other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
%
|
|
|
|
|
Charges reflected in equity
|
|
|
|
|
|
|
|
|
|
|
|
7.6
|
%
|
|
|
|
|
Other
|
|
|
(1.1
|
)%
|
|
|
9.9
|
%
|
|
|
|
2.9
|
%
|
|
|
(5.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
16.7
|
%
|
|
|
93.9
|
%
|
|
|
|
41.1
|
%
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences between the carrying
amounts of assets and liabilities for accounting purposes and
the amounts used for tax purposes are presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Future tax assets
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
8,904
|
|
|
|
7,912
|
|
Intangible assets
|
|
|
9,482
|
|
|
|
5,353
|
|
Unrealized foreign exchange loss
|
|
|
98,087
|
|
|
|
13,029
|
|
Investments
|
|
|
9,355
|
|
|
|
8,256
|
|
Loss carry forwards
|
|
|
112,386
|
|
|
|
12,610
|
|
Derivative assets
|
|
|
|
|
|
|
4,866
|
|
Other
|
|
|
5,415
|
|
|
|
3,560
|
|
Less: valuation allowance
|
|
|
(101,175
|
)
|
|
|
(34,358
|
)
|
|
|
|
|
|
|
|
|
|
Total future tax assets
|
|
|
142,454
|
|
|
|
21,228
|
|
|
|
|
|
|
|
|
|
|
F-88
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Future tax liabilities
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
(208,115
|
)
|
|
|
(170,276
|
)
|
Intangibles
|
|
|
(147,916
|
)
|
|
|
(276,005
|
)
|
Derivative liabilities
|
|
|
(47,327
|
)
|
|
|
(7,398
|
)
|
Other
|
|
|
(2,887
|
)
|
|
|
(4,596
|
)
|
|
|
|
|
|
|
|
|
|
Total future tax liabilities
|
|
|
(406,245
|
)
|
|
|
(458,275
|
)
|
|
|
|
|
|
|
|
|
|
Net future income tax liability
|
|
|
(263,791
|
)
|
|
|
(437,047
|
)
|
|
|
|
|
|
|
|
|
|
Net future income tax liability is comprised of:
|
|
|
|
|
|
|
|
|
Net future income tax asset current portion
|
|
|
2,581
|
|
|
|
2,594
|
|
Net future income tax liability long-term portion
|
|
|
(266,372
|
)
|
|
|
(439,641
|
)
|
|
|
|
|
|
|
|
|
|
Net future income tax liability
|
|
|
(263,791
|
)
|
|
|
(437,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Accounts
and Notes Receivable
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Trade receivables net of allowance for doubtful
accounts
|
|
|
63,723
|
|
|
|
54,114
|
|
Less: long-term portion of trade receivables
|
|
|
(1,790
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
61,933
|
|
|
|
53,875
|
|
|
|
|
|
|
|
|
|
|
The allowance for doubtful accounts was $5.4 at
December 31, 2008 and $4.3 million at
December 31, 2007.
The long-term portion of trade receivables includes items that
will not be collected during the subsequent year and is included
in the long-term portion of other assets in note 10.
As a result of the consolidation of facilities of the two legacy
operating entities, Telesat Canada and Loral Skynet, the Hawley
facility was slated to be sold as part of the overall
integration plan. On February 13, 2008, Skynet Satellite
Corporation, a wholly owned subsidiary of Skynet,
entered into an agreement with a third party to sell the Hawley
facility, along with most of the equipment located within the
facility. The sale closed on May 1, 2008 with net proceeds
of $4.1 million being received (see note 6).
F-89
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Current
|
|
|
Long Term
|
|
|
Current
|
|
|
Long Term
|
|
|
|
Portion
|
|
|
Portion
|
|
|
Portion
|
|
|
Portion
|
|
|
Net investment in
leases(a)
|
|
|
2,217
|
|
|
|
30
|
|
|
|
16,747
|
|
|
|
3,395
|
|
Income taxes recoverable
|
|
|
3,943
|
|
|
|
|
|
|
|
12,847
|
|
|
|
|
|
Accrued pension benefit (see note 21)
|
|
|
|
|
|
|
13,610
|
|
|
|
|
|
|
|
9,911
|
|
Prepaid expenses and
deposits(b)
|
|
|
16,006
|
|
|
|
6,755
|
|
|
|
15,236
|
|
|
|
712
|
|
Deferred
charges(c)
|
|
|
10,709
|
|
|
|
6,224
|
|
|
|
4,808
|
|
|
|
8,637
|
|
Derivative
assets(d)
|
|
|
10,805
|
|
|
|
8,797
|
|
|
|
354
|
|
|
|
|
|
Inventories(e)
|
|
|
4,723
|
|
|
|
|
|
|
|
7,239
|
|
|
|
|
|
Other
assets(f)
|
|
|
784
|
|
|
|
6,887
|
|
|
|
546
|
|
|
|
4,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,187
|
|
|
|
42,303
|
|
|
|
57,777
|
|
|
|
27,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The net investment in leases is
classified on the balance sheet in other current assets and
other long-term assets, and includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Net investment in leases as at
|
|
2008
|
|
|
2007
|
|
|
Total minimum lease payments
|
|
|
2,305
|
|
|
|
21,383
|
|
Unearned finance income
|
|
|
(58
|
)
|
|
|
(1,241
|
)
|
|
|
|
2,247
|
|
|
|
20,142
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
(2,217
|
)
|
|
|
(16,747
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
30
|
|
|
|
3,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned finance income is
allocated to income over the term of the lease in a manner that
produces a constant rate of return on the investment in the
leases. The investment in the leases for the purposes of income
recognition is composed of net minimum lease payments and
unearned finance income. Future minimum lease payments
receivable under the sales-type leases are $2.3 million in
2009.
|
|
(b)
|
|
Prepaid expense and deposits
includes mainly prepaid insurance for in-orbit satellites,
prepaid interest on bankers acceptances and deposits
related to foreign taxes.
|
|
(c)
|
|
Deferred charges include deferred
costs related to deferred revenue, as well as deferred financing
charges related to the revolving credit facility and the
Canadian term loan facility (note 14).
|
|
(d)
|
|
Derivative assets, both short and
long-term, comprise the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Derivative asset
|
|
Maturity
|
|
2007
|
|
|
2008
|
|
|
Foreign currency forward contracts
|
|
February 2, 2009 to December 1, 2009
|
|
|
10,805
|
|
|
|
354
|
|
Cross currency basis swap
|
|
October 31, 2014
|
|
|
8,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,602
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
|
Inventories are valued at lower of
cost and net realizable value and consist of $3.8 million
(2007 $5.7 million) of finished goods and
$0.9 million (2007 $1.5 million) of work
in process. Cost for substantially all network equipment
inventories is determined on an average cost basis. Cost for
work in process and certain one-of-a-kind finished goods is
determined using specific identification. All of the inventories
have been pledged as security pursuant to the terms of the
credit facilities.
|
|
(f)
|
|
Other assets, both short and long
term components, at December 31, 2008 include: tax
indemnifications receivable from Loral of $2.9 million
(note 22), other deposits of $1.1 million, investments
of $0.6 million, long term trade receivables of
$1.8 million, and other assets of $1.3 million. The
breakdown at December 31, 2007 includes: tax
indemnifications receivable from Loral of $2.3 million,
other deposits of $2.1 million, investments of
$0.6 million, and long term trade receivables of
$0.2 million.
|
|
|
|
Investments are recorded at cost.
No impairments were recorded as no events or changes in
circumstances were identified during the period that may have a
significant adverse effect on the carrying value of the
investments. Telesat has a portfolio interest in Hellas-Sat
Consortium
|
F-90
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
|
|
Limited. The consortium has one
satellite which provides regional coverage to Greece, Cyprus and
the Balkans. Telesat also holds a nominal portfolio interest in
Anik-Colombia. Telesats wholly-owned subsidiary Infosat
holds a 22% interest in Pakistans Comstar ISA Ltd., a
satellite service provider which is recorded using the equity
method.
|
|
|
11.
|
Satellites,
Property and Other Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellites
|
|
|
1,544,396
|
|
|
|
(177,768
|
)
|
|
|
1,366,628
|
|
Earth stations
|
|
|
139,227
|
|
|
|
(19,012
|
)
|
|
|
120,215
|
|
Transponders under capital lease
|
|
|
34,189
|
|
|
|
(4,943
|
)
|
|
|
29,246
|
|
Office buildings and other
|
|
|
36,248
|
|
|
|
(8,555
|
)
|
|
|
27,693
|
|
Construction in progress
|
|
|
339,794
|
|
|
|
|
|
|
|
339,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,093,854
|
|
|
|
(210,278
|
)
|
|
|
1,883,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellites
|
|
|
1,285,583
|
|
|
|
(26,324
|
)
|
|
|
1,259,259
|
|
Earth stations
|
|
|
120,210
|
|
|
|
(4,546
|
)
|
|
|
115,664
|
|
Transponders under capital lease
|
|
|
38,588
|
|
|
|
(893
|
)
|
|
|
37,695
|
|
Office buildings and other
|
|
|
32,619
|
|
|
|
(1,544
|
)
|
|
|
31,075
|
|
Construction in progress
|
|
|
346,940
|
|
|
|
|
|
|
|
346,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,823,940
|
|
|
|
(33,307
|
)
|
|
|
1,790,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost of assets under capital lease, including satellite
transponders, was $49.4 million at December 31, 2008
and $55.8 million at December 31, 2007. At
December 31, 2008 the net book value of these assets was
$29.2 million (2007 - $38.6 million). In April 2008,
SpaceConnection renegotiated the terms of two of its capital
leases. The result is a reduction to the cost of transponders
under capital lease of $13.8 million and a reduction to
capital lease liabilities of $14.6 million, and a gain of
$0.5 million reflected in other expense.
Consistent with its accounting policy, the Company tests for
asset impairment upon the occurrence of triggering events.
During the fourth quarter of 2008, the Company determined that,
based on the results of certain fuel studies, the life span of
the Nimiq 3 satellite was shorter than previously expected, and
a triggering event had occurred. Telesat therefore tested the
Nimiq 3 satellite for impairment, and upon determining that its
carrying amount was not recoverable, recorded an impairment
charge of $2.4 in operating expenses. The impairment charge was
measured as the excess of the net carrying amount of the
satellite over its fair value, with the estimated fair value
being based on the present value of the expected future cash
flows of Nimiq 3. Amortization will continue to the end of the
satellites revised estimated service life.
During the second quarter of 2008 Telesat received
$4.0 million of insurance proceeds on Anik F3 which reduced
the cost of the satellite.
In 2007, Telesats indirect subsidiary Telesat
Serviços de Telecomunicação Limitada
(TSL) recognized an asset impairment loss of
$2.1 million related to its capital assets. The impairment
loss was measured as the excess of the net carrying amount of
the asset groups over their fair value, which was estimated
based on the expected present value of cash flows associated
with each type of asset. The carrying values of earth stations
and office buildings and other were reduced by $1.8 million
and $0.3 million, respectively. The impairment loss was
included in other expense (see note 6). The impairment
resulted from the decision to lease TSLs Belo Teleport,
equipment and hub and discontinue the provision of earth segment
services in Brazil.
F-91
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Construction in progress amounts relate primarily to satellites
under construction and the related launch service costs. The
Nimiq 4 satellite was transferred out of construction in
progress to the satellites category upon final acceptance in
October 2008. At December 31, 2008 both Telstar 11N and
Nimiq 5 are under construction.
|
|
12.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets were initially established in
connection with the Telesat Canada acquisition described in
note 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue backlog
|
|
|
274,487
|
|
|
|
(44,988
|
)
|
|
|
229,499
|
|
Customer relationships
|
|
|
207,704
|
|
|
|
(14,500
|
)
|
|
|
193,204
|
|
Favourable leases
|
|
|
4,816
|
|
|
|
(1,987
|
)
|
|
|
2,829
|
|
Concession right
|
|
|
1,230
|
|
|
|
|
|
|
|
1,230
|
|
Transponder rights
|
|
|
28,497
|
|
|
|
(3,626
|
)
|
|
|
24,871
|
|
Patents
|
|
|
59
|
|
|
|
(4
|
)
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516,793
|
|
|
|
(65,105
|
)
|
|
|
451,688
|
|
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Orbital slots
|
|
|
113,347
|
|
|
|
|
|
|
|
113,347
|
|
Trade name
|
|
|
17,000
|
|
|
|
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
647,140
|
|
|
|
(65,105
|
)
|
|
|
582,035
|
|
Goodwill
|
|
|
2,446,603
|
|
|
|
|
|
|
|
2,446,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
3,093,743
|
|
|
|
(65,105
|
)
|
|
|
3,028,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue backlog
|
|
|
274,487
|
|
|
|
(5,316
|
)
|
|
|
269,171
|
|
Customer relationships
|
|
|
207,704
|
|
|
|
(2,072
|
)
|
|
|
205,632
|
|
Favourable leases
|
|
|
4,368
|
|
|
|
(218
|
)
|
|
|
4,150
|
|
Transponder rights
|
|
|
28,497
|
|
|
|
(518
|
)
|
|
|
27,979
|
|
Patents
|
|
|
59
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515,115
|
|
|
|
(8,124
|
)
|
|
|
506,991
|
|
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Orbital slots
|
|
|
596,347
|
|
|
|
|
|
|
|
596,347
|
|
Trade name
|
|
|
17,000
|
|
|
|
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
1,128,462
|
|
|
|
(8,124
|
)
|
|
|
1,120,338
|
|
Goodwill
|
|
|
2,446,603
|
|
|
|
|
|
|
|
2,446,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
3,575,065
|
|
|
|
(8,124
|
)
|
|
|
3,566,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-92
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
During the fourth quarter of 2008, Telesat performed its annual
valuation of goodwill and indefinite life intangible assets,
which resulted in an impairment charge of $483.0 million to
the orbital slots. The impairment charge was measured as the
excess of the carrying amount of orbital slots over their fair
value, with the estimated fair value being based on the present
value of the expected future cash flows to be generated through
the use of the orbital slots, and was recorded in other expense
(see note 6). The increase of the discount rate due to
current market conditions, the impact of a strengthened
U.S. dollar on the cost of satellites, as well as the
increases to insurance costs and launch services in 2008 reduced
the present value of the expected future cash flows for the
orbital slots.
After recording the impairment charges on the orbital slots and
on its Nimiq 3 satellite (see note 11), the Company
performed its annual impairment test on goodwill by comparing
the estimated fair value to the adjusted carrying value of the
reporting unit. The annual impairment test of goodwill did not
result in any impairment. Telesat will continue to monitor,
however, whether the impact of the current uncertain economic
times results in a requirement to test its balance of goodwill
more frequently than on an annual basis. If any such triggering
events are identified, a goodwill impairment test would be
performed accordingly.
