UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
(cid:59)(cid:3)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
(cid:134)(cid:3)(cid:134)(cid:3)(cid:134)(cid:3)(cid:134)(cid:3)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
LORAL SPACE & COMMUNICATIONS INC.
(Exact name of registrant specified in the charter)
Commission file number 1-14180
Successor registrant to
Loral Space & Communications Ltd.
Jurisdiction of incorporation: Delaware
IRS identification number: 87-0748324
600 Third Avenue
New York, New York 10016
(Address of principal executive offices)
Telephone: (212) 697-1105
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, $.01 par value
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134)(cid:3)(cid:134)(cid:3)(cid:134)(cid:3)(cid:134)(cid:3)
No (cid:59)(cid:3)(cid:59)(cid:3)(cid:59)(cid:3)(cid:59)(cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134)(cid:3)(cid:134)(cid:3)(cid:134)(cid:3)(cid:134)(cid:3)
No (cid:59)(cid:3)(cid:59)(cid:3)(cid:59)(cid:3)(cid:59)(cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (cid:59)(cid:3) No (cid:134)(cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes (cid:59)(cid:3) No (cid:134)(cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)(cid:3)
Accelerated filer (cid:134)(cid:3)
Non-accelerated filer (cid:59)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act). Yes (cid:134)(cid:3) No
(cid:59)(cid:3)
On November 21, 2005, the predecessor registrant’s common stock, par value $0.10 per share, was cancelled and the registrant issued
20,000,000 shares of common stock, par value $0.01 per share. At March 1, 2006, 20,000,000 common shares of the registrant were
outstanding.
As of March 1, 2006, the aggregate market value of the common stock, the only voting stock of the registrant currently issued and
outstanding, held by non-affiliates of the registrant, was approximately $345,148,182.
Indicate by a check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes (cid:59)(cid:3) No (cid:134)(cid:3)
Item 1. Business
Overview
PART I
THE COMPANY
Loral Space & Communications Inc. (“New Loral”) together with its subsidiaries is a leading satellite communications company with
substantial activities in satellite-based communications services and satellite manufacturing. New Loral was formed to succeed the business
conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal
bankruptcy laws on November 21, 2005 (the “Effective Date”).
We adopted fresh start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7, Financial Reporting of
Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”). Accordingly, our financial information disclosed under the heading
“Successor Registrant” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not
comparable to, our financial information disclosed under the heading “Predecessor Registrant” for the period ended and as of October 1, 2005
(the date we adopted fresh start accounting) or for prior periods.
The terms, “Loral”, the “Company,” “we,” “our,” and “us,” when used in this report with respect to the period prior to our emergence from
Chapter 11, are references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New
Loral. These references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context
otherwise requires.
Loral is organized into two operating segments:
Satellite Services , conducted by our subsidiary Loral Skynet Corporation (“Loral Skynet”), generates its revenues and cash flows from
leasing satellite capacity on its four-satellite fleet to commercial and government customers for video and direct to home (“DTH”)
broadcasting, high-speed data distribution, Internet access and communications, as well as providing satellite-based networking services. It also
provides professional services to other satellite operators including satellite construction oversight and fleet operating services.
Satellite Manufacturing , conducted by our subsidiary, Space Systems/ Loral, Inc. (“SS/L”), generates its revenues and cash flows from
designing and manufacturing satellites, space systems and space system components for commercial and government customers whose
applications include fixed satellite services, DTH broadcasting, broadband data distribution, wireless telephony, digital radio, military
communications, weather monitoring and air traffic management.
Effective March 1, 2006, Bernard L. Schwartz retired from all officer and director positions he held with the Company and its subsidiaries
and affiliates, including his positions as chairman of the board and chief executive officer. To succeed Mr. Schwartz, the Board of Directors has
elected Michael B. Targoff, non-executive vice chairman of the Company, as chief executive officer, and Dr. Mark H. Rachesky as non-
executive chairman of the Board, both elections effective as of March 1, 2006.
Reorganization
On July 15, 2003, Old Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Old Loral, the “Debtors”),
including Loral Space & Communications Holdings Corporation (formerly known as Loral Space & Communications Corporation), Loral
SpaceCom Corporation (“Loral SpaceCom”), SS/ L and Loral Orion, Inc. (now known as Loral Skynet Corporation), filed voluntary petitions
for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court
for the Southern District of New York (the “Bankruptcy Court”) (Lead Case No. 03-41710 (RDD), Case Nos. 03-41709 (RDD) through 03-
41728 (RDD)) (the “Chapter 11 Cases”). Also on July 15, 2003, Old Loral and one of its Bermuda subsidiaries (the “Bermuda Group”) filed
parallel insolvency proceedings in the Supreme Court of Bermuda (the “Bermuda Court”), and, on that
1
date, the Bermuda Court entered an order appointing certain partners of KPMG, as Joint Provisional Liquidators (“JPLs”) in respect of the
Bermuda Group.
