NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Organization and Principal Business
Loral Space &
Communications Inc., together with its subsidiaries (“Loral,” the “Company,” “we,” “our”
and “us”) is a leading satellite communications company engaged, through our ownership interests in affiliates, in
satellite-based communications services.
Description of Business
Loral has one operating
segment consisting of satellite-based communications services. Loral participates in satellite services operations through its
ownership interest in Telesat Holdings Inc. which owns Telesat Canada, a global satellite services operator. We refer, as the context
requires, to each or both of Telesat Holdings Inc. and Telesat Canada as “Telesat.” Telesat owns and leases a satellite
fleet that 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 earth’s surface and provide reliable, high-bandwidth services anywhere in their
coverage areas, serving as the backbone for many forms of telecommunications.
Loral holds a 62.7%
economic interest and a 32.7% voting interest in Telesat (see Note 6). We use the equity method of accounting for our ownership
interest in Telesat.
2. Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission
(“SEC”) and, in our opinion, include all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of results of operations, financial position and cash flows as of the balance sheet dates presented and for the periods
presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or
omitted pursuant to SEC rules. We believe that the disclosures made are adequate to keep the information presented from being misleading.
The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results
to be expected for the full year.
The December 31, 2015
balance sheet has been derived from the audited consolidated financial statements at that date. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements included in our latest Annual Report
on Form 10-K filed with the SEC.
Discontinued Operations
On November 2, 2012,
Loral completed the sale (the “Sale”) of its wholly-owned subsidiary, Space Systems/Loral, LLC (formerly known as Space
Systems/Loral, Inc.) (“SS/L”), to MDA Communications Holdings, Inc. (“MDA Holdings”), a subsidiary of MacDonald,
Dettwiler and Associates Ltd. (“MDA”). Pursuant to the purchase agreement (the “Purchase Agreement”), dated
as of June 26, 2012, as amended on October 30, 2012 and March 28, 2013, by and among Loral, SS/L, MDA and MDA Holdings, Loral agreed
to indemnify MDA and its affiliates from (1) liabilities with respect to certain pre-closing taxes; and (2) certain damages and
legal expenses stemming from a lawsuit (the “ViaSat Suit”) brought in 2012 by ViaSat, Inc. (“ViaSat”) against
Loral and SS/L (see Note 14).
Adjustments to amounts
previously reported in discontinued operations and interest expense that are directly related to the Sale are classified as discontinued
operations in the statements of operations and cash flows for the three and nine months ended September 30, 2016 and 2015.
Investments in Affiliates
Ownership interests in Telesat and XTAR,
LLC (“XTAR”) are accounted for using the equity method of accounting. Income and losses of affiliates are recorded
based on our beneficial interest. Our equity in net income or loss also reflects amortization of profits eliminated, to the extent
of our economic interest in Telesat and XTAR, on satellites we constructed for them while we owned SS/L and on Loral’s sale
to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets. 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 is recognized when there has been a loss in value of the affiliate that is other-than-temporary.
As discussed in Note 6, during the nine months ended September 30, 2016, we recorded an increase in our equity in net income of
affiliates of $3.0 million ($1.8 million net of tax), which represents our proportionate share of equity in net income of Telesat
that should have been recognized in prior periods.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
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 amount of income (loss) reported for the period. Actual results could materially differ from estimates.
Significant estimates
also included the allowances for doubtful accounts, income taxes, including the valuation of deferred tax assets, the fair value
of liabilities indemnified and our pension liabilities.
Cash and Cash Equivalents
As of September 30,
2016, the Company had $42.7 million of cash and cash equivalents. Cash and cash equivalents include liquid investments, primarily
money market funds, with original 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.
Concentration of Credit Risk
Financial instruments
which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and receivables.
Our cash and cash equivalents are maintained with high-credit-quality financial institutions. As a result, management believes
that its potential credit risks are minimal.
Fair Value Measurements
U.S. GAAP defines fair
value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants. U.S. GAAP also establishes a fair value hierarchy
that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair
value hierarchy are described below:
Level 1:
Inputs
represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in active markets
at the measurement date.
Level 2:
Inputs
represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities,
and pricing inputs, other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level 3:
Inputs
are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Assets and Liabilities Measured at Fair Value
The following table
presents our assets and liabilities measured at fair value at September 30, 2016 and December 31, 2015 (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
40,264
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53,129
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Sale of SS/L
|
|
|
—
|
|
|
|
—
|
|
|
|
1,953
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,953
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Globalstar do Brasil S.A.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
967
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,006
|
|
The carrying amount of cash equivalents
approximates fair value as of each reporting date because of the short maturity of those instruments.
The asset resulting
from the indemnification of SS/L is for certain pre-closing taxes and reflects the excess of payments since inception over the
estimated liability, which was originally determined using the fair value objective approach. The estimated liability for indemnifications
relating to Globalstar do Brasil S.A. (“GdB”), originally determined using expected value analysis, is net of payments
since inception.
The Company does not
have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair value as of September 30, 2016
and December 31, 2015.
Assets and Liabilities Measured at Fair
Value on a Non-recurring Basis
We review the carrying
values of our equity method investments when events and circumstances warrant and consider all available evidence in evaluating
when declines in fair value are other-than-temporary. The fair values of our investments are determined based on valuation techniques
using the best information available and may include quoted market prices, market comparables and discounted cash flow projections.
An impairment charge is recorded when the carrying amount of the investment exceeds its current fair value and is determined to
be other-than-temporary.
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 management’s 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.
Recent Accounting Pronouncements
In August 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15,
Statement
of Cash Flows (Topic 230)
, a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce
diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance relevant to the Company
provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can
be classified using (i) a cumulative earnings approach, or (ii) a nature of distribution approach. Under the cumulative earnings
approach, an investor compares the distributions received to such investor’s cumulative equity method earnings since inception.
Any distributions received up to the amount of cumulative equity earnings are considered a return on investment and classified
in operating activities. Any excess distributions are considered a return of investment and classified in investing activities.