Revenue backlog is amortized based on the annual rate at which
the backlog is recognized in revenue. Customer relationships,
favourable leases and patents are amortized on a straight-line
basis over the assets estimated useful life. The Company
recorded amortization expense on intangible assets of
$55.5 million for the year ended December 31, 2008
($8.1 million for the two months ended December 31,
2007).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Current
|
|
|
Long Term
|
|
|
Current
|
|
|
Long Term
|
|
|
|
|
|
|
Portion
|
|
|
Portion
|
|
|
Portion
|
|
|
Portion
|
|
|
|
|
|
Deferred revenues and
deposits(a)
|
|
|
61,960
|
|
|
|
323,608
|
|
|
|
54,652
|
|
|
|
257,256
|
|
|
|
|
|
Derivative
liabilities(b)
|
|
|
|
|
|
|
82,255
|
|
|
|
14,811
|
|
|
|
271,061
|
|
|
|
|
|
Capital lease
liabilities(c)
|
|
|
15,644
|
|
|
|
24,213
|
|
|
|
29,008
|
|
|
|
44,344
|
|
|
|
|
|
Deferred satellites performance incentive
payments(d)
|
|
|
11,425
|
|
|
|
60,895
|
|
|
|
7,533
|
|
|
|
35,791
|
|
|
|
|
|
Interest payable
|
|
|
43,517
|
|
|
|
|
|
|
|
40,146
|
|
|
|
|
|
|
|
|
|
Dividends payable on senior preferred shares (see note 15)
|
|
|
|
|
|
|
11,550
|
|
|
|
1,695
|
|
|
|
|
|
|
|
|
|
Pension and other post retirement liabilities (see note 21)
|
|
|
|
|
|
|
24,957
|
|
|
|
|
|
|
|
24,313
|
|
|
|
|
|
Other
liabilities(e)
|
|
|
5,549
|
|
|
|
38,658
|
|
|
|
4,530
|
|
|
|
29,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,095
|
|
|
|
566,136
|
|
|
|
152,375
|
|
|
|
662,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Deferred revenues represent the
Companys liability for the provision of future services
and are classified on the balance sheet in other current
liabilities and other long-term liabilities. The prepaid amount
is brought into income over the period of service to which the
prepayment applies. The net amount outstanding at
December 31, 2008 will be reflected in the statements of
loss as follows: $57.5 million in 2009, $34.0 million
in 2010, $32.6 million in 2011, $32.6 million in 2012
, $32.2 million in 2013 and $192.2 million thereafter.
|
F-93
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
(b)
|
|
Derivative liabilities, both short
and long-term, comprise the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Derivative liability
|
|
Maturity
|
|
2008
|
|
|
2007
|
|
|
Foreign currency forward contracts
|
|
January 1, 2008 to December 1, 2009
|
|
|
|
|
|
|
17,545
|
|
Cross currency basis swap
|
|
October 31, 2014
|
|
|
|
|
|
|
261,974
|
|
Interest rate swaps
|
|
January 31, 2010 to November 28, 2011
|
|
|
82,255
|
|
|
|
6,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,255
|
|
|
|
285,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
The capital lease liabilities are
classified on the balance sheet in other current liabilities and
other long-term liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Capital lease liabilities
|
|
2008
|
|
|
2007
|
|
|
Total minimum lease payments
|
|
|
48,889
|
|
|
|
90,025
|
|
Amount representing interest (9)%
|
|
|
(9,032
|
)
|
|
|
(16,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
39,857
|
|
|
|
73,352
|
|
Current portion
|
|
|
(15,644
|
)
|
|
|
(29,008
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
24,213
|
|
|
|
44,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum lease payments
payable under all capital leases are $18.7 million in 2009,
$6.0 million in 2010, $6.1 million in 2011,
$6.0 million in 2012, $6.0 million in 2013 and
$6.1 million thereafter.
|
|
(d)
|
|
Deferred satellite performance
incentive payments are payable over the lives of the Nimiq 1,
Nimiq 4, Anik F1, Anik F2, Anik F3 and Anik F1R satellites.
The present value of the payments is capitalized as part of the
cost of the satellite, recorded as a liability, and charged
against operations as part of the normal amortization of the
satellite. The present value of the amounts payable on the
successful operation of the transponders are $11.4 million
in 2009, $5.2 million in 2010, $4.5 million in 2011,
$3.8 million in 2012, $4.0 million in 2013 and
$43.4 million thereafter.
|
|
(e)
|
|
Other liabilities at
December 31, 2008 include: tax indemnifications payable to
Loral (note 22) of $8.5 million (2007
$6.9 million), potential income tax liabilities of
$2.6 million (2007 $1.8 million),
unfavourable leases of $1.9 million (2007
$2.2 million), unfavourable customer revenue backlog of
$12.8 million (2007 $15.2 million), income
taxes payable of $0.8 million (2007
$0.9 million), promissory note payable to Loral of
$7.4 million (note 23), and other liabilities of
$10.2 million (2007 $7.3 million).
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Senior secured credit facilities(a):
|
|
|
|
|
|
|
|
|
Revolving facility
|
|
|
|
|
|
|
20,000
|
|
The Canadian term loan facility
|
|
|
195,000
|
|
|
|
200,000
|
|
The U.S. term loan facility
|
|
|
2,087,010
|
|
|
|
1,687,652
|
|
The U.S. term loan II facility
|
|
|
179,207
|
|
|
|
5,842
|
|
Senior bridge
loan(b)
|
|
|
|
|
|
|
667,806
|
|
Senior
notes(c)
|
|
|
818,620
|
|
|
|
|
|
Senior subordinated bridge
loan(d)
|
|
|
|
|
|
|
209,324
|
|
Senior subordinated
notes(e)
|
|
|
256,400
|
|
|
|
|
|
Other debt
financing(f)
|
|
|
258
|
|
|
|
3,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,536,495
|
|
|
|
2,794,363
|
|
Current portion
|
|
|
(23,272
|
)
|
|
|
(18,419
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
3,513,223
|
|
|
|
2,775,944
|
|
|
|
|
|
|
|
|
|
|
F-94
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
The outstanding debt balances above, with the exception of the
revolving credit facility and the Canadian term loan, are shown
net of related debt issuance costs. The debt issuance costs
related to the revolving credit facility and Canadian term loan
are included in deferred charges (see note 10) and are
amortized to interest expense on a straight-line basis. All
other debt issuance costs are amortized to interest expense
using the effective interest method.
|
|
|
|
(a)
|
The senior secured credit facilities are secured by
substantially all of Telesats assets. Under the terms of
these facilities, Telesat is required to comply with certain
covenants including financial reporting, maintenance of certain
financial covenant ratios for leverage and interest coverage, a
requirement to maintain minimum levels of satellite insurance,
restrictions on capital expenditures, a restriction on
fundamental business changes or the creation of subsidiaries,
restrictions on investments, restrictions on dividend payments,
restrictions on the incurrence of additional debt, restrictions
on asset dispositions, and restrictions on transactions with
affiliates. The financial covenant ratios include total debt to
EBITDA for covenant purposes (earnings before interest, taxes,
depreciation, amortization and other charges) and EBITDA for
covenant purposes to interest expense. Both financial covenant
ratios become tighter over the term of the credit facility. At
December 31, 2008 Telesat was in compliance with all of the
required covenants.
|
Telesat was required to hedge, at fixed rates, prior to
February, 2008, 50% of its floating interest rate debt for a
three year period ending October 31, 2010. The Company has
complied with this obligation. These derivative instruments have
not been designated as hedging instruments for accounting
purposes.
Each tranche of the credit facility is subject to mandatory
principal repayment requirements, which, in the initial years,
are generally an annual amount representing 1% of the initial
aggregate principal amount, payable quarterly. The senior
secured credit facility has several tranches which are described
below:
|
|
|
|
(i)
|
A revolving Canadian dollar denominated credit facility (the
revolving facility) of up to the Canadian dollar
equivalent of $153 million (US$124.9 million) is
available to Telesat. This revolving facility matures on
October 31, 2012 and is available to be drawn at any time.
The drawn loans will bear interest at the prime rate or LIBOR or
Bankers Acceptance plus an applicable margin of 175 to
275 basis points per annum. Undrawn amounts under the
facility are subject to a commitment fee. As at
December 31, 2008, no funds were drawn under this facility.
|
|
|
|
|
(ii)
|
The Canadian term loan facility is a $200 million loan
facility denominated in Canadian dollars, bears interest at a
floating rate of the Bankers Acceptance rate plus an
applicable margin of 275 basis points per annum, and has a
maturity of October 31, 2012. The required repayments on
the Canadian term loan facility were $5 million for the
year ended December 31, 2008 and will be $10 million
for the year ended December 31, 2009, $15 million for
the year ended December 31, 2010, $90 million for the
year ended December 31, 2011 and $80 million for the
year ended December 31, 2012. The payments will be made
quarterly in varying amounts. The average interest rate was
6.57% for the year ended December 31, 2008,
and 7.55% for the two months ended December 31, 2007. This
facility was fully drawn at December 31, 2008 and principal
repayments are being made as required.
|
|
|
|
|
(iii)
|
The U.S. term loan facility is a $1,755 million loan
facility denominated in US dollars ($2,149 million CAD at
December 31, 2008), bears interest at LIBOR plus an
applicable margin of 300 basis points per annum, and has a
maturity of October 31, 2014. The average interest rate was
6.35% for the year ended December 31, 2008, and 7.92% for
the two months ended December 31, 2007. This facility was
fully drawn at December 31, 2008 and principal repayments
are being made as required.
|
|
|
|
|
(iv)
|
The U.S. term loan II facility is a $150 million
delayed draw facility denominated in US dollars
($183.7 million CAD at December 31, 2008), bears
interest at LIBOR plus an applicable margin of 300 basis
points per annum, and has a maturity of October 31, 2014.
The average interest rate was
|
F-95
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
|
|
6.17% for the year ended December 31, 2008 and 8.0% for the
two months ended December 31, 2007. The U.S. term
loan II facility was available to be drawn for
12 months after the closing of the Telesat Canada
acquisition to fund capital expenditures. The undrawn amount of
the U.S. term loan II was subject to a commitment fee.
This facility was fully drawn at December 31, 2008 and
principal repayments are being made as required.
|
|
|
|
|
(b)
|
The Senior bridge loan was a $692.8 million unsecured loan
facility denominated in US dollars ($684.6 million CAD at
December 31, 2008), guaranteed by certain Telesat
subsidiary entities. This facility had a maturity of
October 31, 2008 and an initial interest rate per annum
equal to the greater of 9% or three-month LIBOR plus the
applicable margin. The applicable margin increased over time
subject to an interest rate cap of 11%. The average interest
rate was 9.0% for the two months ended December 31, 2007
and 9.0% for the January 1, 2008 to June 29, 2008
period.
|
|
|
|
|
(c)
|
On June 30, 2008, Telesat exchanged the outstanding
US$692.8 million Senior bridge loan for
US$692.8 million Senior notes. The Senior notes bear
interest at an annual rate of 11.0% and are due November 1,
2015. The Senior notes include covenants or terms that restrict
Telesats ability to, among other things, (i) incur
additional indebtedness, (ii) incur liens, (iii) pay
dividends or make certain other restricted payments, investments
or acquisitions, (iv) enter into certain transactions with
affiliates, (v) modify or cancel the Companys
satellite insurance, (vi) effect mergers with another
entity, and (vii) redeem the Senior notes prior to
May 1, 2012, in each case subject to exceptions provided in
the Senior notes indenture.
|
|
|
|
|
(d)
|
The Senior subordinated bridge loan was a $217.2 million
unsecured loan facility denominated in US dollars
($214.6 million CAD), guaranteed by certain Telesat
subsidiary entities. This facility had a maturity of
October 31, 2008 and an initial interest rate per annum
equal to the greater of 10.5% or three-month LIBOR plus the
applicable margin. The applicable margin increased over time
subject to an interest rate cap of 12.5%. The average interest
rate was 10.5% for the two months ended December 31, 2007,
and 10.5% for the January 1, 2008 to June 29, 2008
period.
|
|
|
|
|
(e)
|
On June 30, 2008, Telesat also exchanged the outstanding
US$217.2 million Senior subordinated bridge loan for
US$217.2 million Senior subordinated notes. The Senior
subordinated notes bear interest at a rate of 12.5% and are due
November 1, 2017. The Senior subordinated notes include
covenants or terms that restrict Telesats ability to,
among other things, (i) incur additional indebtedness,
(ii) incur liens, (iii) pay dividends or make certain
other restricted payments, investments or acquisitions,
(iv) enter into certain transactions with affiliates,
(v) modify or cancel the Companys satellite
insurance, (vi) effect mergers with another entity, and
(vii) redeem the Senior subordinated notes prior to
May 1, 2013, in each case subject to exceptions provided in
the Senior subordinated notes indenture.
|
|
|
|
|
(f)
|
Other debt financing includes the financing for the
Companys headquarters building. With respect to the
headquarters building, the Company shares equally with the
developer, the ownership, cost and debt of the building. The
Company has leased the developers share for twenty years
beginning January 25, 1989 for an annual rent, excluding
operating costs, of $1.7 million. Total headquarters
financing of $0.2 million includes the amount owing under
this capital lease of $0.1 million at December 31,
2008. The imputed interest rate for the capital lease is 10.69%
per annum.
|
Mortgage financing for the Companys share of the facility
has been arranged by the developer for a twenty-year term
coincident with the lease with interest at 11% per annum and
with annual payments of principal and interest of
$1.9 million.
F-96
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
The outstanding balance of long term debt, excluding debt
issuance costs, will be repaid as follows (in millions of
Canadian dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
33.6
|
|
38.3
|
|
113.3
|
|
103.3
|
|
23.3
|
|
3,308.2
|
|
3,620.0
|
|
|
15.
|
Senior
Preferred Shares
|
Telesat issued 141,435 Senior Preferred Shares in exchange for
cash with an issue price of $1,000 per Senior Preferred Share on
October 31, 2007 as part of the Telesat Canada acquisition
transaction described in notes 1 and 3. The Senior
Preferred Shares rank in priority, with respect to the payment
of dividends and return of capital upon liquidation, dissolution
or
winding-up,
ahead of the shares of all other classes of Telesat stock which
have currently been created, as well as any other shares that
may be created that by their terms rank junior to the Senior
Preferred Shares. The Senior Preferred Shares are entitled to
receive cumulative preferential dividends at a rate of 7% per
annum on the Liquidation Value, being $1,000 per Senior
Preferred Share plus all accrued and unpaid dividends. The
annual dividend may be paid in cash if such payment is permitted
under the terms of (i) the senior secured credit facilities
and the indenture governing the senior notes, and (ii) any
indebtedness incurred to refinance the senior secured credit
facilities or the senior notes. If the cash payment is not
permitted, the dividends will be paid in Senior Preferred Shares
based on an issue price of $1,000 per Senior Preferred Share.
Dividends of $11.6 million (note 13) have been
accrued at December 31, 2008 (2007
$1.7 million, see note 13) and included as
interest expense.
The Senior Preferred Shares may be submitted by the holder for
redemption on or after the twelfth anniversary of the date of
issue, subject to compliance with law. Upon a change of control
which occurs after the fifth anniversary of the issue of the
Senior Preferred Shares, or on the fifth anniversary if a change
of control occurs prior to the fifth anniversary of the issue,
Telesat must make an offer of redemption to all holders of
Senior Preferred Shares, and must redeem any Senior Preferred
Shares for which the offer of redemption is accepted within
25 days of such offer. As a result, the Senior Preferred
Shares have been classified as a liability on the balance sheet.
The holders of the Senior Preferred Shares are not entitled to
receive notice of or to vote at any meeting of shareholders of
the Company except for meetings of the holders of the Senior
Preferred Shares as a class, called to amend the terms of the
Senior Preferred Shares, or otherwise as required by law.
The authorized capital of the Company is comprised of:
(i) an unlimited number of common shares, (ii) an
unlimited number of voting participating preferred shares,
(iii) an unlimited number of non-voting participating
preferred shares, (iv) an unlimited number of redeemable
common shares, (v) an unlimited number of redeemable
non-voting participating preferred shares,
(vi) 1,000 director voting preferred shares, and
(vii) 325,000 senior preferred shares. None of the
Redeemable Common Shares or Redeemable Non-Voting Participating
Preferred Shares have been issued as at December 31, 2008.
Common
Shares
The holders of the Common Shares are entitled to receive notice
of and to attend all annual and special meetings of the
shareholders of the Company and to one vote in respect of each
common share held on all matters at all such meetings, except in
respect of a class vote applicable only to the shares of any
other class, in respect of which the common shareholders shall
have no right to vote. The holders of the Common Shares are
entitled to receive dividends as may be declared by the Board of
Directors of the Company, and are entitled to share in the
distribution of the assets of the Company upon liquidation,
winding-up
or dissolution, subject to the rights, privileges and conditions
attaching to any other class of shares ranking in order of
priority. The Common Shares are
F-97
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
convertible at the holders option, at any time, into
Voting Participating Preferred Shares or Non-Voting
Participating Preferred Shares, on a one-for-one basis.