The Debtors emerged from Chapter 11 on November 21, 2005 pursuant to the terms of their fourth amended joint plan of reorganization, as
modified (the “Plan of Reorganization”). The Plan of Reorganization had previously been confirmed by order (the “Confirmation Order”) of
the Bankruptcy Court entered on August 1, 2005.
Pursuant to the Plan of Reorganization:
• The business and operations of Old Loral have been transferred to New Loral, and Loral Skynet and SS/ L have
emerged intact as separate subsidiaries of reorganized Loral.
• Our new common stock has been listed on NASDAQ under the symbol “LORL.”
• SS/ L has emerged debt-free.
• The initial distributions to creditors of Old Loral and its subsidiaries have been completed in accordance with the
Plan of Reorganization as follows:
• All holders of allowed claims against SS/ L and Loral SpaceCom have been, or will be paid in cash in full,
including interest from the petition date to the Effective Date.
• 20 million shares of New Loral common stock were issued to our distribution agent on the Effective Date,
18.7 million of which have been distributed to creditors.
• $200 million of Loral Skynet preferred stock was issued to our distribution agent on the Effective Date,
$197.4 million of which has been distributed to creditors.
• The remaining undistributed shares of New Loral common stock and Loral Skynet preferred stock have been
reserved to cover disputed claims and will be distributed quarterly in accordance with the Plan of
Reorganization upon resolutions of those claims.
• Pursuant to a rights offering, Loral Skynet issued on the Effective Date $126 million, principal amount, of
senior secured notes to certain creditors who subscribed for the notes and to certain creditors who committed to
purchase any unsubscribed notes (i.e. “backstopped” the offering).
• Old Loral will be liquidated by the JPLs in Bermuda; the common and preferred stock of Old Loral were
cancelled on the Effective Date, and no distribution was made to the holders of such stock.
Old Loral shareholders acting on behalf of the self-styled Loral Stockholders Protective Committee (“LSPC”) have filed appeals seeking to
revoke the Confirmation Order, to overturn the Bankruptcy Court’s denial of the LSPC’s motion to compel Old Loral to hold a shareholders
meeting and to rescind the approval of the Federal Communications Commission (“FCC”) of the transfer of our FCC licenses from Old Loral
to New Loral. We believe that these appeals are completely without merit and will not have any effect on the completed reorganization. For
further details about these appeals see Note 19 to the consolidated financial statements.
Segment Overview
Satellite Services Operations
Through Loral Skynet, which manages and operates our Satellite Services business, we are a global satellite operator, providing our
customers with a wide range of video and data transmission services. Our four globally-positioned satellites operate 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.
They provide reliable, high-bandwidth services anywhere in their coverage areas and serve as the backbone for many forms of
telecommunications. Our satellites operate in the C-band and Ku-band frequencies, and through our affiliate XTAR, we operate in X-band.
2
Transponder Leasing
Customers lease our C- and Ku-band transponder capacity for the distribution of video and data for television programming, direct-to-home
(DTH) services, business communications, Internet connectivity and telephony. Our customers include some of the world’s largest video and
data service providers, including HBO, Disney, Cable & Wireless, Singapore Telecom (SingTel), Connexion by Boeing, Global Crossing, BT
North America, Globecomm Systems, UPC and China Central Television (CCTV).
Network Services
We also provide our customers with access services and transmission platforms that enable rapid and reliable networking solutions. Our
hybrid satellite and ground-based network services capabilities allow our customers to address their communications requirements quickly and
easily through a combination of applications that include broadband transport, bandwidth-on-demand, broadcast SCPC (single channel per
carrier) platforms and teleport services. Loral Skynet’s newest network services offering is SkyReach (SM) , a group of IP-based services that
provide enterprise-level customers with access to regional and global private networking and public Internet services, including broadband
WAN (wide area network) extension for terrestrial providers, Internet access for ISPs (Internet Service Providers), voice over IP (VoIP) and
managed data services. Loral Skynet provides its SkyReach services through IP (Internet Protocol) hubs at facilities in North America, Europe
and Asia, each with access to major satellite and terrestrial communications networks.