Alternatively, under the nature of distribution approach, an investor classifies the distributions based on the nature of activities
of the investee that generated the distribution. If the necessary information is subsequently not available for an investee to
determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and report a change
in accounting principle on a retrospective basis. The new guidance is effective for the Company on January 1, 2018, with earlier
application permitted in any interim or annual period, using a retrospective transition method. The Company is currently evaluating
the impact of ASU No. 2016-15 on its consolidated financial statements.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
In March 2016, the
FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
ASU No. 2016-09 simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences. Under the new guidance,
all excess tax benefits and tax deficiencies related to share-based payment transactions should be recognized in the current period
as discrete adjustments to income tax expense or benefit in the income statement. Under previous U.S. GAAP, excess tax benefits
were recognized in additional paid-in capital while tax deficiencies were recognized first as an offset to accumulated excess tax
benefits, then as additional income tax expense. Also, under previous U.S. GAAP, excess tax benefits were not recognized until
the related income tax deduction reduced income taxes payable. The new guidance is effective for the Company on January 1, 2017,
with earlier application permitted in any interim or annual period. Upon adoption, previously unrecognized excess tax benefits
will be recognized as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of ASU
No. 2016-09 on its consolidated financial statements.
In February 2016, the
FASB amended the Accounting Standards Codification (“ASC”) by creating ASC Topic 842,
Leases.
ASC Topic 842
requires a lessee to record a right-of-use asset and a lease liability for all leases with a lease term greater than 12 months.
The main difference between previous U.S. GAAP and ASC Topic 842 is the recognition under ASC 842 of lease assets and lease liabilities
by lessees for those leases classified as operating leases under previous U.S. GAAP. The new guidance, effective for the Company
on January 1, 2019, with earlier application permitted, is not expected to have a material impact on our consolidated financial
statements.
In January 2015, the
FASB issued ASU No. 2015-01,
Income Statement – Extraordinary and Unusual Items.
ASU 2015-01 simplifies income statement
classification by removing the concept of extraordinary items from U.S. GAAP. Under previous U.S. GAAP, an entity was required
to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event
or transaction was of unusual nature and occurred infrequently. This separate, net-of-tax presentation (and corresponding earnings
per share impact) is no longer allowed. The requirement to separately present items that are of unusual nature or occur infrequently
on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate
presentation of items that are both unusual and infrequent. The guidance, effective for the Company on January 1, 2016, did not
have a material impact on our consolidated financial statements.
In August 2014, the
FASB issued a new standard – ASU No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern
- that will explicitly require management to evaluate whether there is substantial doubt about an entity’s
ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. According to the new
standard, substantial doubt about an entity’s ability to continue as a going concern exists if it is probable that the entity
will be unable to meet its obligations as they become due within one year after the date the entity’s financial statements
are issued. In order to determine the specific disclosures, if any, that would be required, management will need to assess if substantial
doubt exists, and, if so, whether its plans will alleviate such substantial doubt. The new standard requires assessment each annual
and interim period and will be effective for the Company on December 31, 2016 with earlier application permitted. We do not expect
this guidance to have a material impact on our consolidated financial statements.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Additional Cash Flow Information
The following represents
non-cash activities and supplemental information to the condensed consolidated statements of cash flows (in thousands):
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Non-cash operating items:
|
|
|
|
|
|
|
|
|
Equity in net (income) loss of affiliates
|
|
$
|
(96,799
|
)
|
|
$
|
90,233
|
|
Deferred taxes
|
|
|
29,010
|
|
|
|
(33,248
|
)
|
Depreciation
|
|
|
42
|
|
|
|
26
|
|
Amortization of prior service credit and actuarial loss
|
|
|
687
|
|
|
|
1,058
|
|
Net non-cash operating items – continuing operations
|
|
$
|
(67,060
|
)
|
|
$
|
58,069
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid – continuing operations
|
|
$
|
15
|
|
|
$
|
310
|
|
Interest paid – discontinued operations
|
|
$
|
641
|
|
|
$
|
1,234
|
|
Tax payments – continuing operations
|
|
$
|
194
|
|
|
$
|
1,785
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
3. Accumulated Other Comprehensive Loss
The components of accumulated
other comprehensive loss, net of tax, are as follows (in thousands):
|
|
|
|
|
Proportionate
|
|
|
|
|
|
|
|
|
|
Share of
|
|
|
Accumulated
|
|
|
|
|
|
|
Telesat Other
|
|
|
Other
|
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Benefits
|
|
|
Loss
|
|
|
Loss
|
|
Balance at January 1, 2015
|
|
$
|
(13,982
|
)
|
|
$
|
(15,239
|
)
|
|
$
|
(29,221
|
)
|
Other comprehensive loss before reclassification
|
|
|
(265
|
)
|
|
|
—
|
|
|
|
(265
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
788
|
|
|
|
—
|
|
|
|
788
|
|
Net current-period other comprehensive income
|
|
|
523
|
|
|
|
—
|
|
|
|
523
|
|
Balance at December 31, 2015
|
|
|
(13,459
|
)
|
|
|
(15,239
|
)
|
|
|
(28,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassification
|
|
|
—
|
|
|
|
10,863
|
|
|
|
10,863
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
426
|
|
|
|
—
|
|
|
|
426
|
|
Net current-period other comprehensive income
|
|
|
426
|
|
|
|
10,863
|
|
|
|
11,289
|
|
Balance at September 30, 2016
|
|
$
|
(13,033
|
)
|
|
$
|
(4,376
|
)
|
|
$
|
(17,409
|
)
|
The components of other
comprehensive income and related tax effects are as follows (in thousands):
|
|
Three Months
|
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
Amortization of prior service credits and net actuarial loss
|
|
$
|
229
|
(a)
|
|
$
|
(88
|
)
|
|
$
|
141
|
|
|
$
|
205
|
(a)
|
|
$
|
(76
|
)
|
|
$
|
129
|
|
Proportionate share of Telesat other comprehensive income (loss)
|
|
|
2,580
|
(b)
|
|
|
(1,008
|
)
|
|
|
1,572
|
|
|
|
(1,318
|
)
(b)
|
|
|
491
|
|
|
|
(827
|
)
|
Other comprehensive income
|
|
$
|
2,809
|
|
|
$
|
(1,096
|
)
|
|
$
|
1,713
|
|
|
$
|
(1,113
|
)
|
|
$
|
415
|
|
|
$
|
(698
|
)
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
Amortization of prior service credits and net actuarial loss
|
|
$
|
687
|
(a)
|
|
$
|
(261
|
)
|
|
$
|
426
|
|
|
|
1,058
|
(a)
|
|
|
(394
|
)
|
|
|
664
|
|
Proportionate share of Telesat other comprehensive income
|
|
|
17,522
|
(b)
|
|
|
(6,659
|
)
|
|
|
10,863
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other comprehensive income
|
|
$
|
18,209
|
|
|
$
|
(6,920
|
)
|
|
$
|
11,289
|
|
|
$
|
1,058
|
|
|
$
|
(394
|
)
|
|
$
|
664
|
|
|
(a)
|
Reclassifications are included in general and administrative expenses.
|
|
(b)
|
See Note 6 for discussion of our share of Telesat other comprehensive income (loss).