The following table provides the details of the issued and
outstanding Common Shares as at December 31, 2008. All
amounts are in thousands of Canadian dollars, except the number
of shares:
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
Number
|
|
|
Value ($)
|
|
|
Opening balance, October 31, 2007
|
|
|
1
|
|
|
|
|
|
Issued for cash (notes 1 and 3)
|
|
|
35,172,218
|
|
|
|
311,124
|
|
Issued in exchange for contributed assets (notes 1 and 3)
|
|
|
39,080,241
|
|
|
|
445,290
|
|
|
|
|
|
|
|
|
|
|
Ending balances, December 31, 2008 and 2007
|
|
|
74,252,460
|
|
|
|
756,414
|
|
|
|
|
|
|
|
|
|
|
Voting
Participating Preferred Shares
The rights, privileges and conditions of the Voting
Participating Preferred Shares are identical in all respects to
those of the Common Shares, except for the following:
|
|
|
|
|
The holders of Voting Participating Preferred Shares are not
entitled to vote at meetings of the shareholders of the Company
on resolutions electing directors.
|
|
|
|
For all other meetings of the shareholders of the Company, the
holders of Voting Participating Preferred Shares are entitled to
a variable number of votes per Voting Participating Preferred
Share based on the number of Voting Participating Preferred
Shares, Non-Voting Participating Preferred Shares and Redeemable
Non-Voting Participating Preferred Shares outstanding on the
record date of the given meeting of the shareholders of the
Company.
|
|
|
|
The Voting Participating Preferred Shares are convertible, at
any time, at the holders option into Common Shares or
Non-Voting Participating Preferred Shares on a one-for-one basis
as long as the result of such conversion does not cause the
Company to cease to be a qualified corporation
within the meaning of the Canadian Telecommunication Common
Carrier Ownership and Control Regulations pursuant to the
Telecommunications Act (Canada).
|
Non-Voting
Participating Preferred Shares
The rights, privileges and conditions of the Non-Voting
Participating Preferred Shares are identical in all respects to
those of the Common Shares, except for the following:
|
|
|
|
|
The holders of Non-Voting Participating Preferred Shares are not
entitled to vote on any matter at meetings of the shareholders
of the Company, except in respect of a class vote applicable
only to the Non-Voting Participating Preferred Shares.
|
|
|
|
The Non-Voting Participating Preferred Shares are convertible,
at any time, at the holders option into Common Shares or
Voting Participating Preferred Shares on a one-for-one basis as
long as the result of such conversion does not cause the Company
to cease to be a qualified corporation within the
meaning of the Canadian Telecommunication Common Carrier
Ownership and Control Regulations pursuant to the
Telecommunications Act (Canada).
|
F-98
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Director
Voting Preferred Shares
The rights, privileges and conditions of the Director Voting
Preferred Shares are identical in all respects to those of the
Common Shares, except for the following:
|
|
|
|
|
The holders of Director Voting Preferred Shares are entitled to
receive notice of and to attend all meetings of the shareholders
of the Company at which directors of the Company are to be
elected. The holders of the Director Voting Preferred Shares are
not entitled to attend meetings of the shareholders of the
Company and have no right to vote on any matter other than the
election of directors of the Company.
|
|
|
|
The holders of Director Voting Preferred Shares are entitled to
receive annual non-cumulative dividends of $10 per share if
declared by the Board of Directors of the Company, in priority
to the payment of dividends on the Common Shares, Voting
Participating Preferred Shares, Non-Voting Participating
Preferred Shares, Redeemable Common Shares, and Redeemable
Non-Voting Participating Preferred Shares, but after payment of
any accrued dividends on the Senior Preferred Shares.
|
|
|
|
In the event of liquidation,
wind-up or
dissolution, the holders of Director Voting Preferred Shares are
entitled to receive $10 per share in priority to the payment of
dividends on the Common Shares, Voting Participating Preferred
Shares, Non-Voting Participating Preferred Shares, Redeemable
Common Shares, and Redeemable Non-Voting Participating Preferred
Shares, but after payment of any accrued dividends on the Senior
Preferred Shares.
|
|
|
|
The Director Voting Preferred Shares are redeemable at the
option of the Company, at any time, at a redemption price of $10
per share.
|
The following table provides the details of the issued and
outstanding preferred shares as at December 31, 2008 and
2007. See note 3 for a description of the various
transactions. All amounts are in thousands of Canadian dollars,
except share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Voting
|
|
|
|
|
|
|
|
|
|
Voting Participating
|
|
|
Participating
|
|
|
Director Voting
|
|
|
Total
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
Value
|
|
|
|
|
|
Value
|
|
|
|
|
|
Value
|
|
|
|
Number
|
|
|
($)
|
|
|
Number
|
|
|
($)
|
|
|
Number
|
|
|
($)
|
|
|
Number
|
|
|
($)
|
|
|
Opening balance, October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued for cash
|
|
|
7,034,444
|
|
|
|
117,388
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
10
|
|
|
|
7,035,444
|
|
|
|
117,398
|
|
Issued in exchange for contributed assets
|
|
|
|
|
|
|
|
|
|
|
25,794,025
|
|
|
|
304,449
|
|
|
|
|
|
|
|
|
|
|
|
25,794,025
|
|
|
|
304,449
|
|
Issued in exchange for the novation of forward contracts from
Loral Skynet
|
|
|
|
|
|
|
|
|
|
|
10,159,799
|
|
|
|
119,917
|
|
|
|
|
|
|
|
|
|
|
|
10,159,799
|
|
|
|
119,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2008 and 2007
|
|
|
7,034,444
|
|
|
|
117,388
|
|
|
|
35,953,824
|
|
|
|
424,366
|
|
|
|
1,000
|
|
|
|
10
|
|
|
|
42,989,268
|
|
|
|
541,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-99
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
17.
|
Cash Flow
Information
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash and cash equivalents is comprised of:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
26,584
|
|
|
|
32,737
|
|
Short term investments, original maturity 90 days or less
|
|
|
71,955
|
|
|
|
9,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,539
|
|
|
|
42,203
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities are comprised of:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(3,303
|
)
|
|
|
(4,718
|
)
|
Other assets
|
|
|
(34,885
|
)
|
|
|
132,768
|
|
Accounts payable and accrued liabilities
|
|
|
(12,947
|
)
|
|
|
72,380
|
|
Income taxes payable
|
|
|
960
|
|
|
|
(749
|
)
|
Other liabilities
|
|
|
99,034
|
|
|
|
5,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,859
|
|
|
|
205,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Non-cash investing and financing activities are comprised of:
|
|
|
|
|
|
|
|
|
Purchase of satellites, property and other equipment
|
|
|
3,595
|
|
|
|
4,767
|
|
Purchase of concession right
|
|
|
1,230
|
|
|
|
|
|
Shares issued in exchange for assets contributed (note 3)
|
|
|
|
|
|
|
869,656
|
|
Telesat Holdings Inc. is a privately held company. The
Companys financial strategy is designed to maintain
compliance with its financial covenants under its senior secured
credit facility, and to provide adequate returns to its
shareholders and other stakeholders. Telesat meets these
objectives through its monitoring of its financial covenants and
operating results on a quarterly basis.
The Company defines its capital as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Shareholders equity, excluding accumulated other
comprehensive loss
|
|
|
477,174
|
|
|
|
1,294,127
|
|
Debt financing
|
|
|
3,536,495
|
|
|
|
2,794,363
|
|
Cash and cash equivalents
|
|
|
98,539
|
|
|
|
42,203
|
|
Telesat manages its capital by measuring the financial covenant
ratios contained in its senior secured credit agreement (the
credit agreement), dated October 31, 2007 and
which terminates in October 2014. As of December 31, 2008,
the Company was subject to three financial covenant compliance
tests: a maximum Consolidated Total Debt to Consolidated
Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) for covenant purposes ratio test, a minimum
Consolidated EBITDA for covenant purposes to Consolidated
Interest Expense ratio test and a maximum Permitted Capital
Expenditure Amount test. Compliance with financial covenants is
measured on a quarterly basis, except for the maximum Permitted
Capital Expenditure Amount which is only measured at the end of
every fiscal year.
F-100
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
As of December 31, 2008, Telesats Consolidated Total
Debt to Consolidated EBITDA for covenant purposes ratio, for
credit agreement compliance purposes, was 7.29:1, which was less
than the maximum test ratio of 9.50:1. The Consolidated EBITDA
for covenant purposes to Consolidated Interest Expense ratio,
for credit agreement compliance purposes, was 1.74:1, which was
greater than the minimum test ratio of 1.20:1. These test ratios
were constant for the 2008 financial year. The Capital
Expenditure Amount, for credit agreement compliance purposes,
was $263.6 million, which was less than the maximum US
$325.0 million permitted under the credit agreement. The
maximum Permitted Capital Expenditure Amount varies in each
fiscal year with the possibility to carry forward or carry back
unused amounts based on conditions specified in the credit
agreement.
For the quarter ending March 31, 2009, the Consolidated
Total Debt to Consolidated EBITDA for covenant purposes ratio
test becomes 9.25:1, and the ratio test generally becomes more
restrictive over the life of the credit agreement, such that for
the period beginning October 1, 2013, the ratio test is a
maximum of 5.50:1. For the quarter ending June 30, 2009,
the minimum Consolidated EBITDA for covenant purposes to
Consolidated Interest Expense ratio is 1.25:1, and the ratio
test generally becomes more restrictive over the life of the
credit agreement, such that for the quarter ending
September 30, 2014, the minimum test ratio is 1.95:1.
As part of the on-going monitoring of Telesats compliance
with its financial covenants, interest rate risk due to variable
interest rate debt is managed through the use of interest rate
swaps (note 19), and foreign exchange risk exposure arising
from principal and interest payments on Telesats debt is
partially managed through a cross currency basis swap
(note 19). In addition, operating expenses are tracked
against budget on a monthly basis, and this analysis is reviewed
by senior management.
|
|
19.
|
Financial
Instruments
|
Fair
Value
Fair value is the amount that willing parties would accept to
exchange a financial instrument based on the current market for
instruments with the same risk, principal and remaining
maturity. Where possible, fair values are based on the quoted
market values in an active market. In the absence of an active
market, we determine fair values based on prevailing market
rates (bid and ask prices, as appropriate) for instruments with
similar characteristics and risk profiles or internal or
external valuation models, such as option pricing models and
discounted cash flow analysis, using observable market-based
inputs.
Estimates of fair values are affected significantly by the
assumptions for the amount and timing of estimated future cash
flows and discount rates, which all reflect varying degrees of
risk. Potential income taxes and other expense that would be
incurred on disposition of these financial instruments are not
reflected in the fair values. As a result, the fair values are
not necessarily the net amounts that would be realized if these
instruments were actually settled.
The carrying amounts for cash and cash equivalents, short term
investments, trade receivables, promissory notes receivable,
other current liabilities, accounts payable and accrued
liabilities, and debt due within one year approximate fair
market value due to the short maturity of these instruments.
Derivative instruments are based on third party quotes
reflecting observable market inputs for interest and currency
rates. At December 31, 2008 the fair value of the debt
financing is equal to the market value derived from transactions
and quotations from third parties excluding financing charges
considering market interest rates. At December 31, 2007 the
fair value of the debt financing was equal to its carrying
value, excluding financing charges, due to the short period of
time elapsed since the assumption of the debt.
F-101
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
The carrying amounts and fair values of financial instruments
were as follows as at:
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans &
|
|
|
|
|
|
|
|
|
|
HFT
|
|
|
AFS
|
|
|
Receivables
|
|
|
Total
|
|
|
Fair value
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
98,539
|
|
|
|
|
|
|
|
|
|
|
|
98,539
|
|
|
|
98,539
|
|
Accounts and notes receivable
|
|
|
|
|
|
|
|
|
|
|
61,933
|
|
|
|
61,933
|
|
|
|
61,933
|
|
Derivative financial instruments
|
|
|
19,602
|
|
|
|
|
|
|
|
|
|
|
|
19,602
|
|
|
|
19,602
|
|
Other assets
|
|
|
14,936
|
|
|
|
637
|
|
|
|
2,202
|
|
|
|
17,775
|
|
|
|
17,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,077
|
|
|
|
637
|
|
|
|
64,135
|
|
|
|
197,849
|
|
|
|
197,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
|
|
|
|
|
HFT
|
|
|
Other
|
|
|
Total
|
|
|
Fair value
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
48,764
|
|
|
|
48,764
|
|
|
|
48,764
|
|
Debt
|
|
|
|
|
|
|
3,536,237
|
|
|
|
3,536,237
|
|
|
|
2,371,014
|
|
Derivative financial instruments
|
|
|
82,255
|
|
|
|
|
|
|
|
82,255
|
|
|
|
82,255
|
|
Other liabilities
|
|
|
|
|
|
|
288,236
|
|
|
|
288,236
|
|
|
|
191,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,255
|
|
|
|
3,873,237
|
|
|
|
3,955,492
|
|
|
|
2,693,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans &
|
|
|
|
|
|
|
|
|
|
HFT
|
|
|
AFS
|
|
|
Receivables
|
|
|
Total
|
|
|
Fair value
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
42,203
|
|
|
|
|
|
|
|
|
|
|
|
42,203
|
|
|
|
42,203
|
|
Accounts and notes receivable
|
|
|
|
|
|
|
|
|
|
|
55,299
|
|
|
|
55,299
|
|
|
|
55,299
|
|
Derivative financial instruments
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
354
|
|
|
|
354
|
|
Other assets
|
|
|
7,203
|
|
|
|
|
|
|
|
|
|
|
|
7,203
|
|
|
|
7,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,760
|
|
|
|
|
|
|
|
55,299
|
|
|
|
105,059
|
|
|
|
105,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-102
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
|
|
|
|
|
HFT
|
|
|
Other
|
|
|
Total
|
|
|
Fair value
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
81,221
|
|
|
|
81,221
|
|
|
|
81,221
|
|
Debt
|
|
|
|
|
|
|
2,792,575
|
|
|
|
2,792,575
|
|
|
|
2,865,116
|
|
Derivative financial instruments
|
|
|
285,872
|
|
|
|
|
|
|
|
285,872
|
|
|
|
285,872
|
|
Other liabilities
|
|
|
|
|
|
|
228,654
|
|
|
|
228,654
|
|
|
|
230,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,872
|
|
|
|
3,102,450
|
|
|
|
3,388,322
|
|
|
|
3,462,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company, through its financial assets and liabilities, is
exposed to various risks. The following analysis provides a
measurement of risks as at the balance sheet date of
December 31, 2008.
Measurement
of Risks
Credit
Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash
equivalents, short term investments, derivative assets, other
assets and accounts receivable. At December 31, 2008 the
maximum exposure to credit risk is equal to the carrying value
of the financial assets, $197.8 million (2007
$105.1 million) as listed above. Cash and cash equivalents
and short term investments are invested with high quality
investment grade financial institutions and are governed by the
Companys corporate investment policy, which aims to reduce
credit risk by restricting investments to high-grade US dollar
and Canadian dollar denominated investments.
Telesat may be exposed to credit risk if counterparties to its
derivative instruments are unable to meet their obligations. It
is expected that these counterparties will be able to meet their
obligations as they are institutions with strong credit ratings.
Telesat regularly monitors the credit risk and credit exposure.
Telesat has a number of diverse customers, which limits the
concentration of credit risk with respect to accounts
receivable. The Company has credit evaluation, approval and
monitoring processes intended to mitigate potential credit
risks. Telesats standard payment terms are 30 days.