Loral Skynet’s network services are provided through an integrated satellite and fiber network that interconnects terrestrially with customer
networks through points of presence (POPs) in San Jose, California; Ashburn, Virginia; New York, New York; and London, England and
interconnects via satellite and VSAT (very small aperture terminals) services through teleports in Mount Jackson, Virginia; Aflenz, Austria;
Hong Kong; Kapolei, Hawaii; and London, England.
Professional Services
Our team of world-class network architects, engineers, program managers and satellite operations professionals, provides customized
services tailored to unique customer requirements for deploying satellites and network services, including providing other satellite operators
with spacecraft operational services (TT&C), satellite construction oversight services, network architecture design, regulatory management
including orbital slot acquisition and the coordination and customization of distribution solutions.
Market and Competition
Loral Skynet operates in a highly competitive market with larger, well-established satellite service companies including Intelsat/
PanAmSat, SES Global/ New Skies Satellites and Eutelsat, as well as regional operators such as Telesat and AsiaSat. We also compete with
companies such as Hughes Network Systems, Gilat and ViaSat in our network services business. While we also compete with fiber optic cable
and other terrestrial delivery systems, primarily for point-to-point applications, Loral Skynet has been able to combine the inherent advantages
of each technology to provide its customers with complete end-to-end services. Since FSS satellites remain in a fixed point above the earth,
they are considerably more efficient than terrestrial systems for certain applications, such as broadcast or point-to-multipoint transmission of
video and broadband data. A satellite offers instant infrastructure. It can cover large geographic areas, sometimes entire hemispheres, and can
not only deliver services to populated areas, but can also better serve areas with inadequate terrestrial infrastructures, low-density populations
or difficult geographic terrain.
Competition in the satellite services market has been intense in recent years due to a number of factors, including transponder over-capacity
in certain geographic regions and increased competition from fiber. This competition has put further pressure on prices already depressed by
the telecommunications industry downturn earlier this decade. A stronger economy and an increase in capital available for expanded consumer
and enterprise-level services have led to an improvement in demand. Much of Loral Skynet’s remaining available capacity, however, is over
geographic regions where the market is characterized by excess capacity,
3
coupled with weak demand, or where regulatory obstacles are such that we find ourselves at a competitive disadvantage versus local operators.
Loral Skynet’s growth depends on its ability to successfully market the capacity available on its international fleet of satellites, to differentiate
itself from its competition through customized product offerings and superior customer service and to fund additional satellite acquisitions.
Commencing on March 18, 2006, Loral Skynet resumed marketing satellite services to the North American market, a region in which it
was precluded from doing business for two years pursuant to the terms of its sale of satellites to Intelsat in March 2004 (See Note 5 to the
consolidated financial statements).
Satellite Fleet
The following chart provides details on the satellites that comprise Loral Skynet’s fleet (1) .
Satellite
Telstar 10/ ApstarIIR
Licensing
Jurisdiction
China
Telstar 12
U.S.
Location
76.5°
E.L.
15°W.L.
Frequency
C/Ku-band
Ku-band
Telstar 14/ Estrela do Sul-1
Brazil
63°W.L.
Ku-band
Telstar 18 (3)
China/Tonga
138°
E.L.
C/Ku-band
Coverage
Asia and portions of Europe,
portions of Africa and Australia
Eastern U.S., SE Canada, Europe,
Russia, Middle East, North
Africa, portions of South and
Central America
Brazil and portions of Latin
America, North America,
Atlantic Ocean
India, South East Asia, China,
Australia and Hawaii
In Service Date
December 1997
Expected End of Life
February 2014
December 1999
September 2016
April 2004
July 2010 (2)
August 2004
November 2018
(1) We also own and operate Telstar 11 at 37.5°W.L. and Brazil 1T at 63° W.L., both of which are in inclined orbit and generate minimal revenues.
(2) Estrela do Sul-1 was launched in January 2004 and did not fully deploy one of its solar arrays. At the end of March 2004, the satellite began commercial service operating 15 of
its 41 transponders. The satellite’s life expectancy is now approximately six years, as compared to its design life of 15 years. See Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
(3) Telstar 18 went into commercial service in September 2004. We have entered into a sales-type lease arrangement with an Asian satellite services company, initially for the
lease of 37 transponders on the satellite (see Note 8 to the consolidated financial statements).
