NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 Teleast Canada (“Telesat”), a leading global satellite services provider. Prior to and as of
December 31, 2016, Telesat Canada was a subsidiary of, and Loral held its ownership interest in Telesat Canada through, Telesat
Holdings Inc. Effective January 1, 2017, Telesat Holdings Inc. completed a corporate reorganization pursuant to which Telesat Holdings
Inc. amalgamated with Telesat Interco Inc., a wholly owned subsidiary of Telesat Holdings Inc., and immediately thereafter the
newly amalgamated company amalgamated with Telesat Canada. The continuing entity, existing under the laws of Canada, is named Telesat
Canada.
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. Telesat is also developing a global constellation
of low earth orbit (“LEO”) satellites. LEO satellites operate in a circular orbit around the earth with an altitude
typically between 500 and 870 miles. Unlike geosynchronous satellites that operate in a fixed orbital location above the equator,
LEO satellites travel around the earth at high velocities requiring antennas on the ground to track their movement. LEO satellite
systems have the potential to offer a number of advantages over geosynchronous orbit satellites to meet growing requirements for
broadband services, both consumer and commercial, by providing increased data speeds and capacity, global coverage, and latency
on par with, or potentially better than, terrestrial services.
Loral holds a 62.7% economic
interest and a 32.7% voting interest in Telesat (see Note 5). 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 months ended March 31, 2017 are not necessarily indicative of the results to be expected
for the full year.
The December 31, 2016 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.) (“SSL”), 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, SSL, 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 SSL (see Note 13).
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Interest expense that is
directly related to the Sale is classified as discontinued operations in the statements of operations and cash flows for the three
months ended March 31, 2017 and 2016.
Investments in Affiliates
Our ownership interest
in Telesat is accounted for using the equity method of accounting. Income and losses of Telesat are recorded based on our economic
interest. 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 them while we owned SSL and on Loral’s sale to Telesat in April 2011
of its portion of the payload on the ViaSat-1 satellite and related assets. Non-refundable cash distributions received from Telesat
in excess of our initial investment and our share of cumulative equity in comprehensive income of Telesat, net of cash distributions
received in prior periods, are recorded as equity in net income of Telesat (“Excess Cash Distribution”) since we have
no obligation to provide future financial support to Telesat. We do not record additional equity in net income of Telesat until
our share of Telesat’s future net income exceeds the Excess Cash Distribution. 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.
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 March 31, 2017, the
Company had $273.8 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 of March 31, 2017 and December
31, 2016, our cash and cash equivalents were invested primarily in several liquid Prime and Government AAA money market funds.
The dispersion across funds reduces the exposure of a default at any one fund. 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 March 31, 2017 and December 31, 2016 (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
271,444
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,514
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Sale of SSL
|
|
|
—
|
|
|
|
—
|
|
|
|
2,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,410
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Globalstar do Brasil S.A.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
357
|
|
The carrying amount of cash equivalents approximates
fair value as of each reporting date because of the short maturity of those instruments.
The Company did not have
any non-financial assets or non-financial liabilities that were recognized or disclosed at fair value as of March 31, 2017 and
December 31, 2016.
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.
The asset resulting from
the indemnification of SSL 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.
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 March 2017, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-07,
Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. ASU No. 2017-07, as it applies
to the Company, amended the presentation of net periodic pension and postretirement cost (i.e. net benefit cost). The new guidance
requires the service cost component to be presented separate from the other components of net benefit cost. While service cost
will be presented with other employee compensation costs within operations, the other components of net benefit cost, such as interest
cost, amortization of prior service cost, and gains or losses, are required to be separately presented outside of operations, if
income or loss from operations is presented. The guidance, to be applied retrospectively, is effective for the Company on January
1, 2018, with earlier application permitted only within the first interim period starting January 1, 2017. The change in presentation
of net benefit cost, which will be adopted on January 1, 2018, will not have a material impact on our condensed consolidated
financial statements.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
In August 2016, the FASB
issued 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 adopted the new guidance on January 1, 2017 and made an accounting policy election to use the nature of distribution
approach to classify distributions from equity method investments on its statements of cash flows. As a result of adopting the
new guidance, the entire distribution of $242.7 million received from Telesat in the first quarter of 2017 is classified in investing
activities on the statement of cash flows for the three months ended March 31, 2017 (see Note 5).