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
4. Receivables
In connection with
the Sale, Loral received a three-year promissory note in the principal amount of $101 million (the “Land Note”). Loral
received the final principal payment under the Land Note of $33.7 million on March 31, 2015. Interest on the Land Note ranged from
1.0% to 1.5%.
5. Other Current Assets
Other current assets
consists of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Indemnification receivable from SS/L for pre-closing taxes (see Note 14)
|
|
$
|
1,953
|
|
|
$
|
1,953
|
|
Due from affiliates
|
|
|
233
|
|
|
|
381
|
|
Prepaid expenses
|
|
|
445
|
|
|
|
169
|
|
Income taxes receivable
|
|
|
270
|
|
|
|
358
|
|
Other
|
|
|
97
|
|
|
|
118
|
|
|
|
$
|
2,998
|
|
|
$
|
2,979
|
|
6. Investments in Affiliates
Investments in affiliates
consist of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Telesat Holdings Inc.
|
|
$
|
114,321
|
|
|
$
|
—
|
|
XTAR, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
114,321
|
|
|
$
|
—
|
|
Equity in net income
(loss) of affiliates consists of (in thousands):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Telesat Holdings Inc.
|
|
$
|
6,948
|
|
|
$
|
(27,913
|
)
|
|
$
|
96,799
|
|
|
$
|
(74,329
|
)
|
XTAR, LLC
|
|
|
—
|
|
|
|
(10,562
|
)
|
|
|
—
|
|
|
|
(15,904
|
)
|
|
|
$
|
6,948
|
|
|
$
|
(38,475
|
)
|
|
$
|
96,799
|
|
|
$
|
(90,233
|
)
|
Telesat
As of September 30,
2016, we held a 62.7% economic interest and a 32.7% voting interest in Telesat. Our economic interest decreased from 62.8% to 62.7%
in March 2016 when certain Telesat employees exercised share appreciation rights related to a total of 178,642 stock options granted
under Telesat’s share-based compensation plan and received 129,400 non-voting participating preferred shares. Also
in March 2016, a total of 1,253,477 vested stock options were repurchased at fair value from Telesat management personnel and other
employees for total cash consideration of CAD 24.7 million, of which CAD 18.7 million was paid to management personnel.
We use the equity method
of accounting for our majority economic interest in Telesat because we own 32.7% of the voting stock and do not exercise control
by other means to satisfy the U.S. GAAP requirement for treatment as a consolidated subsidiary. We have also concluded that Telesat
is not a variable interest entity for which we are the primary beneficiary. Loral’s equity in net income or loss of Telesat
is based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. Our proportionate
share of Telesat’s net income or loss is based on our 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.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
As of December 31,
2015, we had an unrecorded equity loss in Telesat of $57.9 million, the amount by which our share of Telesat’s losses together
with cash distributions we received from Telesat exceeded our recorded cumulative equity in net income of Telesat and our initial
investment. Accordingly, in following the equity method of accounting, our investment balance in Telesat was reduced to zero as
of December 31, 2015. In addition, our equity in Telesat’s other comprehensive income that we could not record as of December
31, 2015 was $20.8 million. We recognized this $57.9 million equity loss and our $20.8 million share in the equity of Telesat’s
other comprehensive income in the first quarter of 2016 as a result of the recognition of the suspended loss.
In addition, during
the nine months ended September 30, 2016, we recorded an increase in equity in net income of affiliates of $3.0 million ($1.8 million
net of tax) that should have been recognized in prior periods. As a result, earnings per share (basic and diluted) increased $0.06
per share. These non-cash adjustments, which were identified and provided by Telesat in connection with its June 30, 2016 closing
process, related primarily to an error in mark-to-market accounting for embedded foreign exchange derivatives in a Telesat customer
contract. Changes in fair value of these embedded derivatives are required to be recognized under U.S. GAAP, but not under International
Financial Reporting Standards, the basis of accounting used by Telesat. The Company has not revised previous financial statements
for these adjustments based on its belief that the effect of such adjustments is not material to the financial statements taken
as a whole. There were no corrections of prior period items during the three months ended September 30, 2016.
The ability of Telesat
to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants
in Telesat’s debt and shareholder agreements. Under Telesat’s credit agreement and the indenture for Telesat’s
6% senior notes, dividends or certain other restricted payments may be paid only if there is a sufficient capacity under a restricted
payment basket, which is based on a formula of cumulative consolidated EBITDA less 1.4 times cumulative consolidated interest expense.
Under the 6% senior note indenture and credit agreement, Telesat is generally permitted to pay consulting fees to Loral in cash
(see Note 15).
The contribution of
Loral Skynet, a wholly owned subsidiary of Loral prior to its contribution to Telesat in 2007, was recorded by Loral at the historical
book value of our retained interest combined with the gain recognized on the contribution. However, the contribution was recorded
by Telesat at fair value. Accordingly, the amortization of Telesat fair value adjustments applicable to the Loral Skynet assets
and liabilities is proportionately eliminated in determining our share of the net income or losses of Telesat. Our equity in net
income or loss of Telesat also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat,
on satellites we constructed for Telesat while we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion
of the payload on the ViaSat-1 satellite and related assets.