Interest at a rate of 1.5% per month, compounded monthly, is
typically charged on balances remaining unpaid at the end of the
standard payment terms. Telesats historical experience
with customer defaults has been minimal. As a result, Telesat
considers the credit quality of its North American customers to
be high; however due to the additional complexities of
collecting from its International customers the Company
considers the credit quality of its International customers to
be lower than the North American customers. At December 31,
2008, North American and International customers made up 64% and
36% of the outstanding trade receivable balance, respectively.
Anticipated bad debt losses have been provided for in the
allowance for doubtful accounts. The allowance for doubtful
accounts at December 31, 2008 was $5.4 million (2007 -
$4.3 million). A reconciliation of the allowance for
doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1 and October 31, respectively
|
|
|
4.3
|
|
|
|
4.2
|
|
Provision for receivables impairment
|
|
|
1.6
|
|
|
|
0.2
|
|
Receivables written off during the period as uncollectible
|
|
|
(0.5
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
|
5.4
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
F-103
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Foreign
Exchange Risk
The Companys operating results are subject to fluctuations
as a result of exchange rate variations to the extent that
transactions are made in currencies other than Canadian dollars.
The most significant impact of variations in the exchange rate
is on the US dollar denominated debt financing. At
December 31, 2008, approximately $3,341 million of the
$3,536 million total debt financing
(note 14) is the Canadian dollar equivalent of the US
dollar denominated portion of the debt.
Telesat uses forward contracts to hedge foreign currency risk on
anticipated transactions, mainly related to the construction of
satellites. At December 31, 2008, the Company had
$61.0 million (2007 $196.9 million) of
outstanding foreign exchange contracts which require the Company
to pay Canadian dollars to receive US $58.7 million
(2007 US $198.9 million) for future capital
expenditures. At December 31, 2008, the fair value of these
derivative contract liabilities was an unrealized gain of
$10.8 million (December 31, 2007
unrealized loss of $17.5 million). This
non-cash gain will remain unrealized until the contracts are
settled. These forward contracts are due between
February 2, 2009 and December 1, 2009.
The Company has also entered into a cross currency basis swap to
hedge the foreign currency risk on a portion of its US dollar
denominated debt. Telesat uses natural hedges to manage the
foreign exchange risk on operating cash flows. At
December 31, 2008, the Company had a cross currency basis
swap of $1,212 million (2007
$1,224 million) which requires the Company to pay Canadian
dollars to receive US $1,043.5 million (2007 US
$1,054 million). At December 31, 2008, the fair value
of this derivative contract was an unrealized gain of
$8.8 million (2007 unrealized loss of
$262 million). This non-cash gain will remain unrealized
until the contract is settled. This contract is due on
October 31, 2014.
The Companys main currency exposures as at
December 31, 2008 lie in its US dollar denominated cash and
cash equivalents, accounts receivable, accounts payable and debt
financing.
A five percent weakening of the Canadian dollar against the US
dollar at December 31, 2008 would have increased the net
loss and decreased other comprehensive loss for the year by
$189.4 million and $0.3 million, respectively. A five
percent strengthening of the Canadian dollar against the US
dollar at December 31, 2008 would have decreased the net
loss and increased other comprehensive loss for the year by
$189.4 million and $0.3 million, respectively. This
analysis assumes that all other variables, in particular
interest rates, remain constant.
Interest
Rate Risk
The Company is exposed to interest rate risk on its cash and
cash equivalents and its long term debt which is primarily
variable rate financing. Changes in the interest rates could
impact the amount of interest Telesat is required to pay.
Telesat uses interest rate swaps to hedge the interest rate risk
related to variable rate debt financing. At December 31,
2008, the fair value of these derivative contract liabilities
was an unrealized loss of $82.3 million (2007
unrealized loss of $6.4 million). This non-cash
loss will remain unrealized until the contracts are settled.
These contracts are due between January 31, 2010 and
November 28, 2011.
If the interest rates on the unhedged variable rate debt change
by 0.25% this would result in a change in the net loss of
approximately $4.0 million for the year ended
December 31, 2008.
F-104
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Liquidity
Risk
The Company maintains credit facilities to ensure it has
sufficient available funds to meet current and foreseeable
financial requirements. The following are the contractual
maturities of financial liabilities as at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions of Canadian Dollars
|
|
Amount
|
|
|
Cash Flows
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
After 2012
|
|
|
Accounts payable and accrued liabilities
|
|
|
48.8
|
|
|
|
48.8
|
|
|
|
48.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer and other deposits
|
|
|
10.7
|
|
|
|
10.7
|
|
|
|
8.6
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
136.6
|
|
|
|
136.6
|
|
|
|
59.6
|
|
|
|
21.3
|
|
|
|
4.5
|
|
|
|
3.8
|
|
|
|
4.0
|
|
|
|
43.4
|
|
Derivative financial instruments
|
|
|
82.3
|
|
|
|
82.3
|
|
|
|
|
|
|
|
18.5
|
|
|
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
3,536.2
|
|
|
|
3,620.0
|
|
|
|
33.6
|
|
|
|
38.3
|
|
|
|
113.3
|
|
|
|
103.3
|
|
|
|
23.3
|
|
|
|
3,308.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,814.6
|
|
|
|
3,898.4
|
|
|
|
150.6
|
|
|
|
80.2
|
|
|
|
181.6
|
|
|
|
107.1
|
|
|
|
27.3
|
|
|
|
3,351.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
Stock-Based
Compensation Plans
|
Employee
Savings Plans (ESPs)
The ESP enabled Telesat employees to acquire BCE common shares
through payroll deductions of up to 10% of their annual base
earnings and target bonus plus employer contributions of up to
2%. Compensation expense in the predecessor entity for ESPs was
$0.6 million in 2007 and $0.6 million in 2006. The ESP
was discontinued on October 31, 2007.
BCE Stock
Options
Prior to the acquisition of Telesat Canada, as described in
note 1 and 3, options were granted to key employees of
Telesat Canada to purchase BCE common shares at a subscription
price usually equal to the market value of the shares on the
last trading day before the grant came into effect. For options
granted before January 1, 2004, the right to exercise the
options generally vested or accrued by 25% a year for four years
of continuous employment from the date of the grant, except
where a special vesting period applied. Options became
exercisable when they vested and could be exercised for a period
of up to 10 years from the date of grant. For options
granted after January 1, 2004, the right to exercise
options vested after two to three years of continuous employment
from the date of grant, if specific performance targets were
met. Options became exercisable when they vested and could be
exercised for a period of up to six years from the date of
grant. Subject to achieving specific performance targets, 50% of
the options would vest after two years and 100% after three
years.
During 2007, under the predecessor entity, stock options were
granted and an expense of $0.6 million (2006
$0.2 million) was charged to contributed surplus. The stock
option program was discontinued on October 31, 2007. All
outstanding options vested on October 30, 2007. There are
no outstanding options at December 31, 2008 under the BCE
stock option programs. All previously outstanding options
expired on April 30, 2008.
F-105
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
The following table is a summary of the status of the
Predecessors portion of the BCE stock option programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
|
|
|
|
of Shares
|
|
|
Price ($)
|
|
|
of Shares
|
|
|
Price ($)
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
406,908
|
|
|
|
34
|
|
|
|
411,047
|
|
|
|
34
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(264,853
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/forfeited
|
|
|
(142,055
|
)
|
|
|
41
|
|
|
|
(4,139
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
|
|
|
|
|
|
|
|
406,908
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
|
|
|
|
|
|
|
|
406,908
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Number
|
|
|
Life
|
|
|
Price ($)
|
|
|
Number
|
|
|
Price ($)
|
|
|
Below $20
|
|
|
375
|
|
|
|
0.33
|
|
|
|
15.15
|
|
|
|
375
|
|
|
|
15.15
|
|
$20 to $29
|
|
|
101,972
|
|
|
|
0.33
|
|
|
|
29.42
|
|
|
|
101,972
|
|
|
|
29.42
|
|
$30 to $39
|
|
|
162,506
|
|
|
|
0.33
|
|
|
|
30.79
|
|
|
|
162,506
|
|
|
|
30.79
|
|
$40 and over
|
|
|
142,055
|
|
|
|
1.22
|
|
|
|
40.95
|
|
|
|
142,055
|
|
|
|
40.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406,908
|
|
|
|
0.64
|
|
|
|
33.98
|
|
|
|
406,908
|
|
|
|
33.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions the Predecessor used to determine the
stock-based compensation expense under the Black-Scholes option
pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Compensation cost
|
|
|
617
|
|
|
|
170
|
|
Number of stock options granted
|
|
|
159,506
|
|
|
|
101,972
|
|
Weighted-average fair value per option granted($)
|
|
|
3.4
|
|
|
|
2.3
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
4.5
|
%
|
|
|
4.4
|
%
|
Expected volatility
|
|
|
20
|
%
|
|
|
17
|
%
|
Risk-free interest rate
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Expected life (years)
|
|
|
3.5
|
|
|
|
3.5
|
|
Restricted
Share Units (RSUs)
RSUs were granted to Telesat executives in 2006 and 2007. The
value of an RSU was always equal to the value of one BCE common
share. Dividends in the form of additional RSUs were credited to
the participants account on each dividend payment date and
were equivalent in value to the dividend paid on BCE common
shares. Each executive was granted a specific number of RSUs for
a given performance period, based on his or her position
F-106
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
and level of contribution. At the end of each given performance
period, RSUs would vest if performance objectives were met or
would be forfeited.
Vested RSUs were to be paid in BCE common shares purchased on
the open market, in cash or through a combination of both, at
the holders choice, as long as individual share ownership
requirements were met. The RSU plan was discontinued on
October 31, 2007.
The table below is a summary of the status of RSUs:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Outstanding, beginning of period
|
|
|
136,523
|
|
|
|
76,237
|
|
Granted
|
|
|
|
|
|
|
136,523
|
|
Dividends credited
|
|
|
5,460
|
|
|
|
883
|
|
Payments
|
|
|
(141,983
|
)
|
|
|
(77,120
|
)
|
Expired/forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
|
|
|
|
136,523
|
|
|
|
|
|
|
|
|
|
|
For the ten months ended October 30, 2007, the predecessor
entity recorded a compensation expense for RSUs of
$5.3 million (year ended December 31, 2006
$0.2 million).
Special
Compensation Payments (SCPs)
Before 2000, when options were granted to employees, related
rights to SCPs were also often granted. SCPs were cash payments
representing the amount that the market value of the shares on
the date of exercise exceeded the exercise price of these
options.
The number of SCPs for BCE common shares outstanding at
October 30, 2007 was 375 (year ended December 31,
2006 20,750). All of the outstanding SCPs cover the
same number of shares as the options to which they relate. It
was Telesats responsibility to make the payments under the
SCPs. The predecessor entitys annual compensation expense
for the SCP was an expense of $0.2 million for the ten
months ended October 30, 2007 (year ended December 31,
2006 recovery of $0.1 million).
Deferred
Share Units (DSUs)
DSUs were granted to executives when they chose to receive their
bonuses in the form of DSU units instead of cash. The value of a
DSU was always equal to the value of one BCE common share.
Dividends in the form of additional DSUs were credited to the
participants account on each dividend payment date and
were equivalent in value to the dividend paid on BCE common
shares. DSUs were paid in cash when the holder chose to exercise
their units. There are no outstanding DSUs at December 31,
2008. All of the outstanding DSUs expired on April 30, 2008.
F-107
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
The table below is a summary of the status of the DSUs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Outstanding, beginning of period
|
|
|
6,772
|
|
|
|
6,772
|
|
|
|
6,512
|
|
|
|
4,399
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,846
|
|
Dividends credited
|
|
|
65
|
|
|
|
|
|
|
|
260
|
|
|
|
267
|
|
Exercised
|
|
|
(6,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
|
|
|
|
6,772
|
|
|
|
6,772
|
|
|
|
6,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the ten months ended October 30, 2007, the predecessor
entity recorded a compensation expense for DSUs of
$0.1 million (year ended December 31, 2006
$0.1 million).
Telesat
Holdings Stock Options
On September 19, 2008, Telesat adopted a stock incentive
plan for certain key employees of the Company and its
subsidiaries. The plan provides for the grant of up to 8,824,646
options to purchase non-voting participating preferred shares of
Telesat Holdings Inc., convertible into common shares.
Two different types of stock options can be granted under the
plan: time-vesting options and performance-vesting options. The
time-vesting options generally become vested and exercisable
over a five year period by 20% increments on each
October 31st starting in 2008. The vesting amount is
prorated for optionees whose employment with the Company or its
subsidiaries started after October 31, 2007. The
performance-vesting options become vested and exercisable over a
five year period starting March 31, 2009, provided that the
Company has achieved or exceeded an annual or cumulative target
consolidated EBITDA established and communicated on the grant
date by the Board of Directors. The exercise periods of the
share options expire ten years from the grant date. The exercise
price of each share underlying the options will be the higher of
a fixed price, established by the Board of Directors on the
grant date, and the fair market value of a non-voting
participating preferred share on the grant date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
At December 31, 2008
|
|
Number
|
|
|
Remaining Life
|
|
|
Number
|
|
|
Exercise price $11.07
|
|
|
7,740,476
|
|
|
|
9 years
|
|
|
|
1,538,623
|
|
The assumptions used to determine the stock-based compensation
expense under the Black-Scholes option pricing model were as
follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Compensation cost (credited to contributed surplus)
|
|
|
5,448
|
|
Number of stock options granted
|
|
|
7,740,476
|
|
Weighted-average fair value per option granted($)
|
|
|
8.52
|
|
Assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
%
|
Expected volatility
|
|
|
31.5
|
%
|
Risk-free interest rate
|
|
|
3.78
|
%
|
Expected life (years)
|
|
|
10
|
|
F-108
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
21.
|
Employee
Benefit Plans
|
Telesat
Canada
The Companys funding policy is to make contributions to
its pension funds based on various actuarial cost methods as
permitted by pension regulatory bodies. Contributions reflect
actuarial assumptions concerning future investment returns,
salary projections and future service benefits. Plan assets are
represented primarily by Canadian and foreign equity securities,
fixed income instruments and short-term investments.
Skynet
Satellite Corporation
The Company provides certain health care and life insurance
benefits for retired employees of the legacy Skynet companies
and their dependents. Participants are eligible for these
benefits generally when they retire from active service and meet
the eligibility requirements for the pension plan. These
benefits are funded primarily on a pay-as-you-go basis, with the
retiree generally paying a portion of the cost through
contributions, deductibles and coinsurance provisions.