In March 2016, the FASB
issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
ASU No. 2016-09 simplified 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 are 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 Company adopted the new guidance on January 1, 2017, and upon adoption previously
unrecognized excess tax benefits of $4.7 million were recognized as a cumulative-effect adjustment to increase retained earnings
and deferred tax assets.
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.
Additional Cash Flow Information
The following represents
non-cash activities and supplemental information to the condensed consolidated statements of cash flows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Non-cash operating items:
|
|
|
|
|
|
|
|
|
Equity in net income of affiliates
|
|
$
|
(139,714
|
)
|
|
$
|
(46,494
|
)
|
Deferred taxes
|
|
|
12,171
|
|
|
|
13,074
|
|
Depreciation and amortization
|
|
|
15
|
|
|
|
14
|
|
Amortization of prior service credit and actuarial loss
|
|
|
239
|
|
|
|
203
|
|
Net non-cash operating items – continuing operations
|
|
$
|
(127,289
|
)
|
|
$
|
(33,203
|
)
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid – continuing operations
|
|
$
|
5
|
|
|
$
|
5
|
|
Interest paid – discontinued operations
|
|
$
|
55
|
|
|
$
|
265
|
|
Tax (refunds) payments, net – continuing operations
|
|
$
|
(144
|
)
|
|
$
|
60
|
|
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):
|
|
|
|
|
Equity in
|
|
|
Accumulated
|
|
|
|
|
|
|
Telesat Other
|
|
|
Other
|
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Benefits
|
|
|
Loss
|
|
|
Loss
|
|
Balance at January 1, 2016
|
|
$
|
(13,459
|
)
|
|
$
|
(15,239
|
)
|
|
$
|
(28,698
|
)
|
Other comprehensive (loss) income before reclassification
|
|
|
(1,209
|
)
|
|
|
15,477
|
|
|
|
14,268
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
594
|
|
|
|
—
|
|
|
|
594
|
|
Net current-period other comprehensive (loss) income
|
|
|
(615
|
)
|
|
|
15,477
|
|
|
|
14,862
|
|
Balance at December 31, 2016
|
|
|
(14,074
|
)
|
|
|
238
|
|
|
|
(13,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
|
—
|
|
|
|
(3,192
|
)
|
|
|
(3,192
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
154
|
|
|
|
—
|
|
|
|
154
|
|
Net current-period other comprehensive income (loss)
|
|
|
154
|
|
|
|
(3,192
|
)
|
|
|
(3,038
|
)
|
Balance at March 31, 2017
|
|
$
|
(13,920
|
)
|
|
$
|
(2,954
|
)
|
|
$
|
(16,874
|
)
|
The components of other
comprehensive income and related tax effects are as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
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
|
|
$
|
239
|
(a)
|
|
$
|
(85
|
)
|
|
$
|
154
|
|
|
$
|
203
|
(a)
|
|
$
|
(76
|
)
|
|
$
|
127
|
|
Equity in Telesat other comprehensive (loss) income
|
|
|
(4,929
|
)
|
|
|
1,737
|
|
|
|
(3,192
|
)
|
|
|
14,448
|
(b)
|
|
|
(5,416
|
)
|
|
|
9,032
|
|
Other comprehensive income
|
|
$
|
(4,690
|
)
|
|
$
|
1,652
|
|
|
$
|
(3,038
|
)
|
|
$
|
14,651
|
|
|
$
|
(5,492
|
)
|
|
$
|
9,159
|
|
|
(a)
|
Reclassifications are included in general and administrative expenses.
|
|
(b)
|
Includes $20.8 million ($13.5 million, net of tax) share in the equity of Telesat’s other
comprehensive income that we could not record in 2015 (
see Note 5).