The following table
presents summary financial data for Telesat in accordance with U.S. GAAP and in U.S. dollars, for the three and nine months ended
September 30, 2016 and 2015 and as of September 30, 2016 and December 31, 2015 (in thousands):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
172,336
|
|
|
$
|
187,937
|
|
|
$
|
522,849
|
|
|
$
|
557,313
|
|
Operating expenses
|
|
|
(34,626
|
)
|
|
|
(34,032
|
)
|
|
|
(102,853
|
)
|
|
|
(102,918
|
)
|
Depreciation, amortization and stock-based compensation
|
|
|
(49,816
|
)
|
|
|
(46,239
|
)
|
|
|
(147,207
|
)
|
|
|
(145,067
|
)
|
Loss on disposition of long lived asset
|
|
|
(19
|
)
|
|
|
(7
|
)
|
|
|
(1,932
|
)
|
|
|
(28
|
)
|
Operating income
|
|
|
87,875
|
|
|
|
107,659
|
|
|
|
270,857
|
|
|
|
309,300
|
|
Interest expense
|
|
|
(34,311
|
)
|
|
|
(34,533
|
)
|
|
|
(104,662
|
)
|
|
|
(104,804
|
)
|
Foreign exchange (loss) gain
|
|
|
(33,639
|
)
|
|
|
(164,235
|
)
|
|
|
120,632
|
|
|
|
(333,076
|
)
|
Gain (loss) on financial instruments
|
|
|
2,587
|
|
|
|
2,968
|
|
|
|
(3,364
|
)
|
|
|
4,164
|
|
Other income
|
|
|
1,518
|
|
|
|
857
|
|
|
|
3,301
|
|
|
|
2,232
|
|
Income tax provision
|
|
|
(13,556
|
)
|
|
|
(16,289
|
)
|
|
|
(39,625
|
)
|
|
|
(54,368
|
)
|
Net income (loss)
|
|
$
|
10,474
|
|
|
$
|
(103,573
|
)
|
|
$
|
247,139
|
|
|
$
|
(176,552
|
)
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
656,254
|
|
|
$
|
568,324
|
|
Total assets
|
|
|
4,248,874
|
|
|
|
3,991,301
|
|
Current liabilities
|
|
|
1,282,027
|
|
|
|
180,462
|
|
Long-term debt, including current portion
|
|
|
2,917,704
|
|
|
|
2,950,726
|
|
Total liabilities
|
|
|
3,626,535
|
|
|
|
3,617,867
|
|
Shareholders’ equity
|
|
|
622,339
|
|
|
|
373,434
|
|
The Telesat balance
sheet data shown above as of December 31, 2015 has been restated for adoption on January 1, 2016 of ASU No. 2015-03,
Simplifying
the Presentation of Debt Issuance Costs
. As a result of this restatement, total assets and long-term debt, including current
portion, each decreased by approximately $18.1 million.
Telesat had capital
expenditures of $153.2 million and $57.0 million for the nine months ended September 30, 2016 and 2015, respectively.
XTAR
We own 56% of XTAR,
a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of Spain. We account for our ownership
interest in XTAR under the equity method of accounting because we do not control certain of its significant operating decisions.
We have also concluded that XTAR is not a variable interest entity for which we are the primary beneficiary.
XTAR owns and operates
an X-band satellite, XTAR-EUR, located at 29° E.L., which is designed to provide X-band communications services exclusively
to United States, Spanish and allied government users throughout the satellite’s coverage area, including Europe, the Middle
East and Asia. XTAR also leases 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L., owned by Hisdesat.
These transponders, designated as XTAR-LANT, provide capacity to XTAR for additional X-band services and greater coverage and flexibility.
As of September 30,
2016 and December 31, 2015, the carrying value of our investment in XTAR was zero as a result of the decline in its fair value
that was determined to be other-than-temporary. The value of our investment in XTAR was determined based on the income approach
by discounting projected annual cash flows to their present value using a rate of return appropriate for the risk of achieving
the projected cash flows. In the third quarter of 2015, we recorded an impairment charge of $8 million primarily as a result of
an increase in the discount rate used to value our investment in XTAR. We recorded an additional impairment charge of $13.2 million
in the fourth quarter of 2015 primarily due to the reassessment of our revenue expectations for future years dictated by a decline
in XTAR’s revenues by approximately 11% from 2014 to 2015. Beginning January 1, 2016, we discontinued providing for our allocated
share of XTAR’s net losses as our investment has been reduced to zero and we have no commitment to provide further financial
support to XTAR.
XTAR’s lease
obligation to Hisdesat for the XTAR-LANT transponders (the “Transponder Service”) requires payment by XTAR up to a
maximum amount of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2021. Under
the lease agreement (the “Spainsat Lease Agreement”), Hisdesat may also be entitled under certain circumstances to
a share of the revenues generated on the Transponder Service. In September 2016, XTAR and Hisdesat amended the Spainsat Lease Agreement
to, among other things, reduce for 2016 and 2017 the minimum capacity required to be leased by XTAR, and accordingly lease payments
by XTAR for 2016 and 2017 were reduced from $26 million to $18.2 million. The 2016 reduction was retroactive to January 1, 2016.
In March 2009, XTAR entered into an agreement with Hisdesat pursuant to which the past due balance on XTAR-LANT transponders of
$32.3 million as of December 31, 2008, together with a deferral of $6.7 million in payments due in 2009, is payable to Hisdesat
over 12 years through annual payments of $5 million (the “Catch Up Payments”). XTAR has a right to prepay, at any time,
all unpaid Catch Up Payments discounted at 9%. Cumulative amounts paid to Hisdesat for Catch-Up Payments through September 30,
2016 were $29.2 million. As of September 30, 2016 and December 31, 2015, XTAR has deferred payment of liabilities of $24.6 million
and $17.7 million, respectively, for its lease obligation and Catch-Up Payments to Hisdesat. XTAR has also agreed that XTAR’s
excess cash balance (as defined) will be applied towards making limited payments on future lease obligations, as well as payments
of other amounts owed to Hisdesat, Telesat and Loral for services provided by them to XTAR. The ability of XTAR to pay dividends
and management fees in cash to Loral is governed by XTAR’s operating agreement (see Note 15).
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
The following table
presents summary financial data for XTAR for the three and nine months ended September 30, 2016 and 2015 and as of September 30,
2016 and December 31, 2015 (in thousands):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,815
|
|
|
$
|
6,552
|
|
|
$
|
14,115
|
|
|
$
|
19,249
|
|
Operating expenses
(1)
|
|
|
(1,882
|
)
|
|
|
(8,079
|
)
|
|
|
(18,075
|
)
|
|
|
(24,185
|
)
|
Depreciation and amortization
|
|
|
(2,191
|
)
|
|
|
(2,190
|
)
|
|
|
(6,575
|
)
|
|
|
(6,682
|
)
|
Operating loss
|
|
|
(258
|
)
|
|
|
(3,717
|
)
|
|
|
(10,535
|
)
|
|
|
(11,618
|
)
|
Net loss
|
|
|
(706
|
)
|
|
|
(5,177
|
)
|
|
|
(12,745
|
)
|
|
|
(14,444
|
)
|
(1)
During
the three months ended September 30, 2016, pursuant to the Spainsat Lease Agreement, as amended, XTAR recorded a $6 million reduction
in transponder lease charges of which $4 million relates to the six months ended June 30, 2016.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,983
|
|
|
$
|
7,533
|
|
Total assets
|
|
|
37,668
|
|
|
|
44,793
|
|
Current liabilities
|
|
|
49,723
|
|
|
|
41,712
|
|
Total liabilities
|
|
|
72,655
|
|
|
|
68,126
|
|
Members’ equity
|
|
|
(34,987
|
)
|
|
|
(23,333
|
)
|
Other
As of September 30,
2016 and December 31, 2015, the Company held various indirect ownership interests in two foreign companies that currently serve
as exclusive service providers for Globalstar service in Mexico and Russia. The Company accounts for these ownership interests
using the equity method of accounting. Loral has 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.