The changes in the benefit obligations and in the fair value of
assets and the funded status of the defined benefit plans were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
|
|
|
|
Pension and other benefits
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, January 1, 2008
|
|
|
163,546
|
|
|
|
16,224
|
|
|
|
8,089
|
|
|
|
187,859
|
|
|
|
|
|
Current service cost
|
|
|
3,926
|
|
|
|
433
|
|
|
|
|
|
|
|
4,359
|
|
|
|
|
|
Interest cost
|
|
|
9,271
|
|
|
|
862
|
|
|
|
883
|
|
|
|
11,016
|
|
|
|
|
|
Actuarial (gains) losses
|
|
|
(40,426
|
)
|
|
|
(4,396
|
)
|
|
|
(129
|
)
|
|
|
(44,951
|
)
|
|
|
|
|
Benefit payments
|
|
|
(10,884
|
)
|
|
|
(596
|
)
|
|
|
(155
|
)
|
|
|
(11,635
|
)
|
|
|
|
|
Employee contributions
|
|
|
1,321
|
|
|
|
|
|
|
|
37
|
|
|
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, December 31, 2008
|
|
|
126,754
|
|
|
|
12,527
|
|
|
|
8,725
|
|
|
|
148,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
|
|
|
|
Pension and other benefits
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, January 1, 2008
|
|
|
173,457
|
|
|
|
|
|
|
|
|
|
|
|
173,457
|
|
|
|
|
|
Return on plan assets
|
|
|
(29,811
|
)
|
|
|
|
|
|
|
|
|
|
|
(29,811
|
)
|
|
|
|
|
Benefit payments
|
|
|
(10,884
|
)
|
|
|
(596
|
)
|
|
|
(155
|
)
|
|
|
(11,635
|
)
|
|
|
|
|
Employee contributions
|
|
|
1,321
|
|
|
|
|
|
|
|
37
|
|
|
|
1,358
|
|
|
|
|
|
Employer contributions
|
|
|
4,210
|
|
|
|
596
|
|
|
|
118
|
|
|
|
4,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, December 31, 2008
|
|
|
138,293
|
|
|
|
|
|
|
|
|
|
|
|
138,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan surplus (deficit)
|
|
|
11,539
|
|
|
|
(12,527
|
)
|
|
|
(8,725
|
)
|
|
|
(9,713
|
)
|
|
|
|
|
Unamortized net actuarial (gain) loss
|
|
|
2,071
|
|
|
|
(3,705
|
)
|
|
|
|
|
|
|
(1,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit asset (liability)
|
|
|
13,610
|
|
|
|
(16,232
|
)
|
|
|
(8,725
|
)
|
|
|
(11,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-109
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefits
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, October 31, 2007
|
|
|
159,392
|
|
|
|
16,631
|
|
|
|
8,079
|
|
|
|
184,102
|
|
|
|
|
|
|
|
|
|
Current service cost
|
|
|
774
|
|
|
|
79
|
|
|
|
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
1,513
|
|
|
|
146
|
|
|
|
|
|
|
|
1,659
|
|
|
|
|
|
|
|
|
|
Benefit payments
|
|
|
(722
|
)
|
|
|
(70
|
)
|
|
|
(24
|
)
|
|
|
(816
|
)
|
|
|
|
|
|
|
|
|
Plan amendment (early retirement program)
|
|
|
5,703
|
|
|
|
|
|
|
|
5
|
|
|
|
5,708
|
|
|
|
|
|
|
|
|
|
Employee contributions
|
|
|
145
|
|
|
|
|
|
|
|
87
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
(3,259
|
)
|
|
|
(562
|
)
|
|
|
(58
|
)
|
|
|
(3,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, December 31, 2007
|
|
|
163,546
|
|
|
|
16,224
|
|
|
|
8,089
|
|
|
|
187,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
|
Pension and other benefits
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, October 31, 2007
|
|
|
176,595
|
|
|
|
|
|
|
|
|
|
|
|
176,595
|
|
Return on plan assets
|
|
|
(2,596
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,596
|
)
|
Benefit payments
|
|
|
(722
|
)
|
|
|
(70
|
)
|
|
|
(24
|
)
|
|
|
(816
|
)
|
Employee contributions
|
|
|
145
|
|
|
|
|
|
|
|
5
|
|
|
|
150
|
|
Employer contributions
|
|
|
35
|
|
|
|
70
|
|
|
|
19
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, December 31, 2007
|
|
|
173,457
|
|
|
|
|
|
|
|
|
|
|
|
173,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded (deficiency) status
|
|
|
9,911
|
|
|
|
(16,224
|
)
|
|
|
(8,089
|
)
|
|
|
(14,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Telesat Canada plan assets consists of the
following asset categories:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Equity securities
|
|
|
59
|
%
|
|
|
60
|
%
|
Fixed income instruments
|
|
|
39
|
%
|
|
|
38
|
%
|
Short-term investments
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Plan assets are valued as at the measurement date of December 31
each year.
F-110
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
The significant weighted-average assumptions adopted in
measuring Telesat Canadas pension and other benefit
obligations and Skynets other benefit obligations were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Accrued benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
7.5
|
%
|
|
|
7.5
|
%
|
|
|
6.5
|
%
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
|
|
6.5
|
%
|
Rate of compensation increase
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
4.3
|
%
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
4.3
|
%
|
Benefit costs for the periods ended Discount rate
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
|
|
6.5
|
%
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
|
|
6.5
|
%
|
Expected long-term rate of return on plan assets
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
4.3
|
%
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
4.3
|
%
|
For the Telesat Canada plans, for measurement purposes,) a 10.5%
(drugs) / 4.5% (other) annual rate of increase in the
per capita cost of covered health care benefits (the health care
cost trend) was assumed for 2008. The drug rate is assumed to
gradually decrease to 4.5% by 2014 and remain at that level
thereafter. For the Skynet plan, actuarial assumptions to
determine the benefit obligation for other benefits as of
December 31, 2008, used a health care cost trend rate of
10% decreasing gradually to 5% by 2018. Assumed health care cost
trend rates have a significant effect on the amounts reported
for the health care plans.
The net benefit expense included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period October 31 to
|
|
|
|
Year Ended December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
|
|
Telesat Canada
|
|
|
Skynet
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
Pension
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
Current service cost
|
|
|
3,926
|
|
|
|
433
|
|
|
|
|
|
|
|
4,359
|
|
|
|
774
|
|
|
|
79
|
|
|
|
|
|
|
|
853
|
|
Interest cost
|
|
|
9,271
|
|
|
|
862
|
|
|
|
883
|
|
|
|
11,016
|
|
|
|
1,513
|
|
|
|
146
|
|
|
|
|
|
|
|
1,659
|
|
Expected return on plan assets
|
|
|
(12,686
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,686
|
)
|
|
|
(2,206
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense
|
|
|
511
|
|
|
|
1,295
|
|
|
|
883
|
|
|
|
2,689
|
|
|
|
81
|
|
|
|
225
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Entity
|
|
|
|
For the Period January 1 to
|
|
|
|
|
|
|
October 30, 2007
|
|
|
Year Ended December 31, 2006
|
|
|
|
Pension
|
|
|
Other
|
|
|
Total
|
|
|
Pension
|
|
|
Other
|
|
|
Total
|
|
|
Current service cost
|
|
|
3,612
|
|
|
|
396
|
|
|
|
4,008
|
|
|
|
4,315
|
|
|
|
465
|
|
|
|
4,780
|
|
Interest cost
|
|
|
7,149
|
|
|
|
681
|
|
|
|
7,830
|
|
|
|
8,212
|
|
|
|
767
|
|
|
|
8,979
|
|
Expected return on plan assets
|
|
|
(10,610
|
)
|
|
|
|
|
|
|
(10,610
|
)
|
|
|
(11,271
|
)
|
|
|
|
|
|
|
(11,271
|
)
|
Amortization of past service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
900
|
|
Amortization of net actuarial loss
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
|
|
1,780
|
|
|
|
|
|
|
|
1,780
|
|
Amortization of transitional (asset) obligation
|
|
|
(1,288
|
)
|
|
|
515
|
|
|
|
(773
|
)
|
|
|
(1,273
|
)
|
|
|
618
|
|
|
|
(655
|
)
|
Additional expense
|
|
|
169
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense (income)
|
|
|
(934
|
)
|
|
|
1,592
|
|
|
|
658
|
|
|
|
2,663
|
|
|
|
1,850
|
|
|
|
4,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-111
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Sensitivity
of assumptions
The impact of a hypothetical 1% change in the health care cost
trend rate on the other post-retirement benefit obligation and
the aggregate of service and interest cost would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate of
|
|
|
|
|
|
|
service and
|
|
|
|
Benefit Obligation
|
|
|
interest cost
|
|
|
As reported
|
|
|
21,252
|
|
|
|
2,178
|
|
Impact of increase of 1% point
|
|
|
1,817
|
|
|
|
198
|
|
Impact of decrease of 1% point
|
|
|
(1,587
|
)
|
|
|
(166
|
)
|
The above sensitivities are hypothetical and should be used with
caution. Changes in amounts based on a 1% point variation in
assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in
amounts may not be linear. The sensitivities have been
calculated independently of changes in other key variables.
Changes in one factor may result in changes in another, which
could amplify or reduce certain sensitivities.
|
|
22.
|
Commitments
and Contingent Liabilities
|
Off balance sheet commitments include operating leases,
commitments for future capital expenditures and other future
purchases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
Off balance sheet commitments
|
|
$
|
218,313
|
|
|
$
|
36,513
|
|
|
$
|
20,949
|
|
|
$
|
15,002
|
|
|
$
|
12,672
|
|
|
$
|
40,584
|
|
|
$
|
344,033
|
|
Certain of the Companys satellite transponders, offices,
warehouses, earth stations, vehicles, and office equipment are
leased under various terms. Minimum annual commitments under
operating leases determined as at December 31, 2008 are
$29.2 million in 2009, $23.7 million in 2010,
$20.0 million in 2011, $14.0 million in 2012,
$11.6 million in 2013 and 23.6 million thereafter. The
aggregate lease expense for the year ended December 31,
2008, the two months ended December 31, 2007, the
predecessor periods of ten months ended October 30, 2007
and the year ended December 31, 2006 was
$21.0 million, $4.5 million, $11.2 million and
$18.0 million respectively. The expiry terms range from
January 2009 to July 2016.
Telesat has non-satellite purchase commitments of CAD
$4.1 million, or US $3.4 million, with
various suppliers at December 31, 2008 (2007
CAD $4.4 million, or US $4.5 million). The total
outstanding commitments at December 31, 2008 are in US
dollars.
Telesat has entered into contracts for the construction of Nimiq
5 (targeted for launch in 2009) and Telstar 11-N (targeted
for launch in 2009). The outstanding commitments at
December 31, 2008 on these contracts are CAD
$200.1 million or US $163.4 million (2007
CAD $261.2 million or US $264.3 million). The total
outstanding commitments at December 31, 2008 are in US
dollars.
Telesat has agreements with various customers for prepaid
revenues on several satellites which take effect on final
acceptance of the spacecraft. Telesat is responsible for
operating and controlling these satellites. Deposits of
$341.3 million (2007 $273.3 million),
refundable under certain circumstances, are reflected in other
liabilities, both current and long-term.
In the normal course of business, Telesat has executed
agreements that provide for indemnification and guarantees to
counterparties in various transactions. These indemnification
undertakings and guarantees may require Telesat to compensate
the counterparties for costs and losses incurred as a result of
certain events including, without limitation, loss or damage to
property, change in the interpretation of laws and regulations
(including tax
F-112
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
legislation), claims that may arise while providing services, or
as a result of litigation that may be suffered by the
counterparties.
Certain indemnification undertakings can extend for an unlimited
period and may not provide for any limit on the maximum
potential amount, although certain agreements do contain
specified maximum potential exposure representing a cumulative
amount of approximately $20.7 million (2007
$14.9 million). The nature of substantially all of the
indemnification undertakings prevents the Company from making a
reasonable estimate of the maximum potential amount Telesat
could be required to pay counterparties as the agreements do not
specify a maximum amount and the amounts are dependent upon the
outcome of future contingent events, the nature and likelihood
of which cannot be determined at this time. Historically,
Telesat has not made any significant payments under such
indemnifications.
Telesat and Loral have entered into an indemnification agreement
whereby Loral will indemnify Telesat for any tax liabilities for
taxation years prior to 2007. Likewise, Telesat will indemnify
Loral for the settlement of any tax receivables for taxation
years prior to 2007.
In August 2001, Boeing, the manufacturer of the Anik F1
satellite, advised Telesat of a gradual decrease in available
power on-board the satellite. Telesat filed an insurance claim
with its insurers on December 19, 2002, and in March 2004
reached a final settlement agreement. The settlement calls for
an initial payment in 2004 of US $136.2 million and an
additional payment of US $49.1 million in 2007 if the power
level on Anik F1 degrades as predicted by the manufacturer. In
the event that the power level on Anik F1 is better than
predicted, the amount of the payment(s) will be adjusted by
applying a formula which is included in the settlement
documentation and could result in either a pro-rated payment to
Telesat of the additional US $49.1 million or a pro-rated
repayment of up to a maximum of US $36.1 million to be made
by Telesat to the insurers. The initial payment has been
received. During December 2005, a number of insurers elected to
pay a discounted amount of the proceeds due in 2007. A
discounted value of US$26.2 million was received from a
number of insurance underwriters in December 2005 with US
$20.0 million to be paid by a few insurers in 2007. Telesat
submitted its final claim in the fourth quarter of 2007. In
January 2008, certain insurance underwriters indicated
disagreement with Telesats determination of the available
power such that the final payment, in the insurers view,
would be approximately US$2.4 million. In July 2008,
Telesat received a final settlement of US $2.0 million from
certain insurers. Claims with other insurers, for a value of US
$18.0 million, remain unresolved. In the event Telesat is
unable to resolve this disagreement, it fully intends to pursue
arbitration. At December 31, 2008, Telesat has not recorded
any receivable related to this claim.
F-113
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
23.
|
Related
Party Transactions
|
Related parties include PSP and Loral, the common shareholders,
together with their subsidiaries and affiliates.
The following transactions are in the normal course of
operations and are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related
parties. The related party transactions as at and for the period
ended December 31, 2008 and 2007 were between Telesat and
Loral, and subsidiaries and affiliates of Loral. The related
party transactions as at and for the predecessor periods ended
October 30, 2007 and December 31, 2006 were between
Telesat and BCE, together with BCE subsidiaries and affiliates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
October 31
|
|
|
|
January 1
|
|
|
|
|
|
|
Year Ended
|
|
|
to
|
|
|
|
to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Service revenues
|
|
|
3,560
|
|
|
|
440
|
|
|
|
|
139,706
|
|
|
|
139,335
|
|
Operations and administration expenses
|
|
|
6,295
|
|
|
|
825
|
|
|
|
|
5,340
|
|
|
|
7,340
|
|
Capital expenditures satellites
|
|
|
83,203
|
|
|
|
12,318
|
|
|
|
|
|
|
|
|
|
|
The balances with related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Receivables at end of period
|
|
|
3,200
|
|
|
|
3,389
|
|
Payables at end of period
|
|
|
13,770
|
|
|
|
9,682
|
|
Note and interest payable at end of period
|
|
|
7,380
|
|
|
|
|
|
In January 2008, Telesat entered into an option agreement with
Loral whereby Telesat has the option to cause Loral to assign
their rights and obligations with respect to a portion of the
ViaSat-1 satellite payload providing coverage into Canada to
Telesat. The option expires on October 31, 2009. This
transaction is not in the normal course of operations and has
been accounted for at carrying value. Telesat has assigned no
value to the option as the carrying value of the orbital slot
license is nominal. At December 31, 2008, Telesat had not
exercised the option.
Certain of the prior years figures have been reclassified
to conform with the current years presentation, the most
significant of which was to reclass transponder rights of
$28.5 million from transponders under capital lease within
Satellites, property and other equipment, net to finite life
intangible assets within Intangible assets, net. This is not a
material change to the financial statements since it is a
reclassification of long term depreciable assets with no change
to the estimated useful life.
F-114
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
|
|
25.
|
Reconciliation
of Canadian GAAP to United States GAAP
|
Telesat has prepared these consolidated financial statements
according to Canadian GAAP. The following tables are a
reconciliation of differences relating to the statement of
(loss) earnings and total shareholders equity reported
according to Canadian GAAP and United States GAAP
(U.S. GAAP).
Reconciliation
of Net (Loss) Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
October 31
|
|
|
|
January 1
|
|
|
|
|
|
|
Year Ended
|
|
|
to
|
|
|
|
to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Canadian GAAP Net (loss) earnings
|
|
|
(822,401
|
)
|
|
|
(4,051
|
)
|
|
|
|
81,742
|
|
|
|
103,985
|
|
Gains (losses) on embedded
derivatives(a)
|
|
|
20,118
|
|
|
|
774
|
|
|
|
|
(5,051
|
)
|
|
|
(998
|
)
|
Losses on derivatives designated as cash flow hedges under
Canadian
GAAP(a)
|
|
|
|
|
|
|
|
|
|
|
|
(10,361
|
)
|
|
|
|
|
Sales type lease operating lease for U.S.
GAAP(b)
|
|
|
18,808
|
|
|
|
2,748
|
|
|
|
|
(23,617
|
)
|
|
|
|
|
Capital lease operating lease for U.S.