|
4. Other Current Assets
Other current assets consists
of (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Indemnification receivable from SSL for pre-closing taxes (see Note 13)
|
|
$
|
2,410
|
|
|
$
|
2,410
|
|
Due from affiliate
|
|
|
224
|
|
|
|
225
|
|
Prepaid expenses
|
|
|
637
|
|
|
|
192
|
|
Income taxes receivable
|
|
|
181
|
|
|
|
545
|
|
Other
|
|
|
367
|
|
|
|
111
|
|
|
|
$
|
3,819
|
|
|
$
|
3,483
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
5. Investments in Affiliates
Investments in affiliates
consist of (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Telesat
|
|
$
|
—
|
|
|
$
|
107,950
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of
affiliates consists of (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Telesat
|
|
$
|
139,714
|
|
|
$
|
46,494
|
|
|
|
|
|
|
|
|
|
|
Telesat
As of March 31, 2017 and
December 31, 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.
In the first quarter of
2017, we received $242.7 million in cash from Telesat, representing our share of an approximately $400 million distribution from
Telesat to its shareholders and stock option holders. The cash distribution we received from Telesat exceeded our initial investment
and our share of cumulative equity in comprehensive income of Telesat, net of cash distributions received from Telesat in prior
periods. In following the equity method of accounting, as of March 31, 2017, our investment balance in Telesat has been reduced
to zero, and approximately $103.8 million of the cash distribution was recorded as equity in net income of Telesat. We will not
record additional equity in net income of Telesat until our share of Telesat’s future comprehensive income exceeds $103.8
million.
During the three months
ended March 31, 2016, we recognized our $57.9 million share of Telesat’s net loss and our $20.8 million share of Telesat’s
other comprehensive income that we were unable to recognize as of December 31, 2015 as our share of Telesat’s cumulative
losses, together with cash distributions we received from Telesat, exceeded our recorded cumulative equity in net income of Telesat
and initial investment.
On November 17, 2016, Telesat
entered into amended senior secured credit facilities which provide for term loan borrowings of $2.43 billion maturing on November
17, 2023 and revolving credit borrowings of up to $200 million (or Canadian dollar equivalent) maturing on November 17, 2021. Telesat
also issued, through a private placement, $500 million of 8.875% senior notes which mature on November 17, 2024.
In connection therewith,
on November 17, 2016, Telesat repaid all outstanding amounts under its former senior secured credit facilities and its 6.0% senior
notes.
On February 1, 2017, Telesat
amended the senior secured credit facilities to effectively reprice the then outstanding term loan borrowings of $2.424 billion.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
The ability of Telesat
to pay dividends or certain other restricted payments in cash to Loral is governed by applicable covenants in Telesat’s debt
and shareholder agreements. Telesat’s credit agreement governing its senior secured credit facilities limits, among other
items, Telesat’s ability to incur debt and make dividend payments if the total leverage ratio (“Total Leverage Ratio”)
is above 4.50:1.00, with certain exceptions. As of March 31, 2017, Telesat’s Total Leverage Ratio was 4.86:1.00. Telesat
is, however, permitted to pay annual consulting fees of $5.0 million to Loral in cash (see Note 14).
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 SSL 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, for the three months ended March 31, 2017 and 2016 and as of March
31, 2017 and December 31, 2016 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
177,111
|
|
|
$
|
170,501
|
|
Operating expenses
|
|
|
(41,672
|
)
|
|
|
(32,569
|
)
|
Depreciation, amortization and stock-based compensation
|
|
|
(48,497
|
)
|
|
|
(47,013
|
)
|
Loss on disposition of long lived asset
|
|
|
(18
|
)
|
|
|
(1,817
|
)
|
Operating income
|
|
|
86,924
|
|
|
|
89,102
|
|
Interest expense
|
|
|
(36,793
|
)
|
|
|
(35,202
|
)
|
Foreign exchange gain
|
|
|
17,851
|
|
|
|
135,907
|
|
Loss on financial instruments
|
|
|
(3,613
|
)
|
|
|
(12,617
|
)
|
Other income
|
|
|
145
|
|
|
|
854
|
|
Income tax provision
|
|
|
(9,838
|
)
|
|
|
(11,020
|
)
|
Net income
|
|
$
|
54,676
|
|
|
$
|
167,024
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
300,287
|
|
|
$
|
678,361
|
|
Total assets
|
|
|
3,822,364
|
|
|
|
4,194,006
|
|
Current liabilities
|
|
|
136,822
|
|
|
|
154,173
|
|
Long-term debt, including current portion
|
|
|
2,844,622
|
|
|
|
2,877,950
|
|
Total liabilities
|
|
|
3,552,133
|
|
|
|
3,597,056
|
|
Shareholders’ equity
|
|
|
270,231
|
|
|
|
596,950
|
|
Telesat had capital expenditures
of $34.3 million and $69.2 million for the three months ended March 31, 2017 and 2016, respectively.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
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. As of March 31, 2017 and December
31, 2016, the carrying value of our investment in XTAR was zero. Beginning January 1, 2016, we discontinued providing for our allocated
share of XTAR’s net losses as our investment was reduced to zero and we have no commitment to provide further financial support
to XTAR.