7. Other Current Liabilities
Other current liabilities
consists of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
SS/L indemnification liability relating to ViaSat Suit settlement (see Note 14)
|
|
$
|
5,548
|
|
|
$
|
10,714
|
|
Accrued professional fees
|
|
|
941
|
|
|
|
871
|
|
Pension and other postretirement liabilities
|
|
|
120
|
|
|
|
120
|
|
Accrued liabilities
|
|
|
238
|
|
|
|
350
|
|
|
|
$
|
6,847
|
|
|
$
|
12,055
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
8. Income Taxes
The following summarizes
our income tax (provision) benefit on the loss from continuing operations (in thousands):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total current income tax provision
|
|
$
|
(713
|
)
|
|
$
|
(517
|
)
|
|
$
|
(2,056
|
)
|
|
$
|
(2,347
|
)
|
Total deferred income tax (provision) benefit
|
|
|
(8,198
|
)
|
|
|
37,451
|
|
|
|
(29,010
|
)
|
|
|
33,248
|
|
Income tax (provision) benefit
|
|
$
|
(8,911
|
)
|
|
$
|
36,934
|
|
|
$
|
(31,066
|
)
|
|
$
|
30,901
|
|
Following the Sale,
to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets,
we would generate sufficient taxable income from the appreciated value of our Telesat investment, which currently has a nominal
tax basis, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax
assets.
The following summarizes
amounts for uncertain tax positions (“UTPs”) included in our income tax (provision) benefit (in thousands):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Current provision for UTPs
|
|
$
|
(636
|
)
|
|
$
|
(507
|
)
|
|
$
|
(1,774
|
)
|
|
$
|
(784
|
)
|
Deferred benefit for UTPs
|
|
|
289
|
|
|
|
187
|
|
|
|
801
|
|
|
|
244
|
|
Tax provision for UTPs
|
|
$
|
(347
|
)
|
|
$
|
(320
|
)
|
|
$
|
(973
|
)
|
|
$
|
(540
|
)
|
As of September 30,
2016, we had unrecognized tax benefits relating to UTPs of $72 million. The Company recognizes interest and penalties related to
income taxes in income tax expense on a quarterly basis. As of September 30, 2016, we have accrued approximately $7.4 million and
$6.4 million for the payment of potential tax-related interest and penalties, respectively.
Subject to certain
limited exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities
for years prior to 2011. Earlier years related to certain foreign jurisdictions remain subject to examination. Various federal,
state and foreign income tax returns are currently under examination. However, to the extent allowed by law, the tax authorities
may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments
up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for UTPs, 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 certain UTPs related to our state income tax returns filed for 2011, potentially resulting in a
$3.9 million reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify
SS/L for taxes related to periods prior to the closing of the transaction.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
The following summarizes
the changes to our liabilities for UTPs included in long-term liabilities in the condensed consolidated balance sheets (in thousands):
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Liabilities for UTPs:
|
|
|
|
|
|
|
|
|
Opening balance — January 1
|
|
$
|
69,511
|
|
|
$
|
77,133
|
|
Current provision (benefit) for:
|
|
|
|
|
|
|
|
|
Potential additional interest
|
|
|
1,779
|
|
|
|
1,695
|
|
Statute expirations
|
|
|
(5
|
)
|
|
|
(174
|
)
|
Tax settlements
|
|
|
—
|
|
|
|
(737
|
)
|
Ending balance
|
|
$
|
71,285
|
|
|
$
|
77,917
|
|
As of September 30,
2016, if our positions are sustained by the taxing authorities, the Company’s income tax provision from continuing operations
would be reduced by approximately $31.3 million. Other than as described above, there were no significant changes to our UTPs during
the nine months ended September 30, 2016 and 2015, and we do not anticipate any other significant changes to our unrecognized tax
benefits during the next twelve months.
9. Long-Term Liabilities
Long-term liabilities
consists of (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
SS/L indemnification liability relating to ViaSat Suit settlement (see Note 14)
|
|
$
|
—
|
|
|
$
|
2,754
|
|
Indemnification liabilities - other (see Note 14)
|
|
|
967
|
|
|
|
1,006
|
|
Deferred tax liability
|
|
|
385
|
|
|
|
—
|
|
Liabilities for uncertain tax positions
|
|
|
71,285
|
|
|
|
69,511
|
|
Other
|
|
|
238
|
|
|
|
307
|
|
|
|
$
|
72,875
|
|
|
$
|
73,578
|
|
10. Stock-Based Compensation
Stock Plans
The Loral amended and
restated 2005 stock incentive plan (the “Stock Incentive Plan”) which allowed 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, had a ten-year term and has expired. The Company granted 75,262 restricted stock units under the
Stock Incentive Plan that do not expire and remained unconverted as of September 30, 2016 and December 31, 2015.
11. Earnings Per Share
Telesat has awarded
employee stock options, which, if exercised, would result in dilution of Loral’s economic ownership interest in Telesat from
62.7% to approximately 61.8%.
The following table
presents the dilutive impact of Telesat stock options on Loral’s reported income from continuing operations for the purpose
of computing diluted earnings per share (in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
Income from continuing operations — basic
|
|
$
|
59,652
|
|
Less: Adjustment for dilutive effect of Telesat stock options
|
|
|
(2,302
|
)
|
Income from continuing operations — diluted
|
|
$
|
57,350
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Telesat stock options
are excluded from the calculation of diluted loss per share for the three months ended September 30, 2016 and the three and nine
months ended September, 2015 as the effect would have been antidilutive.