GAAP(b)
|
|
|
(7,584
|
)
|
|
|
(78
|
)
|
|
|
|
9,436
|
|
|
|
|
|
Lease
amendments(c)
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on senior preferred
shares(d)
|
|
|
9,855
|
|
|
|
1,695
|
|
|
|
|
|
|
|
|
|
|
Tax effect of above
adjustments(e)
|
|
|
(8,761
|
)
|
|
|
275
|
|
|
|
|
9,606
|
|
|
|
1,568
|
|
Uncertainty in income
taxes(f)
|
|
|
(6,875
|
)
|
|
|
(2,648
|
)
|
|
|
|
3,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP Net (loss) earnings
|
|
|
(798,073
|
)
|
|
|
(1,285
|
)
|
|
|
|
64,989
|
|
|
|
104,555
|
|
Dividends on preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,487
|
)
|
Other comprehensive (loss) earnings items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in currency translation adjustment
|
|
|
(7,143
|
)
|
|
|
(599
|
)
|
|
|
|
1,715
|
|
|
|
(448
|
)
|
Loss on derivatives designated as cash flow
hedges(a)
|
|
|
|
|
|
|
|
|
|
|
|
(7,168
|
)
|
|
|
|
|
Net actuarial plans
cost(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
(314
|
)
|
|
|
|
|
Net transitional assets
|
|
|
|
|
|
|
|
|
|
|
|
(525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP Comprehensive (loss) earnings
|
|
|
(806,385
|
)
|
|
|
(1,884
|
)
|
|
|
|
58,697
|
|
|
|
102,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-115
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Accumulated
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Entity
|
|
|
|
Predecessor Entity
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
October 31
|
|
|
|
January 1
|
|
|
|
|
|
|
Year Ended
|
|
|
to
|
|
|
|
to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
October 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
Cumulative translation adjustment, net of tax
|
|
|
(7,742
|
)
|
|
|
(599
|
)
|
|
|
|
(568
|
)
|
|
|
(2,283
|
)
|
Loss on derivatives designated as cash flow
hedges(a)
|
|
|
|
|
|
|
|
|
|
|
|
(7,168
|
)
|
|
|
|
|
Net benefit plans
cost(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
(7,448
|
)
|
|
|
(7,080
|
)
|
Net transitional assets
|
|
|
|
|
|
|
|
|
|
|
|
3,980
|
|
|
|
4,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(8,911
|
)
|
|
|
(599
|
)
|
|
|
|
(11,204
|
)
|
|
|
(4,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Total Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Canadian GAAP
|
|
|
469,432
|
|
|
|
1,293,528
|
|
Adjustments
|
|
|
|
|
|
|
|
|
Gains on embedded
derivatives(a)
|
|
|
20,892
|
|
|
|
774
|
|
Net actuarial
losses(g)
|
|
|
(1,169
|
)
|
|
|
|
|
Sales type lease operating lease for U.S.
GAAP(b)
|
|
|
21,556
|
|
|
|
2,748
|
|
Capital lease operating lease for U.S.
GAAP(b)
|
|
|
(7,662
|
)
|
|
|
(78
|
)
|
Lease
amendment(c)
|
|
|
(1,233
|
)
|
|
|
|
|
Tax effect of above
adjustments(e)
|
|
|
(8,486
|
)
|
|
|
275
|
|
Uncertainty in income
taxes(f)
|
|
|
(9,523
|
)
|
|
|
(2,648
|
)
|
|
|
|
|
|
|
|
|
|
U.S. GAAP
|
|
|
483,807
|
|
|
|
1,294,599
|
|
|
|
|
|
|
|
|
|
|
Description of United States GAAP adjustments:
|
|
(a)
|
Derivatives
and embedded derivatives
|
Embedded derivatives
The accounting for derivative instruments and hedging activities
under Canadian GAAP is now substantially harmonized with
U.S. GAAP, with the exception of the accounting for certain
embedded derivatives. Under U.S. GAAP an embedded foreign
currency derivative in a host contract that is not a financial
instrument must be separated and recorded on the balance sheet
unless the currency in which payments are to be paid or received
is: i) either the functional currency of either party to
the contract or ii) the currency that the price of the
related good or service is routinely denominated in commercial
transactions around the world (typically referring to a traded
commodity). The same applies to an embedded foreign currency
derivative in a host contract under Canadian GAAP except that
the entity has the option, as a matter of accounting policy, to
account for the embedded foreign currency derivative in a host
contract as a single instrument providing certain criteria are
met. One of these criteria is that the payments to be paid or
received are in a currency that is commonly used in contracts to
purchase or sell such non-financial items in the economic
environment in which the transaction takes place. This option
under Canadian GAAP results in
F-116
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
embedded derivatives that must be recorded separately under
U.S. GAAP to not have to be separately recorded and
disclosed under Canadian GAAP. The additional option loosens the
more stringent U.S. GAAP requirement that the currency be
one in which such commercial transactions are denominated around
the world to be one that is commonly used in the economic
environment in which the transaction takes place.
In accordance with U.S. GAAP, all derivative instruments
embedded in contracts are recorded on the balance sheet at fair
value. The Company denominates many of its long-term
international purchase contracts in U.S. dollars resulting
in embedded derivatives. This exposure to the U.S. dollar
is partially offset by revenue contracts that are also
denominated in U.S. dollars. For Canadian GAAP, the Company
has elected to account for such contracts as single instruments
(as explained above), resulting in a U.S. GAAP reconciling
item. At December 31, 2008, the estimated fair value of
assets resulting from embedded derivatives is $55.4 million
(December 31, 2007 $35.3 million).
The impact on the statement of earnings of changes in the fair
value of these embedded derivatives, for the year ended
December 31, 2008, the two and twelve month periods ended
December 31, 2007, the ten month period ended
October 30, 2007 and the year ended December 31, 2006
is reflected as a gain of $20.1, a gain of $0.8 million, a
loss of $5.1 million and a loss of $1.0 million,
respectively, in the U.S. GAAP reconciliation note.
Derivatives
In 2007, the Company hedged a portion of its exposure to foreign
exchange. Since the adoption of the Canadian GAAP standards for
hedging activities on January 1, 2007, the Company elected
to designate the forward contracts as hedging instruments for
both Canadian and U.S. GAAP purposes. Accordingly, the
changes in fair value of derivatives designated as cash flow
hedges were recognized in other comprehensive income. Changes in
fair value of derivatives that were not designated as cash flow
hedges prior to adoption of the Canadian GAAP standards are
recognized in net income. Hedge accounting was discontinued
effective October 31, 2007.
Prior to the adoption of the Canadian standards, significant
differences existed between Canadian GAAP and U.S. GAAP
with respect to the recognition of derivatives and accounting
for certain hedging relationships. Under U.S. GAAP all
derivatives are required to be recorded on the balance sheet and
under Canadian GAAP certain derivatives were not recorded until
settled.
(b) Sales-type
and capital leases
Under U.S. GAAP, if the beginning of a lease term falls
within the last 25% of a leased assets total estimated
economic life; then it can only be classified as a capital lease
if the lease transfers ownership at the end of the lease term or
there is a bargain purchase option. This exception does not
exist under Canadian GAAP, therefore certain leases are reported
as a capital lease and sales-type lease respectively under
Canadian GAAP, and as operating leases for U.S. GAAP.
(c) Lease
amendments
Under Canadian GAAP, when amendments to the provisions of a
capital lease agreement result in a change in lease
classification from a capital lease to an operating lease, the
gain or loss that results from removing the capital lease from
the balance sheet is immediately recognized in the statement of
earnings. Under U.S. GAAP, if removing the capital lease
from the balance sheet results in a loss it is recognized over
the remaining term of the lease. Therefore, an adjustment has
been made to defer the gain that has been recognized under
Canadian GAAP.
F-117
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
(d) Senior
preferred shares
In accordance with U.S. GAAP, the senior preferred shares
are classified outside of permanent equity as they are
redeemable at the option of the holder. These senior preferred
shares are classified as liabilities under Canadian GAAP. This
results in a U.S. GAAP reconciling item to reflect the
different classification.
(e) Income
taxes
The income tax adjustment reflects the impact the US GAAP
adjustments described above have on income taxes. The impact on
the statement of operations of the income tax adjustment for the
year ended December 31, 2008, the two month period ended
December 31, 2007, the ten month period ended
October 30, 2007 and the year ended December 31, 2006
is an expense of $8.8 million, a recovery of
$0.3 million, a recovery of $9.6 million, and a
recovery of $1.6 million, respectively. Included in these
figures is the effect of tax rate changes applied to the
accumulated gains and losses on embedded derivatives and to
certain lease transactions classified as operating leases as
discussed above. The impact on the statement of operations of
the tax rate changes for year ended December 31, 2008, the
two month period ended December 31, 2007, the ten month
period ended October 30, 2007 and the year ended
December 31, 2006 is an expense of $0.6 million, a
recovery of $1.3 million, a recovery of $0.2 million
and a recovery of $1.3 million, respectively.
The tax difference for enacted rates represents the difference
between the substantively enacted income tax rate and the
enacted income tax rate. Under U.S. GAAP, the enacted
income tax rate must be applied whereas under Canadian GAAP, the
substantively enacted income tax rate is used.
|
|
(f)
|
Uncertainty
in income taxes
|
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of
FAS 109, effective for fiscal years beginning after
December 15, 2006. FIN 48 provides specific guidance
on the recognition, de-recognition and measurement of income tax
positions in financial statements, including the accrual of
related interest and penalties recorded in interest expense. An
income tax position is recognized when it is more likely than
not that it will be sustained upon examination based on its
technical merits, and is measured as the largest amount that is
greater than 50% likely of being realized upon ultimate
settlement. Under Canadian GAAP, significant differences may
arise as Telesat recognizes and measures income tax positions,
based on the best estimate of the amount that is more likely
than not of being realized.
|
|
(g)
|
Net
benefit plans cost
|
Effective December 31, 2006, the Company adopted the
recognition requirements of Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting for
Defined Benefit Pension and Other Post Retirement Plans, on a
prospective basis.
This standard requires that the Company recognize the funded
status of benefit plans on the balance sheet as well as
recognize as a component of other comprehensive income, net of
tax, the actuarial losses and transitional asset and obligation.
Amounts recognized in accumulated other comprehensive income are
adjusted as they are subsequently recognized as components of
net periodic benefit cost.
At December 31, 2008, the balance sheet was adjusted such
that actuarial losses and the transitional asset and obligation
that have not yet been included in net benefit plans cost at
December 31, 2008 were recognized as components of
accumulated other comprehensive loss, net of tax. The adjustment
at December 31, 2008 resulted in an increase of
$1.2 million in accumulated other comprehensive loss, net
of tax of $0.4 million (December 31, 2007
nil).
F-118
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
Transaction
costs on long-term debt
Under Canadian GAAP, transaction costs of $83.6 million
($72.5 million at December 31, 2007) related to
the issuance of long-term debt are netted against the long-term
debt. Under U.S. GAAP these costs are recognized as
deferred charges. This results in a U.S. GAAP reconciling
item to reflect the different classification on the balance
sheet.
Statement
of cash flows
There are no material differences in the consolidated statement
of cash flows under U.S. GAAP.
Recent
Accounting Pronouncements
In November 2007, the Securities Exchange Commission issued
SAB 109, Written Loan Commitments Recorded at Fair Value
Through Earnings. It requires that the expected net future
cash flows related to the associated servicing of the loan
should be included in the measurement of all written loan
commitments that are accounted for at fair value through
earnings. In addition, internally developed intangible assets
should not be recorded as part of the fair value of any written
loan commitment that is accounted for at fair value through
earnings. SAB 109 became effective for the Company on
January 1, 2008 and did not have a material impact on the
financial results.
In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141(R), Business
Combinations, which broadens the guidance of SFAS 141,
extending its applicability to all transactions and other events
in which one entity obtains control over one or more other
businesses. It broadens the fair value measurement and
recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations.
SFAS 141(R) expands on required disclosures to improve the
statement users abilities to evaluate the nature and
financial effects of business combinations. It requires the
acquirer to recognize as an adjustment to income tax expense
changes in the valuation allowance for acquired deferred assets.
SFAS 141(R) is effective for the Company on January 1,
2009. The Company is currently assessing the impact of this
standard on its financial reporting.
In April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets,
which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS 142,
Goodwill and Other Intangible Assets. It is intended to
improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected
cash flows used to measure the fair value of the asset under
SFAS 141(R) and other applicable accounting literature. FSP
FAS 142-3
is effective for the Company on January 1, 2009. It is not
anticipated to have a material impact on Telesats
financial reporting.
In September 2006, the FASB issued SFAS 157, Fair Value
Measurement, which provides a definition of fair value,
establishes a framework for measuring fair value, and requires
expanded disclosures about fair value measurements.
SFAS 157 became effective as of January 1, 2008 except
for the provisions relating to non-financial assets and
liabilities measured at fair value on a nonrecurring basis, for
which the effective date has been deferred until January 1,
2009. The Company is currently assessing the impact of this
standard on its financial reporting.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining Fair Value of a Financial Asset When the Market
for that Asset is not Active. This FSP clarifies the
application of SFAS 157 in a market that is not active and
provides key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active. FSP
FAS 157-3
was effective upon issuance and did not have a material impact
on these financial statements.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Liabilities.
SFAS 159 provides an entity the option to report selected
financial assets and liabilities at fair value and establishes
F-119
TELESAT
HOLDINGS INC.
NOTES TO
THE 2008 CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All amounts in thousands of Canadian dollars, except for per
share amounts and where otherwise noted)
new disclosure requirements when the fair value option is
applied. The Company has opted not to adopt this standard.
In December 2007, the FASB issued SFAS 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS 160 requires that a non-controlling interest in a
subsidiary be reported as equity and the amount of consolidated
net income specifically attributable to the non-controlling
interest be identified in the consolidated financial statements.
It also calls for consistency in the manner of reporting changes
in the parents ownership interest and requires fair value
measurement of any non-controlling equity investment retained in
a deconsolidation. SFAS is effective for the Company on
January 1, 2009. The Company is currently assessing the
impact of this standard on its financial reporting.
In March 2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities, which
requires specific disclosures regarding the location and amounts
of derivative instruments in the financial statements; how
derivative instruments and related hedged items are accounted
for; and how derivative instruments and related hedged items
affect financial position, financial performance and cash flows.
SFAS 161 is effective for the Company on January 1,
2009. The Company is currently assessing the impact of this
standard on its financial reporting.
In May 2008, the FASB issued SFAS 162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS 162
identifies a consistent framework for selecting accounting
principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities.
SFAS 162 will become effective 60 days following the
SECs approval of the Public Company accounting Oversight
Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company is currently assessing the impact
of this standard on its financial reporting.
F-120
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
XTAR, L.L.C.