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.
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 January
2017, XTAR and Hisdesat again amended the Spainsat Lease Agreement to, among other things, reduce the minimum capacity required
to be leased by XTAR for 2017, and accordingly lease payments by XTAR for 2017 were reduced to $9.5 million. 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 March 31, 2017 were $29.2 million.
As of March 31, 2017 and December 31, 2016, XTAR has deferred payment of liabilities of $29.8 million and $28.8 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 14).
The following table presents
summary financial data for XTAR for the three months ended March 31, 2017 and 2016 and as of March 31, 2017 and December 31, 2016
(in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,697
|
|
|
$
|
5,878
|
|
Operating expenses
|
|
|
(3,981
|
)
|
|
|
(8,255
|
)
|
Depreciation and amortization
|
|
|
(1,658
|
)
|
|
|
(2,192
|
)
|
Operating loss
|
|
|
(1,942
|
)
|
|
|
(4,569
|
)
|
Net loss
|
|
|
(3,273
|
)
|
|
|
(5,528
|
)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
5,713
|
|
|
$
|
6,364
|
|
Total assets
|
|
|
33,698
|
|
|
|
36,008
|
|
Current liabilities
|
|
|
55,321
|
|
|
|
53,795
|
|
Total liabilities
|
|
|
75,601
|
|
|
|
75,395
|
|
Members’ equity
|
|
|
(41,903
|
)
|
|
|
(39,387
|
)
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Other
As of March 31, 2017 and
December 31, 2016, 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.
6. Other Current Liabilities
Other current liabilities
consists of (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
SSL indemnification liability relating to ViaSat Suit settlement (see Note 13)
|
|
$
|
—
|
|
|
$
|
2,801
|
|
Due to affiliate
|
|
|
127
|
|
|
|
—
|
|
Accrued professional fees
|
|
|
960
|
|
|
|
665
|
|
Pension and other postretirement liabilities
|
|
|
108
|
|
|
|
108
|
|
Accrued liabilities
|
|
|
193
|
|
|
|
198
|
|
|
|
$
|
1,388
|
|
|
$
|
3,772
|
|
7. Income Taxes
The following summarizes
our income tax provision on the loss from continuing operations (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Total current income tax provision
|
|
$
|
(53,893
|
)
|
|
$
|
(601
|
)
|
Total deferred income tax provision
|
|
|
(12,171
|
)
|
|
|
(13,074
|
)
|
Income tax provision
|
|
$
|
(66,064
|
)
|
|
$
|
(13,675
|
)
|
Our income tax
provision for each period is computed by applying an expected effective annual tax rate against the pre-tax results for the
three months ended March 31, 2017 and 2016 (after adjusting for certain tax items that are discrete to each period). For the
three months ended March 31, 2017, in accordance with authoritative guidance for accounting for income taxes in interim
periods, we applied separate expected effective annual tax rates against our pre-tax loss from continuing operations and our
equity in net income of Telesat, combining the results of both computations with the tax items discrete to the three months
ended March 31, 2017, such as the income tax provision related to the Telesat distribution. For the three months ended March
31, 2016, we applied a single expected effective annual tax rate, which included tax expense on the equity income of Telesat,
against our pre-tax loss from continuing operations for the three months. This change in how we calculated the estimate was made to improve the
accuracy and consistency of the expected effective annual tax rate calculated in interim periods.