Basic income per share
is computed based upon the weighted average number of share of voting and non-voting common stock outstanding. The following is
the computation of common shares outstanding for diluted earnings per share (in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
Weighted average common shares outstanding
|
|
|
30,933
|
|
Unconverted restricted stock units
|
|
|
75
|
|
Common shares outstanding for diluted earnings per share
|
|
|
31,008
|
|
For the three months
ended September 30, 2016 and the three and nine months ended September 30, 2015, the following unconverted restricted stock units
are excluded from the calculation of diluted loss per share as the effect would have been antidilutive (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended
|
|
|
|
2016
|
|
|
2015
|
|
|
September 30, 2015
|
|
Unconverted restricted stock units
|
|
|
75
|
|
|
|
75
|
|
|
|
78
|
|
12. Pensions and Other Employee Benefit Plans
The following tables
provide the components of net periodic cost included in general and administrative expenses for our qualified retirement plan (the
“Pension Benefits”) and health care and life insurance benefits for retired employees and dependents (the “Other
Benefits”) for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
167
|
|
|
$
|
128
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
|
495
|
|
|
|
474
|
|
|
|
6
|
|
|
|
6
|
|
Expected return on plan assets
|
|
|
(512
|
)
|
|
|
(526
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of net actuarial loss
|
|
|
223
|
|
|
|
199
|
|
|
|
1
|
|
|
|
3
|
|
Amortization of prior service credits
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
3
|
|
Net periodic cost
|
|
$
|
373
|
|
|
$
|
275
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
501
|
|
|
$
|
384
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
1,486
|
|
|
|
1,422
|
|
|
|
16
|
|
|
|
33
|
|
Expected return on plan assets
|
|
|
(1,535
|
)
|
|
|
(1,580
|
)
|
|
|
—
|
|
|
|
—
|
|
Recognition due to settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
428
|
|
Amortization of net actuarial loss
|
|
|
667
|
|
|
|
597
|
|
|
|
4
|
|
|
|
25
|
|
Amortization of prior service credits
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
|
8
|
|
Net periodic cost
|
|
$
|
1,119
|
|
|
$
|
823
|
|
|
$
|
37
|
|
|
$
|
495
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Effective
January 1, 2015, retiree medical coverage for retirees age 65 or over and their dependents was discontinued. In January 2015, the
Company made discretionary one-time payments to eligible participants to assist them in purchasing alternate coverage. In August
2015, the Company made discretionary one-time payments of $0.8 million to other participants to settle the remaining liability
for retiree medical coverage applicable to benefits at age 65 and later. The effect on pension expense for the nine months ended
September 30
, 2015 of the one-time payments to eligible participants is included in the table
above as recognition due to settlement.
13.
Financial Instruments, Derivative Instruments and Hedging
Financial Instruments
The carrying amount
of cash equivalents approximates fair value because of the short maturity of those instruments.
Foreign Currency
We are subject to the
risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate exposure, we attempt
to denominate all contracts in U.S. dollars. Where appropriate, derivatives are used to minimize the risk of foreign exchange rate
fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative purposes.
Derivatives and Hedging Transactions
There were no derivative
instruments as of September 30, 2016 and December 31, 2015.
14. Commitments and Contingencies
Financial Matters
In the fourth quarter
of 2012, we sold our former subsidiary, SS/L, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement,
we are obligated to indemnify MDA from (1) liabilities with respect to certain pre-closing taxes; and (2) certain litigation costs
and litigation damages relating to the ViaSat Suit. Our condensed consolidated balance sheets include an indemnification refund
receivable of $2.0 million as of September 30, 2016 and December 31, 2015. This receivable represents Loral’s payments to
date net of the estimated fair value of the liability for our indemnification of SS/L for certain pre-closing taxes. The final
amounts for indemnification claims related to pre-closing taxes have not yet been determined. Where appropriate, we intend vigorously
to contest the underlying tax assessments, but there can be no assurance that we will be successful. Although no assurance can
be provided, we do not believe that these tax-related matters will have a material adverse effect on our financial position or
results of operations. For a discussion of the ViaSat Suit and our indemnification obligations related thereto, see Legal Proceedings,
below.
In connection with
the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their respective interests
in GdB, the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for certain GdB pre-closing
liabilities, primarily related to Brazilian taxes. Our condensed consolidated balance sheets include liabilities of $1.0 million
as of September 30, 2016 and December 31, 2015, for indemnification liabilities relating to the sale of GdB.
See Note 15—
Related Party Transactions —
Transactions with Affiliates
—
Telesat
for commitments and contingencies
relating to our agreement to indemnify Telesat for certain liabilities and our arrangements with ViaSat and Telesat.
Legal Proceedings
ViaSat
Under the terms of
the Purchase Agreement, Loral agreed to indemnify MDA and its affiliates from certain damages in the ViaSat Suit brought in 2012
by ViaSat against Loral and SS/L. In September 2014, Loral, SS/L and ViaSat entered into a settlement agreement (“the Settlement
Agreement”) pursuant to which the ViaSat Suit and an additional patent infringement and breach of contract lawsuit brought
by ViaSat against SS/L in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SS/L from indemnification
claims relating to the ViaSat lawsuits under the Purchase Agreement.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
The terms of the Settlement
Agreement provide, among other things, for payment by Loral and SS/L to ViaSat on a joint and several basis of $100 million, $40
million of which was paid in September 2014 in connection with entering into the Settlement Agreement, with the remaining $60 million
payable with interest in ten equal quarterly installments of $6.9 million from October 15, 2014 through January 15, 2017. As of
September 30, 2016 and December 31, 2015, the total principal and interest payable by Loral and SS/L to ViaSat, on a joint and
several basis, was $13.5 million and $32.4 million, respectively.
Following a mediation
session held on December 1, 2014, Loral and MDA entered into an agreement titled “MDA/Loral Dispute Resolution” dated
December 1, 2014 (the “Allocation Agreement”), pursuant to which Loral and MDA agreed that Loral will be responsible
for $45 million, and MDA and SS/L will be responsible for $55 million, of the $100 million litigation settlement with ViaSat.
As of September 30,
2016, Loral has paid $40.5 million, including interest, toward the ViaSat settlement. Pursuant to the Allocation Agreement, Loral
paid ViaSat $2.8 million in October 2016 and is obligated to make
one
additional payment
to ViaSat in January 2017 of $2.8 million inclusive of interest at 3.25% per year. Our condensed consolidated balance sheets as
of September 30, 2016 and December 31, 2015 include indemnification liabilities related to the ViaSat Settlement Agreement of $5.5
million and $13.5 million, respectively. As Loral’s payment obligations to ViaSat are on a joint and several basis with MDA
and SS/L, if MDA and SS/L were to default on all or part of their payment obligations to ViaSat, Loral would be obligated to pay
ViaSat any amounts not paid by MDA and SS/L.