New York, New York
We have audited the accompanying consolidated balance sheets of
XTAR, L.L.C. and subsidiary (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, members equity, and cash flows
for each of the three years in the period ended
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 present
fairly, in all material respects, the financial position of the
Company as of December 31, 2008 and 2007, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, the Company has substantial transactions with
related parties, including an agreement which allows the Company
to indefinitely defer payments of certain related party amounts
to the extent that such payments would cause the Companys
cash balance to be less than a specified amount.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 16, 2009
F-121
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,547
|
|
|
$
|
1,810
|
|
Accounts receivable net
|
|
|
4,963
|
|
|
|
6,624
|
|
Other current assets
|
|
|
597
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,107
|
|
|
|
8,899
|
|
PROPERTY, PLANT AND EQUIPMENT NET
|
|
|
105,922
|
|
|
|
115,538
|
|
OTHER ASSETS NET
|
|
|
408
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
115,437
|
|
|
$
|
124,898
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
162
|
|
|
$
|
177
|
|
Accrued liabilities
|
|
|
8,584
|
|
|
|
2,191
|
|
Payable to related parties
|
|
|
39,854
|
|
|
|
27,286
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
48,600
|
|
|
|
29,654
|
|
Term loan-related party
|
|
|
14,744
|
|
|
|
13,632
|
|
Other long term liabilities
|
|
|
16,042
|
|
|
|
21,154
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
79,386
|
|
|
|
64,440
|
|
|
|
|
|
|
|
|
|
|
Members Equity:
|
|
|
|
|
|
|
|
|
Loral Skynet Corporation
|
|
|
17,905
|
|
|
|
33,919
|
|
Hisdesat
|
|
|
18,146
|
|
|
|
26,539
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
36,051
|
|
|
|
60,458
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
115,437
|
|
|
$
|
124,898
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from satellite services
|
|
$
|
13,226
|
|
|
$
|
12,999
|
|
|
$
|
8,416
|
|
Related party revenues from satellite services
|
|
|
7,179
|
|
|
|
6,340
|
|
|
|
6,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
20,405
|
|
|
|
19,339
|
|
|
|
15,334
|
|
COST OF SATELLITE SERVICES
|
|
|
39,963
|
|
|
|
29,689
|
|
|
|
20,735
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,193
|
|
|
|
4,072
|
|
|
|
3,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(23,751
|
)
|
|
|
(14,422
|
)
|
|
|
(8,633
|
)
|
INTEREST AND INVESTMENT INCOME
|
|
|
125
|
|
|
|
182
|
|
|
|
150
|
|
INTEREST EXPENSE
|
|
|
4,495
|
|
|
|
3,308
|
|
|
|
3,496
|
|
OTHER INCOME (EXPENSE) Net
|
|
|
157
|
|
|
|
(313
|
)
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE TAXES
|
|
|
(27,964
|
)
|
|
|
(17,861
|
)
|
|
|
(12,113
|
)
|
INCOME TAX PROVISION
|
|
|
633
|
|
|
|
560
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(28,597
|
)
|
|
$
|
(18,421
|
)
|
|
$
|
(12,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hisdesat
|
|
|
|
|
|
|
Loral
|
|
|
Loral
|
|
|
Servicios
|
|
|
|
|
|
|
Skynet
|
|
|
Skynet
|
|
|
Estrategicos,
|
|
|
|
|
|
|
International LLC
|
|
|
Corporation
|
|
|
S.A.
|
|
|
Total
|
|
|
BALANCE January 1, 2006
|
|
$
|
51,307
|
|
|
$
|
|
|
|
$
|
40,201
|
|
|
$
|
91,508
|
|
Net loss
|
|
|
(7,072
|
)
|
|
|
|
|
|
|
(5,557
|
)
|
|
|
(12,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2006
|
|
|
44,235
|
|
|
|
|
|
|
|
34,644
|
|
|
|
78,879
|
|
Net loss January 1, 2007 to October 31,
2007
|
|
|
(7,577
|
)
|
|
|
|
|
|
|
(5,954
|
)
|
|
|
(13,531
|
)
|
(Sale) purchase of membership interests
|
|
|
(36,658
|
)
|
|
|
36,658
|
|
|
|
|
|
|
|
|
|
Net loss November 1, 2007 to December 31,
2007
|
|
|
|
|
|
|
(2,739
|
)
|
|
|
(2,151
|
)
|
|
|
(4,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
|
|
|
|
|
33,919
|
|
|
|
26,539
|
|
|
|
60,458
|
|
Interest payable converted to equity
|
|
|
|
|
|
|
|
|
|
|
4,190
|
|
|
|
4,190
|
|
Net loss
|
|
|
|
|
|
|
(16,014
|
)
|
|
|
(12,583
|
)
|
|
|
(28,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
$
|
|
|
|
$
|
17,905
|
|
|
$
|
18,146
|
|
|
$
|
36,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(28,597
|
)
|
|
$
|
(18,421
|
)
|
|
$
|
(12,629
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,651
|
|
|
|
9,747
|
|
|
|
9,693
|
|
Non cash interest expense
|
|
|
3,893
|
|
|
|
2,464
|
|
|
|
1,950
|
|
Other accretion to launch consideration payable to
Arianespace
|
|
|
630
|
|
|
|
695
|
|
|
|
1,525
|
|
Adjustment to revenue straight lining assessment
|
|
|
18
|
|
|
|
(25
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets
|
|
|
1,529
|
|
|
|
(3,779
|
)
|
|
|
(1,646
|
)
|
Accounts payable and other accrued liabilities
|
|
|
(78
|
)
|
|
|
(2,826
|
)
|
|
|
625
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
(2,191
|
)
|
Long term liabilities
|
|
|
2,258
|
|
|
|
1,511
|
|
|
|
605
|
|
Payable to related parties
|
|
|
13,977
|
|
|
|
12,695
|
|
|
|
8,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,281
|
|
|
|
2,061
|
|
|
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES Capital expenditures
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Arianespace Incentive Cap (Note 10) repayments
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
|
|
Notes payable repayments
|
|
|
|
|
|
|
(3,340
|
)
|
|
|
(8,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,544
|
)
|
|
|
(3,340
|
)
|
|
|
(8,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,737
|
|
|
|
(1,281
|
)
|
|
|
(2,596
|
)
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
1,810
|
|
|
|
3,091
|
|
|
|
5,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
3,547
|
|
|
$
|
1,810
|
|
|
$
|
3,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-125
|
|
1.
|
Organization
and Principal Business
|
XTAR, L.L.C. (XTAR or the Company), is a
joint venture between Loral Skynet Corporation (Loral
Skynet), a wholly owned subsidiary of Loral
Space & Communications Inc. (Loral) and
Hisdesat Servicios Estrategicos, S.A. (Hisdesat), a
consortium comprised of leading Spanish telecommunications
companies, including Hispasat, S.A., and agencies of the Spanish
government. Loral Skynet owns 56% of XTAR and Hisdesat owns 44%.
XTAR was formed to provide satellite-based X-band communications
services to United States, Spanish and allied governments. XTAR
operates in accordance with an operating agreement dated
July 12, 2001, as amended, which requires approval from
both Loral and Hisdesat for significant operating decisions.
Prior to October 31, 2007, Loral Skynet held this interest
through Loral Skynet International, LLC (Loral Skynet
International), a 100% owned subsidiary. On
October 31, 2007, immediately prior to the contribution by
Loral Skynet of its fixed satellite services business (including
shares of Loral Skynet International) to Telesat Canada in
connection with Lorals acquisition of 64% economic
interest in Telesat Canada (the Telesat Canada
Transaction), Loral Skynet International distributed its
entire interest in the Company to Loral Skynet. Prior to Loral
Skynet acquiring the 56% interest in November 2005, Lorals
other subsidiaries namely, Space Systems/ Loral, Inc.
(SS/L) and Loral Space and Communications Holdings
Corporation together held a 56% interest in XTAR. XTAR
successfully launched its XTAR-EUR satellite, which was
constructed by SS/L, on February 12, 2005, and it commenced
service in March 2005. XTAR also leases X-band transponders
(marketed as
XTAR-LANT)
on the Spainsat satellite, which was constructed by SS/L for
Hisdesat. Spainsat was successfully launched on March 11,
2006, and commenced service in April 2006. The XTAR-EUR and
XTAR-LANT
satellites provide high-power X-band communication services over
a large portion of the earth, including North America west to
Colorado Springs, Colorado; South America, Europe, and the
Middle East; Asia east to Singapore; and the Atlantic and Indian
Oceans.
The Company has substantial transactions with Loral Skynet,
Hisdesat, Telesat Canada and their affiliates, including
transponder leases, service agreements, and a term loan. During
2008, the Company and these related parties reached an agreement
under which the Company can indefinitely defer certain amounts
due to these related parties, to the extent that such payments
would cause the Companys cash balance to be less than a
specified amount. These matters are discussed in more detail in
notes 8 and 9 to the consolidated financial statements.
The consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting
principles (U.S. GAAP) and in U.S. dollars. The
consolidated financial statements include the accounts of XTAR
and its wholly owned subsidiary. All intercompany transactions
and balances have been eliminated.
|
|
3.
|
Summary
of Significant Accounting Policies
|
Use of Estimates in Preparation of Financial
Statements The preparation of financial
statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the amounts of revenues and expenses reported for the
period. Actual results could differ from estimates.
Cash and Cash Equivalents Cash and cash
equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
Property, Plant and Equipment Property, plant
and equipment are stated at historical cost. Depreciation is
provided on the straight-line method for the satellite and
related equipment over the estimated useful lives of
F-126
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
the related assets. Leasehold improvements on the Spainsat
transponders leased from Hisdesat are being amortized over the
life of the lease, which equates to the estimated useful life of
the underlying satellite asset. Below are the estimated useful
lives of our property, plant and equipment:
|
|
|
|
|
Years
|
|
Satellite-in-orbit
|
|
15
|
Earthstations
|
|
7-15
|
Equipment, furniture and fixtures
|
|
3
|
Leasehold improvement on Spainsat Transponders
|
|
15
|
Valuation of Satellite, Long-Lived Assets The
carrying value of the Companys satellite and other
long-lived assets is reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). The Company periodically
evaluates potential impairment loss relating to their satellite
and other long-lived assets, when a change in circumstances
occurs, by assessing whether the carrying amount of these assets
can be recovered over their remaining lives through future
undiscounted expected cash flows generated by those assets
(excluding financing costs). If the expected undiscounted future
cash flows were less than the carrying value of the long-lived
asset, an impairment charge would be recorded based on such
assets estimated fair value. Changes in estimates of
future cash flows could result in a write-down of the asset in a
future period. Estimated future cash flows from our satellite
could be impacted by, among other things:
|
|
|
|
|
Changes in estimates of the useful life of the satellite
|
|
|
|
Changes in estimates of our ability to operate the satellite at
expected levels
|
|
|
|
Changes in the manner in which the satellite is to be used
|
|
|
|
The loss of one or several significant customer contracts on the
satellite
|
If an impairment loss was indicated for the satellite, such
amount would be recognized in the period of occurrence, net of
any insurance proceeds to be received so long as such amounts
are determinable and receipt is probable. If no impairment loss
was indicated in accordance with SFAS 144, and the Company
received insurance proceeds, the proceeds would be recognized in
their statement of operations.
Fair
Value of Financial Instruments
Financial instruments include cash and cash equivalents,
customer receivables, accounts payable, certain other accrued
liabilities, the Hisdesat Term Loan (Note 9), and the
Arianespace Incentive Cap (Note 10). The carrying amounts
of the financial investments are reasonable estimates of their
fair values.
Revenue Recognition The Company provides
satellite capacity under lease agreements that generally provide
for the use of satellite transponders for periods generally
ranging from three months to three years. Some of these
agreements have certain obligations, including providing spare
or substitute capacity, if available, in the event of satellite
failure. If no spare or substitute capacity is available, the
agreement may be terminated. Revenue under transponder lease
agreements is recognized as services are performed, provided
that a contract exists, the price is fixed or determinable and
collectibility is reasonably assured. Revenues under contracts
that include fixed lease payment increases
and/or free
rent periods are recognized on a straight-line basis over the
life of the lease.
Income Taxes XTAR is a Delaware limited
liability company treated as a partnership for U.S. tax
purposes. As such, no U.S. income tax provision (benefit)
is included in the accompanying financial statements because
U.S. income taxes are the responsibility of its members.
XTAR is subject to foreign income taxes on certain income from
sources outside the United States.
F-127
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
Taxes Collected from Customers and Remitted to Governmental
Authorities In accordance with EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation), the
Company has included $605, $527, and $522, in gross revenue for
taxes collected from customers to be remitted to government
authorities for fiscal years 2008, 2007, and 2006, respectively.
Additional Cash Flow Information Supplemental
information to the consolidated statements of cash flows for the
years ended December 31, 2008, 2007, and 2006, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure incurred and unpaid related
parties
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable converted to equity
|
|
$
|
4,190
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
2,546
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign taxes paid net of refunds
|
|
$
|
533
|
|
|
$
|
524
|
|
|
$
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency XTAR uses the
U.S. dollar as its functional currency. Foreign currency
denominated monetary assets and liabilities are remeasured into
U.S. dollars at the period end rate and the expenses are
translated at the average exchange rate in effect during each
period. Nonmonetary assets, liabilities and equity are
maintained at historical cost. Gains or losses are recognized in
other income (expense) on the consolidated statements of
operations.
Comprehensive Income Comprehensive income
(loss) is comprised of two components: net loss and other
comprehensive income (loss). Other comprehensive income (loss)
refers to revenue, expenses, gains and losses that under
U.S. GAAP are recorded as an element of members
equity, but are excluded from net loss. Comprehensive loss for
the years ended December 31, 2008, 2007, and 2006, was the
same as net loss.
Prospective Method of Valuing/Accreting Arianespace Incentive
Obligation The Company adopted the
prospective method, as described in EITF Issue No.
99-20, of
accreting the Arianespace incentive cap liability (see
Note 10). Under this accounting policy the Company accounts
for differences in actual versus expected cash flows or
revisions of future cash flow projections in light of current
information prospectively that is, as an adjustment
to the effective yield to be recognized in interest expense over
the remaining life of the contracts, rather than as an
adjustment to the carrying amount.
|
|
4.
|
New
Accounting Pronouncements
|
FIN 48 In June 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements and
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. The
interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. In accordance with FSP
FIN 48-3, Effective Date of FASB Interpretation
No. 48 for Certain Nonpublic Enterprises, the Company
has elected to defer the application of FIN 48 until
January 1, 2009. The Company evaluates uncertain tax
positions based on the probable outcome of potential audit
issues estimating the additional taxes that may be due in the
future.
SFAS 157 In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements
(SFAS 157), to define fair value, establish
a framework for measuring fair value in accordance with United
States GAAP and
F-128
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
expand disclosures about fair value measurements. SFAS 157
requires quantitative disclosures using a tabular format in all
periods and qualitative disclosures about the valuation
techniques used to measure fair value in all annual periods. The
Company adopted SFAS 157 on January 1, 2008. The
adoption of SFAS 157 did not have a significant impact on
our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2)
which delayed the effective date of SFAS 157 for all
non-financial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis.
FSP 157-2
is effective for the Company on January 1, 2009. The
Company is currently evaluating the impact of the adoption of
FSP 157-2
will have on the Companys consolidated financial position
and results of operations.
SFAS 159 In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). Under SFAS 159, a company
may elect to use fair value to measure certain financial assets
and financial liabilities, on an
instrument-by-instrument
basis. Subsequent to the adoption of SFAS 159, changes in
fair value are recognized in earnings. The Company adopted
SFAS 159 on January 1, 2008, and did not elect the
fair value option for any of its qualifying financial
instruments.
SFAS 141R In December 2007, the FASB
issued Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations (SFAS
141R). SFAS 141R broadens the guidance of
SFAS 141, extending its applicability to all transactions
and other events in which one entity obtains control over one or
more other businesses. It broadens the fair value measurement
and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations.
SFAS 141R expands on required disclosures to improve the
statement users abilities to evaluate the nature and
financial effects of business combinations. SFAS 141R requires
the acquirer to recognize as an adjustment to income tax
expense, changes in the valuation allowance for acquired
deferred tax assets. SFAS 141R is effective for any
business comobinations entered into by the Company on or after
January 1, 2009. We are currently evaluating the impact of
adopting SFAS 141R.
|
|
5.
|
Property,
Plant and Equipment
|
Property, plant and equipment as of December 31, 2008 and
2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Satellite in-orbit
|
|
$
|
130,436
|
|
|
$
|
130,436
|
|
Earth stations
|
|
|
9,177
|
|
|
|
9,177
|
|
Equipment, furniture and fixtures
|
|
|
387
|
|
|
|
387
|
|
Leasehold improvement on transponders
|
|
|
2,100
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,100
|
|
|
|
142,100
|
|
Accumulated depreciation and amortization
|
|
|
(36,178
|
)
|
|
|
(26,562
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment net
|
|
$
|
105,922
|
|
|
$
|
115,538
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for property, plant and
equipment was $9,616, $9,712, and $9,659, for the years ended
December 31, 2008, 2007, and 2006, respectively.