For the three months
ended March 31, 2017, the current income tax provision primarily includes our anticipated income tax liability related to the
cash distribution received from Telesat after use of available benefits from our AMT credit and net operating loss
carryforwards and foreign tax credits from Telesat. Based upon our analysis, the amount of foreign tax credits generated from the cash distribution currently allowed to be utilized against our current
tax liability will be limited, thereby resulting in a carryforward of unused foreign tax
credits. Since, at the current time, sufficient positive evidence does not exist to support full recovery of the foreign tax
credit carryforward, we recorded a full valuation allowance against this deferred tax asset during the three months ended
March 31, 2017. We will continue to maintain this valuation allowance until sufficient positive evidence exists to support
full or partial reversal. Such a reversal could be material in future periods.
Effective January 1, 2017,
we adopted ASU No. 2016-09, and upon adoption previously unrecognized excess tax benefits of $4.7 million were recognized as a
cumulative-effect adjustment to increase retained earnings and deferred tax assets (see Note 2).
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Subsequent to 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 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current provision for UTPs
|
|
$
|
(675
|
)
|
|
$
|
(511
|
)
|
Deferred benefit for UTPs
|
|
|
244
|
|
|
|
192
|
|
Tax provision for UTPs
|
|
$
|
(431
|
)
|
|
$
|
(319
|
)
|
As of March 31, 2017, we
had unrecognized tax benefits relating to UTPs of $68 million. The Company recognizes interest and penalties related to income
taxes in income tax expense on a quarterly basis. As of March 31, 2017, we have accrued approximately $8.3 million and $6.0 million
for the payment of potential tax-related interest and penalties, respectively.
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 2012.
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 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 certain UTPs related to our state income tax returns filed for 2012, potentially resulting in a $14.0 million
reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify SSL
for taxes related to periods prior to the closing of the transaction.
The following summarizes
the changes to our liabilities for UTPs included in long-term liabilities in the condensed consolidated balance sheets (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Liabilities for UTPs:
|
|
|
|
|
|
|
|
|
Opening balance — January 1
|
|
$
|
68,658
|
|
|
$
|
69,511
|
|
Current provision for potential additional interest
|
|
|
675
|
|
|
|
511
|
|
Ending balance
|
|
$
|
69,333
|
|
|
$
|
70,022
|
|
As of March 31, 2017, if
our positions are sustained by the taxing authorities, the Company’s income tax provision from continuing operations would
be reduced by approximately $30.6 million. Other than as described above, there were no significant changes to our UTPs during
the three months ended March 31, 2017 and 2016, and we do not anticipate any other significant changes to our unrecognized tax
benefits during the next twelve months.
8. Long-Term Liabilities
Long-term liabilities consists
of (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Indemnification liabilities - other (see Note 13)
|
|
|
338
|
|
|
|
357
|
|
Deferred tax liability
|
|
|
—
|
|
|
|
6
|
|
Liabilities for uncertain tax positions
|
|
|
69,333
|
|
|
|
68,658
|
|
Other
|
|
|
238
|
|
|
|
238
|
|
|
|
$
|
69,909
|
|
|
$
|
69,259
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
9. 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 March 31, 2017 and December 31, 2016.
10. 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 62.4%.
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):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income from continuing operations — basic
|
|
$
|
71,364
|
|
|
$
|
30,819
|
|
Less: Adjustment for dilutive effect of Telesat stock options
|
|
|
(185
|
)
|
|
|
(1,535
|
)
|
Income from continuing operations — diluted
|
|
$
|
71,179
|
|
|
$
|
29,284
|
|
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):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares outstanding
|
|
|
30,933
|
|
|
|
30,933
|
|
Unconverted restricted stock units
|
|
|
75
|
|
|
|
75
|
|
Common shares outstanding for diluted earnings per share
|
|
|
31,008
|
|
|
|
31,008
|
|
11. 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 months ended
March 31, 2017
and 2016 (in thousands):
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
173
|
|
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
|
486
|
|
|
|
490
|
|
|
|
5
|
|
|
|
5
|
|
Expected return on plan assets
|
|
|
(532
|
)
|
|
|
(512
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of net actuarial loss
|
|
|
232
|
|
|
|
196
|
|
|
|
1
|
|
|
|
1
|
|
Amortization of prior service credits
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
6
|
|
Net periodic cost
|
|
$
|
359
|
|
|
$
|
316
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
12.