Other Litigation
We are not currently
subject to any legal proceedings that, if decided adversely, could have a material adverse effect on our financial position or
results of operations. In the future, however, we may become subject to legal proceedings and claims, either asserted or unasserted,
that may arise in the ordinary course of business or otherwise.
15. Related Party Transactions
MHR Fund Management LLC
Mark H. Rachesky, President
of MHR Fund Management LLC (“MHR”), and Janet T. Yeung, a principal and the General Counsel of MHR, are members of
Loral’s board of directors. Hal Goldstein, a former managing principal of MHR, was a member of the Loral Board until May
2015.
Various funds affiliated
with MHR and Dr. Rachesky held, as of September 30, 2016 and December 31, 2015, approximately 39.9% and 38.0%, respectively, of
the outstanding voting common stock and 58.4% and 57.1%, respectively, of the combined outstanding voting and non-voting common
stock of Loral.
Transactions with Affiliates
Telesat
As described in Note
6, we own 62.7% of Telesat and account for our ownership interest under the equity method of accounting.
In connection with
the acquisition of our ownership interest in Telesat (which we refer to as the Telesat transaction), Loral and certain of its subsidiaries,
our Canadian co-owner, Public Sector Pension Investment Board (“PSP”) and one of its subsidiaries, Telesat Holdings
Inc. 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 and
its subsidiaries will be conducted and the relationships among the parties thereto and future shareholders of Telesat. 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 or any of its subsidiaries. Additionally, the Shareholders
Agreement details the matters requiring the approval of the shareholders of Telesat (including veto rights for Loral over certain
extraordinary actions) and provides for preemptive rights for certain shareholders upon the issuance of certain capital shares
of Telesat. The Shareholders Agreement also (i) restricts the ability of holders of certain shares of Telesat to transfer such
shares unless certain conditions are met or approval of the transfer is granted by the directors of Telesat, (ii) provides for
a right of first offer to certain Telesat shareholders if a holder of equity shares of Telesat wishes to sell any such shares to
a third party and (iii) 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 equity securities.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
In addition, the Shareholders
Agreement provides for either PSP or Loral to initiate the process of conducting an initial public offering of the equity shares
of Telesat Holdings Inc. (a “Telesat IPO”). In connection with our exploration of strategic initiatives to alter the
status quo in our ownership of Telesat, in July 2015, we exercised our right under the Shareholders Agreement to require Telesat
to conduct a Telesat IPO. Specifically, we requested that Telesat issue not more than 25 million newly issued shares of Telesat
voting common stock. We also requested the termination of the Shareholders Agreement and the elimination of certain provisions
in Telesat’s Articles of Incorporation, both of which we believe are important for a successful public offering. If those
provisions are eliminated, an impediment to the conversion of our non-voting Telesat shares to voting shares would be eliminated.
Termination or modification of the Shareholders Agreement and conversion of our non-voting shares to voting shares would enable
us, after a Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority voting control of
Telesat. Telesat selected two co-managing underwriters and informed us that it will work to implement a Telesat IPO pending our
agreement with PSP on the post-IPO governance matters. To date, no such agreement has been reached. There can be no assurance as
to whether, when or on what terms a Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes
to Telesat’s Articles of Incorporation may occur or that any particular economic, tax, structural or other objectives or
benefits with respect to a Telesat IPO will be achieved. If a Telesat IPO is expected to proceed under unfavorable terms or at
an unfavorable price, we may withdraw our demand for a Telesat IPO.
Depending upon the
outcome of discussions with PSP relating to Telesat strategic matters, we may assert certain claims against PSP for actions we
believe violated our rights relating to the affairs of Telesat under the Telesat Shareholders Agreement and otherwise. In response
to our claims, PSP has informed us that it believes that it may have claims against us, although we are not aware of the legal
or factual basis for any such claims. We and PSP have agreed that, pending the outcome of our discussions, it would be beneficial
to delay the commencement of any action relating to either party’s claims and have entered into an agreement (the “Tolling
Agreement”) which preserves the parties’ rights to assert against one another legal claims relating to Telesat. We
also included Telesat as a party to the Tolling Agreement because, as a technical matter of Canadian law and for purposes of potentially
seeking equitable relief, Telesat may be a necessary party. There can be no assurance that if the Tolling Agreement lapses that
we and PSP will not pursue legal claims against one another relating to Telesat.
Under the Shareholders
Agreement, in the event that, except in certain limited circumstances, either (i) ownership or control, directly or indirectly,
by Dr. Rachesky of Loral’s voting stock falls below certain levels other than in connection with certain specified circumstances,
including an acquisition by a Strategic Competitor (as defined in the Shareholders Agreement) 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 without the approval
of the incumbent directors, Loral will lose its veto rights relating to certain extraordinary actions by Telesat 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, including
a right to cause Telesat to conduct an initial public offering in which PSP’s 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, to cause the sale of Telesat
and to drag along the other shareholders in such sale, subject to Loral’s right to call PSP’s shares at fair market
value.
The Shareholders Agreement
provides for a board of directors of each of Telesat and certain of its subsidiaries, including Telesat, 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 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 Holdings Inc. and certain of its subsidiaries,
including Telesat Canada. In addition, Michael B. Targoff, Loral’s Vice Chairman, serves on the board of directors of Telesat
Holdings Inc. and certain of its subsidiaries, including Telesat Canada.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
On October 31, 2007,
Loral and Telesat entered into a consulting services agreement (the “Consulting Agreement”). Pursuant to the terms
of the Consulting Agreement, Loral provides to Telesat certain non-exclusive consulting services in relation to the business of
Loral Skynet which was transferred to Telesat as part of the Telesat transaction as well as with respect to certain aspects of
the satellite communications business of Telesat. The Consulting Agreement has a term of seven years with an automatic renewal
for an additional seven-year term if Loral is not then in material default under the Shareholders Agreement. Upon expiration of
the initial term on October 31, 2014, the Consulting Agreement was automatically renewed for the additional seven-year term. In
exchange for Loral’s services under the Consulting Agreement, Telesat pays Loral an annual fee of $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’s bank or bridge facilities or certain other debt obligations prevent Telesat from paying such fees
in cash, Telesat may 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 general and administrative expenses are net of income related to the Consulting Agreement of $1.25 million
for each of the three-month periods ended September 30, 2016 and 2015 and $3.8 million for each of the nine-months periods ended
September 30, 2016 and 2015. For each of the nine-month periods ended September 30, 2016 and 2015, Loral received payments in cash
from Telesat, net of withholding taxes, of $3.6 million for consulting fees. We had no notes receivable from Telesat as of September
30, 2016 and December 31, 2015 related to the Consulting Agreement.