F-129
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
The transponder capacity on our satellite in-orbit is available
for lease to customers. Future minimum lease receipts due from
customers under long-term operating leases for transponder
capacity as of December 31, 2008, are as follows:
|
|
|
|
|
December 31
|
|
|
|
|
2009
|
|
$
|
8,303
|
|
2010
|
|
|
1,216
|
|
2011
|
|
|
1,199
|
|
Other assets as of December 31, 2008 and 2007, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Regulatory and orbital slot
|
|
$
|
518
|
|
|
$
|
518
|
|
Accumulated amortization
|
|
|
(130
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets net
|
|
|
388
|
|
|
|
423
|
|
Other assets
|
|
|
20
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
408
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
In connection with the execution of the Companys LLC
Operating Agreement, Hisdesat agreed to freely license XTAR the
right to the XTAR-EUR orbital slot provided that XTAR would
reimburse the related orbital slot filing and regulatory fees.
The Company paid $518 of such filing and regulatory fees and has
recorded the amounts as an intangible asset on the consolidated
balance sheet amortized over a 15 year useful life.
Total amortization expense was $35 for each of the years ended
December 31, 2008, 2007, and 2006. Annual pre-tax
amortization for intangible assets for the five years ending
December 31, 2013, and thereafter is estimated to be as
follows:
|
|
|
|
|
Years Ending December 31
|
|
|
|
|
2009
|
|
$
|
35
|
|
2010
|
|
|
35
|
|
2011
|
|
|
35
|
|
2012
|
|
|
35
|
|
2013
|
|
|
35
|
|
Thereafter
|
|
|
213
|
|
|
|
|
|
|
Total
|
|
$
|
388
|
|
|
|
|
|
|
The provision for income taxes consists of a current foreign tax
provision in the amount of $633, $560, and $516, for the years
ended December 31, 2008, 2007, and 2006, respectively.
XTAR is a Delaware limited liability company treated as a
partnership for U.S. tax purposes. As such, no
U.S. income tax provision (benefit) is required since
U.S. income taxes are the responsibility of its members.
Generally, taxable income or loss, deductions and credits are
passed through to its members in proportion to their percentage
interest.
F-130
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
XTAR is subject to foreign income taxes on certain income from
sources outside the United States, including sales to customers
in certain countries, such as Spain, where a withholding tax is
imposed against gross sales in lieu of a tax on net income, and
branch income earned in certain foreign countries. During 2008,
2007, and 2006, we paid $533, $524, and $522, respectively, of
Spanish income tax.
|
|
8.
|
Related
Party Transactions
|
In addition to the transaction described in Note 9, XTAR
has additional transactions with its shareholders and their
subsidiaries and affiliates. The following describes such
related party transactions.
Lease of Capacity to Hisdesat on XTAR-EUR
XTAR leases X-Band space segment capacity to Hisdesat on its
XTAR-EUR satellite to enable Hisdesat to provide services to the
Spanish government, as well as re-leasing XTAR capacity to other
European governments. Revenue recognized under these lease
agreements during the years ended December 31, 2008, 2007,
and 2006, was $7,179, $6,340, and $6,918, respectively. Hisdesat
owed XTAR $1,578 and $1,171 as of December 31, 2008 and
2007, respectively.
XTAR has agreed to provide
back-up
service to Hisdesat in the event of a partial or total failure
of the Spainsat satellite. Accordingly, the 238 MHz of
transponder capacity on XTAR-EUR that would be utilized to
provide such
back-up
service can be leased by XTAR only on a preemptible basis.
Hisdesat is not required to make any payments to XTAR until such
capacity is actually utilized, at which time, if the full
238 MHz is utilized, Hisdesat would pay to XTAR $1,300 per
month for such capacity.
The components of the payable to related parties as of
December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Lease obligation To Hisdesat
|
|
$
|
32,308
|
|
|
$
|
17,348
|
|
Operations Services Agreements With Hisdesat
|
|
|
2,093
|
|
|
|
3,454
|
|
Hisdesat Management Agreement With XTAR
|
|
|
1,153
|
|
|
|
1,175
|
|
Loral Skynet/Telesat Canada/Space Systems Loral Services
Agreement
|
|
|
2,972
|
|
|
|
3,646
|
|
Loral SpaceCom Corporation Management Agreement With XTAR
|
|
|
1,296
|
|
|
|
1,632
|
|
Other
|
|
|
32
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,854
|
|
|
$
|
27,286
|
|
|
|
|
|
|
|
|
|
|
Lease Obligation to Hisdesat XTAR signed an
agreement with Hisdesat in February 2002 to procure satellite
transponder capacity on the Spainsat
(XTAR-LANT)
satellite for commercial resale to XTAR customers. The agreement
provides a minimum lease obligation, initially of 25% ramping up
to 90% of the eight transponders made available by Hisdesat
through the end of life of the Spainsat satellite. Spainsat was
successfully launched on March 11, 2006, and commenced
service in April 2006. XTARs lease obligation to Hisdesat
for the
XTAR-LANT
transponders was initially $7,744 per year, ultimately growing
to $27,486 per year. The lease expense is recorded on a
straight-line basis for the increasing lease payments. The
deferred lease liability which is recorded as other long-term
liabilities was $4,373 and $2,116, as of December 31, 2008
and 2007, respectively. Under this lease agreement, Hisdesat may
also be entitled under certain circumstances to a share of the
revenues generated on the
XTAR-LANT
transponders. Cost of satellite services recognized under the
lease obligations for the years ended December 31, 2008,
2007, and 2006 were $25,309, $14,665, and $5,201, respectively.
Total amounts due to Hisdesat under the lease obligation,
including interest on past due invoices, as of December 31,
2008 and 2007, are $32,308 and $17,348, respectively. As of
December 31, 2008, XTAR has no customer requirements for
this Spainsat capacity. While XTAR has made certain limited
payments to Hisdesat in respect of this lease obligation, XTAR
will not, absent a substantial increase in its
take-up
rate, have the ability to service this obligation. XTAR and
Hisdesat have entered into an arrangement to indefinitely defer
payments on the Spainsat lease subject to distribution of excess
F-131
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
cash over $3,000. The following table presents the future
minimum payments, excluding interest, due under this lease
agreement:
|
|
|
|
|
Years Ending December 31
|
|
|
|
|
2009
|
|
$
|
23,420
|
|
2010
|
|
|
23,794
|
|
2011
|
|
|
24,175
|
|
2012
|
|
|
24,562
|
|
2013
|
|
|
24,955
|
|
Thereafter
|
|
|
195,114
|
|
|
|
|
|
|
Total
|
|
$
|
316,020
|
|
|
|
|
|
|
Operations Services Agreements With Hisdesat
XTAR signed an agreement with Hisdesat in January 2005 whereby
Hisdesat provides ground control system operation and
maintenance services through the end of life of XTAR-EUR
satellite. XTAR is to pay Hisdesat Euros 41 per month ($54 and
$60 on the basis of exchange rates as of December 31, 2008
and 2007, respectively). Cost of satellite services recognized
under this agreement for the years ended December 31, 2008,
2007, and 2006, were $844, $786, and $696, respectively. XTAR
and Hisdesat have also entered into an agreement whereby
Hisdesat provides XTAR tax and legal representation in Spain.
Expenses related to these services are included in selling,
general and administrative expenses and for the years ended
December 31, 2008, 2007, and 2006, amounted to $116, $109,
and $99, respectively. Amounts due to Hisdesat under these
agreements as of December 31, 2008 and 2007, were at $2,093
and $3,454, respectively.
Hisdesat Management Agreement With XTAR XTAR
and Hisdesat have entered into a management agreement whereby
Hisdesat provides general and specific services of technical,
financial, commercial and administrative nature to XTAR in
Europe and Latin America. For the services rendered by Hisdesat,
XTAR is to pay a quarterly management fee equal to 2.9% of
XTARs quarterly gross revenues. Expenses recognized under
the agreement included in selling, general and administrative
expense for the years ended December 31, 2008, 2007, and
2006, were $592, $561, and $445, respectively. Amounts due to
Hisdesat under the management agreement as of December 31,
2008 and 2007, were $1,153 and $1,175, respectively.
Loral Skynet Corporation/Telesat Canada Service/Space Systems
Loral Agreements and Arrangements With XTAR XTAR
signed agreements with Loral Skynet in January 2004 whereby
Loral Skynet agreed to provide telemetry, tracking and control
(TT&C) services, access management services through the end
of life of XTAR-EUR satellite as well as a satellite
construction oversight service, which is no longer active. XTAR
is to pay Loral Skynet $46 per month for TT&C and $28 per
month for access management. In October 2007 in connection with
the Telesat Canada Transaction, Loral Skynet assigned these
agreements, as well as the outstanding payables owed by XTAR to
Loral Skynet, to Telesat Canada. Cost of satellite services
recognized under these agreements for the years ended
December 31, 2008, 2007, and 2006, are $888, $883, and
$933, respectively.
XTAR and Loral Skynet have also entered into agreements whereby
Loral Skynet provided to XTAR certain general and administrative
services. In October 2007, Loral Skynet assigned these
agreements, as well as the outstanding payables owed by XTAR to
Loral Skynet, to Telesat Canada. Selling, general and
administrative expenses recognized under these agreements for
the years ended December 31, 2008, 2007, and 2006, were
$185, $408, and $424, respectively. The Global Administration
contract with Loral Skynet expired June 30, 2008 and
effective July 1, 2008 Space System Loral took over that
function which resulted in fees of $45 for the remainder of 2008.
Loral provides US employee benefits administration and certain
XTAR employees participate in the Loral pension plan. Loral
charges XTAR for this cost which amounted to $0, $58, and $55
for the years ended December 31, 2008, 2007, and 2006,
respectively.
F-132
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
Amounts due under these agreements as of December 31, 2008
and 2007, were $2,972 and $3,646, respectively.
Loral Space & Communications Inc. Management
Agreement With XTAR XTAR and Loral
Space & Communications Inc. have entered into a
management agreement whereby Loral Space &
Communications, Inc. provides general and specific services of a
technical, financial, commercial and administrative nature to
XTAR. For the services rendered by Loral Space &
Communications Inc., XTAR is to pay a quarterly management fee
equal to 3.7% of XTARs quarterly gross revenues. Selling,
general and administrative expenses recognized under these
agreements for the years ended December 31, 2008, 2007, and
2006, were $755, $716, and $567, respectively. Amounts due to
Loral Space & Communications Inc. under the management
agreement as of December 31, 2008 and 2007, were at $1,296
and $1,632, respectively.
Deferment Arrangement With Hisdesat, Loral and Telesat
Canada As of December 31, 2008 and 2007,
XTAR owes Hisdesat and Loral, including its subsidiaries,
$39,854 and $27,286, respectively. Loral and Hisdesat have
agreed to defer the outstanding balances, except any interest
due on the Spainsat lease, indefinitely, to the extent that such
payments would cause the Companys cash balance to be less
than $3 million. Any cash balance over $3 million
shall be applied in the following manner: 50% of such excess
cash balance shall be applied to pay outstanding balances due on
the Spainsat lease, with the remaining 50% to be applied to pay
outstanding balances owed to each of Hisdesat and Loral,
including its subsidiaries. The Company and Hisdesat executed an
agreement on March 13, 2008, whereby interest on past dues
relating to Spainsat lease, plus any and all future interest
amounts on Spainsat lease, will be capitalized into equity by
issuing a class of nonvoting equity interests in the Company
(the Class A Equity), which class will enjoy
priority rights over Lorals and Hisdesats existing
equity interests in the Company in respect of all dividends and
distributions until such time as the Class A Equity has
been repaid in full. For the year ended December 31, 2008,
$4,190 of lease interest has been converted into non-voting
equity interest in XTAR.
Hisdesat Term Loan In January 2005, Hisdesat
provided XTAR with a convertible 8% loan in the amount of
$10,787 due September 2011, for which Hisdesat received enhanced
governance rights in XTAR. If Hisdesat were to convert the loan
into XTAR equity, Loral Skynets equity interest in XTAR
would be reduced to 51% and Hisdesats equity interest
would increase to 49%. The principal amount and interest accrued
on the term loan as of December 31, 2008 and 2007, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Principal amount
|
|
$
|
10,787
|
|
|
$
|
10,787
|
|
Interest accrued
|
|
|
3,957
|
|
|
|
2,845
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,744
|
|
|
$
|
13,632
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Other
Long Term Liabilities
|
XTAR entered into a Launch Services Agreement with Arianespace
providing for the launch of its XTAR-EUR satellite on
Arianespaces Ariane 5 ECA launch vehicle. Arianespace
provided a one-year, $15,800, 10% interest
paid-in-kind
loan for a portion of the launch price in addition to a
revenue-based fee (incentive portion) to be paid over time for
the remainder of the launch price. The Company granted and
pledged to Arianespace a security interest in the XTAR-EUR
satellite to ensure payment of the liabilities. The incentive
portion of the launch service price is based on 3.5% of annual
operating revenues during the 15 year in-orbit operations
of the satellite subject to a maximum threshold, as defined in
the Launch Services Agreement (the Incentive Cap).
The Incentive Cap is set at $20,000 through December 2007 and
shall be increased by $208 each month beginning January 2008 to
a maximum of $50,000 on December 1, 2019. The Company has
the option to prepay some or all of this incentive portion and
F-133
XTAR,
L.L.C.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollar
amounts in thousands, unless otherwise noted)
once the incentive payments actually paid to Arianespace equal
the Incentive Cap at any point in time, we will have no further
payment obligation to Arianespace. At the end of XTAR-EURs
useful life, the Company will have no further obligation to
Arianespace on the incentive portion, even if the aggregate
amount of the incentive fee payments shall not have reached the
$50,000 Incentive Cap. The carrying value of the incentive
payable to Arianespace is arrived at by accreting interest on
the previous years outstanding balance at a rate that
equates the 3.5% fee payable on the projected revenue through
the end of the life of the XTAR-EUR satellite.
All yearly incentive payments earned prior to 2007 were payable
together with the yearly incentive payment of fiscal year 2007
before February 29, 2008. XTAR made the first incentive
payment of $1,544 on February 29, 2008.
The current and long term liabilities as of December 31,
2008 and 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Straight lining of Spainsat lease
|
|
$
|
4,373
|
|
|
$
|
2,116
|
|
Arianespace Incentive Cap
|
|
|
19,669
|
|
|
|
20,582
|
|
Less current portion of Arianespace Incentive Cap
|
|
|
(8,000
|
)
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
|
|
|
Total long term liabilities
|
|
$
|
16,042
|
|
|
$
|
21,154
|
|
|
|
|
|
|
|
|
|
|
Xtar and Arianespace entered into an Incentive Prepayment
Agreement on January 27, 2009, whereby both parties agree
to reduce the liability to $8,000. The liability will be paid
off in three installments with the final installment due
June 30, 2009. The Company has already made a $4,000
payment in January 2009. The carrying value of the total
liability as of December 31, 2008 of $19,669 has not been
adjusted to reflect this subsequent agreement, but the $8,000
due in 2009 has been classified as a current liability at
December 31, 2008.
Revenue by Customer Location Our revenues by
country based on customer location for the years ended
December 31, 2008, 2007, and 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
13,226
|
|
|
$
|
12,999
|
|
|
$
|
8,416
|
|
Spain
|
|
|
7,179
|
|
|
|
6,340
|
|
|
|
6,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,405
|
|
|
$
|
19,339
|
|
|
$
|
15,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2009, Loral made an equity contribution of $4,480 to
XTAR.
* * * * * *
F-134