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 March 31, 2017 and December 31, 2016.
13. Commitments and Contingencies
Financial Matters
In the fourth quarter of
2012, we sold our former subsidiary, SSL, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement,
we are obligated to indemnify MDA and its affiliates from (1) liabilities with respect to certain pre-closing taxes; and (2) certain
litigation costs and litigation damages relating to the ViaSat Suit. Our consolidated balance sheets include an indemnification
refund receivable of $2.4 million as of March 31, 2017 and December 31, 2016. This receivable represents payments to date net of
the estimated fair value of the liability for our indemnification for our obligation with respect to 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 $0.3 million
and $0.4 million as of March 31, 2017 and December 31, 2016, respectively, for indemnification liabilities relating to the sale
of GdB.
See Note 14 — Related
Party Transactions — Transactions with Affiliates — Telesat for commitments and contingencies relating to our agreement
to indemnify Telesat for certain liabilities.
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 SSL. In September 2014, Loral, SSL 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 SSL in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SSL from indemnification
claims relating to the ViaSat lawsuits under the Purchase Agreement.
The terms of the Settlement
Agreement provide, among other things, for payment by Loral and SSL 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.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
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 SSL will be responsible for $55 million, of the $100 million litigation settlement with ViaSat.
Pursuant to the Allocation
Agreement, Loral paid ViaSat the final installment of $2.8 million in January 2017. Our condensed consolidated balance sheets as
of March 31, 2017 and December 31, 2016 include indemnification liabilities related to the ViaSat Settlement Agreement of nil and
$2.8 million, respectively.
Joint Venture Arbitration
In connection with a joint
venture that serves as the service provider for Globalstar service in Russia in which Loral holds an indirect ownership interest,
the Russian joint venture partner has commenced an arbitration against Loral in the London Court of International Arbitration seeking,
among other things, to recover (i) losses it claims it has suffered in defending legal proceedings in Russian state courts brought
by Loral seeking to collect certain payments owed to Loral and (ii) costs of the arbitration. Although no assurance can be provided,
we do not believe that this matter will have a material adverse effect on our financial position or results of operations.
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.
14. 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 March 31, 2017 and December 31, 2016, approximately 39.9% of the outstanding voting common
stock and 58.4% of the combined outstanding voting and non-voting common stock of Loral.
Transactions with Affiliates
Telesat
As described in Note 5,
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 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 (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. If we pursue claims against PSP, there can be no assurance that our
claims will be successful or that the relief we seek will be granted. If PSP pursues claims against us, there can be no assurance
that PSP will not prevail on its claims.
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 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. In addition, Michael B. Targoff, Loral’s Vice Chairman, serves on the board of directors
of Telesat.
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 term of the Consulting Agreement was renewed upon expiration of its initial term on October
31, 2014 and expires on October 31, 2021. 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. 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 March 31, 2017 and 2016. For each of the three-month periods
ended March 31, 2017 and 2016, Loral received payments in cash from Telesat, net of withholding taxes, of $1.2 million for consulting
fees.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
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.
In the first quarter of
2017, Loral received a $242.7 million cash distribution from Telesat (see Note 5).
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. SSL 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 March 31, 2017 and
December 31, 2016 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 three months ended March 31,
2017 and 2016, and we had an allowance of $6.6 million against receivables from XTAR as of March 31, 2017 and December 31, 2016.
Loral and Hisdesat have agreed to waive future management fees for an indefinite period starting January 1, 2014.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
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-month periods ended March 31,
2017 and 2016, Mr. Targoff earned $360,000 in consulting fees and reimbursed Loral net expenses of $15,750.