In connection with
the acquisition of our ownership interest in Telesat in 2007, Loral retained the benefit of tax recoveries related to the transferred
assets and indemnified Telesat (“Telesat Indemnification”) for certain liabilities, including Loral Skynet’s
tax liabilities arising prior to January 1, 2007. The Telesat Indemnification includes certain tax disputes currently under review
in various jurisdictions including Brazil. The Brazilian tax authorities challenged Loral Skynet’s historical characterization
of its revenue generated in Brazil for the years 2003 to 2006. Telesat received and challenged, on Loral Skynet’s behalf,
tax assessments from Brazil totaling approximately $2.3 million. The Company believes that Loral Skynet’s filing position
will ultimately be sustained requiring no payment under the Telesat Indemnification. There can be no assurance that there will
be no future claims under the Telesat Indemnification related to tax disputes.
Loral’s employees
and retirees participate in certain welfare plans sponsored by Telesat. Loral pays Telesat an annual administrative fee of $0.1
million and reimburses Telesat for the plan costs attributable to Loral participants.
Loral, along with Telesat,
PSP and 4440480 Canada Inc., an indirect wholly-owned subsidiary of Loral (the “Special Purchaser”), entered into grant
agreements (the “Grant Agreements”) with certain executives of Telesat (each, a “Participant” and collectively,
the “Participants”). Each of the Participants is or was, at the time, an executive of Telesat.
The Grant Agreements
confirm grants of Telesat stock options (including tandem SAR rights) to the Participants and provide for certain rights, obligations
and restrictions related to such stock options, which include, among other things: (w) the possible obligation of the Special Purchaser
to purchase the shares in the place of Telesat should Telesat be prohibited by applicable law or under the terms of any credit
agreement applicable to Telesat from purchasing such shares, or otherwise default on such purchase obligation, pursuant to the
terms of the Grant Agreements; and (x) the obligation of the Special Purchaser to purchase shares upon exercise by Telesat of its
call right under Telesat’s Management Stock Incentive Plan in the event of a Participant’s termination of employment;
and, in the case of certain executives, (y) the right of each such Participant to require the Special Purchaser or Loral to purchase
a portion of the shares in Telesat owned by him in the event of exercise after termination of employment to cover taxes that are
greater than the minimum withholding amount; and (z) the right of each such Participant to require Telesat to cause the Special
Purchaser or Loral to purchase a portion of the shares in Telesat owned by him, or that are issuable to him under Telesat's Management
Stock Incentive Plan at the relevant time, in the event that more than 90% of Loral’s common stock is acquired by an unaffiliated
third party that does not also purchase all of PSP's and its affiliates' interest in Telesat.
The Grant Agreements
further provide that, in the event the Special Purchaser is required to purchase shares, such shares, together with the obligation
to pay for such shares, shall be transferred to a subsidiary of the Special Purchaser, which subsidiary shall be wound up into
Telesat, with Telesat agreeing to the acquisition of such subsidiary by Telesat from the Special Purchaser for nominal consideration
and with the purchase price for the shares being paid by Telesat within ten (10) business days after completion of the winding-up
of such subsidiary into Telesat.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
ViaSat/Telesat
In connection with
an agreement entered into between SS/L and 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, pursuant to which we invested in the Canadian coverage
portion of the ViaSat-1 satellite. Until his resignation in February 2012, Michael B. Targoff served, and another Loral director
currently serves, as a member of the ViaSat Board of Directors.
On April 11, 2011,
Loral assigned to Telesat and Telesat assumed from Loral all of Loral’s rights and obligations with respect to the ViaSat-1
satellite payload providing coverage into Canada and all related agreements. Loral also assigned to Telesat and Telesat assumed
Loral’s 15-year contract with Xplornet Communications, Inc. (“Xplornet”) (formerly known as Barrett Xplore Inc.)
for delivery of high throughput satellite Ka-band capacity and gateway services for broadband services in Canada. In connection
with the assignments, Loral was entitled to receive one-half of any net revenue earned by Telesat in connection with the leasing
of certain supplemental capacity on the payload to its customers during the first four years after the commencement of service
using the supplemental capacity. Under this arrangement, which expired in December 2015, we earned approximately $0.2 million and
$0.6 million for the three and nine months ended September 30, 2015, respectively. We had a receivable from Telesat of nil and
$0.2 million as of September 30, 2016 and December 31, 2015, respectively, related to this arrangement.
Other
As described in Note
6, we own 56% of XTAR, a joint venture between Loral and Hisdesat and account for our investment in XTAR under the equity method
of accounting. SS/L constructed XTAR’s 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, until December 31, 2013, was charged a quarterly management fee equal to 3.7%
of XTAR’s quarterly gross revenues. Amounts due to Loral primarily due to the management agreement as of September 30, 2016
and December 31, 2015 were $6.8 million. Beginning in 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), will be applied at least quarterly towards repayment of receivables
owed to Loral, as well as to Hisdesat and Telesat. No cash was received under this agreement for the nine months ended September
30, 2016 and 2015, and we had an allowance of $6.6 million against receivables from XTAR as of September 30, 2016 and December
31, 2015. Loral and Hisdesat have agreed to waive future management fees for an indefinite period starting January 1, 2014.
Consulting Agreement
On December 14, 2012,
Loral entered into a consulting agreement with Michael B. Targoff, Vice Chairman of the Company and former Chief Executive Officer
and President. Pursuant to this agreement, Mr. Targoff is engaged as a part-time consultant to the Board to assist the Board with
respect to the oversight of strategic matters relating to Telesat and XTAR. Under the agreement, Mr. Targoff receives consulting
fees of $120,000 per month and reimburses the Company for certain expenses. For each of the three and nine month periods ended
September 30, 2016 and 2015, Mr. Targoff earned $360,000 and $1,080,000, respectively, in consulting fees and reimbursed Loral
net expenses of $15,750 and $47,250, respectively.