Satellite Services Performance
Satellite services revenues
Satellite services sales-type lease arrangement (1)
Total segment revenues
Eliminations
Revenues from satellite services as reported
Segment Adjusted EBITDA before eliminations (2)
$
$
$
37
—
37
(1 )
36
12
$
$
$
115
—
115
(4 )
111
40
4
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
(in millions)
For the Years
Ending
December 31,
2004
2003
$ 141
87
228
(5 )
$ 223
$ 23
$ 154
—
154
(7 )
$ 147
$ 8
(1) See Note 8 to the consolidated financial statements.
(2) See Management’s Discussion and Analysis of Financial Condition and Results of Operations for significant items that affect comparability between the periods presented (see
Note 20 to the consolidated financial statements for the definition of Adjusted EBITDA).
Total satellite services post-emergence assets were $741 million as of December 31, 2005 and pre-emergence assets were $781 million and
$1.984 billion as of December 31, 2004 and 2003, respectively. Assets as of December 31, 2003, include the assets relating to the North
American operations, which were sold to Intelsat (see Note 5 to the consolidated financial statements). As of December 31, 2005 and 2004,
backlog was $453 million and $544 million, respectively, including intercompany backlog, representing business arrangements between SS/L
and Loral Skynet, of $20 million and $33 million, respectively.
Satellite Manufacturing Operations
For more than 40 years, SS/L has been designing, manufacturing and integrating satellites and space systems for a wide variety of
commercial and government customers. Our products include high-powered direct-to -home broadcast satellites, commercial weather satellites,
digital audio radio satellites and spot-beam satellites for data networking applications. SS/L customers include such satellite service providers
and government organizations as APT Satellite, DIRECTV, EchoStar, Hisdesat, ICO Satellite Management, Intelsat, Japan’s Ministry of
Transport and Civil Aviation Bureau, Loral Skynet, the National Oceanic & Atmospheric Administration (NOAA) of the U.S Department of
Commerce, Optus (SingTel), PanAmSat, Shin Satellite, Sirius Satellite Radio, TerreStar Networks, XTAR and XM Satellite Radio. Since its
inception, SS/L has delivered more than 220 satellites, which together have achieved more than 1,200 years of cumulative on-orbit service;
many of these satellites significantly exceeded design life expectations. SS/L’s broad product line meets the vast majority of customer
requirements for satellites with up to 23 kilowatts of power. The capacity offered on these satellites ranges from one to as many as 150
transponders.
SS/L has a history of technical innovation that includes the first three-axis spin stabilized satellite, which has since become an industry
standard for large communications satellites. In addition, SS/L has recently pioneered research in electric propulsion systems, lithium-ion
power systems and the use of advanced composites on commercial satellites, which permit significant increases in the size and power of a
satellite’s payload and extend the satellite’s on-orbit lifetime. SS/L is an industry leader in developing new service-enhancing technologies
such as super power systems for direct-to -user applications and ground-based beam forming, a technology that uses both satellite and
terrestrial assets to provide mobile users with increased coverage and capacity capabilities.
Market and Competition
SS/L competes in the highly competitive commercial satellite manufacturing industry principally on the basis of superior customer value,
technical excellence, reliability and pricing with such manufacturers as Boeing, Lockheed Martin, Alcatel Alenia Space, EADS Astrium and
Orbital Sciences. SS/L’s continued success depends on its ability to perform on a cost-effective and timely basis. The number of annual
satellite manufacturing contracts awarded varies annually and is difficult to predict. After a period of nearly two years without being awarded a
new satellite construction contract, SS/L received orders for the construction of nine satellites between October 2003 and December 2005.
5
Satellite Manufacturing Performance
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
(in millions)
For the Years
Ending
December 31,
2004
2003
Total segment revenues
Eliminations
Revenues from satellite manufacturing as reported
Segment Adjusted EBITDA before eliminations (1)
$
$
$
162
(1 )
161
12
$
$
$
329
(11 )
318
15
$ 437
(137 )
$ 300
$ (14 )
$ 474
(229 )
$ 245
$ (159 )
(1) See Consolidated Operating Results in Management’s Discussion and Analysis of Financial Condition and Results of Operations for significant items that affect comparability
between the periods presented (see Note 20 to the consolidated financial statements for the definition of Adjusted EBITDA).
Total SS/L post-emergence assets are $872 million as of December 31, 2005 and pre-emergence assets were $382 million and $362 million
as of December 31, 2004 and 2003, respectively. Backlog at December 31, 2005 was $815 million, including intercompany backlog of
$0.3 million. Backlog at December 31, 2004 was $483 million, including intercompany backlog of $12 million.
Investment in Affiliates
XTAR
We own 56% of XTAR, L.L.C. (“XTAR”), a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of Madrid.
XTAR is accounted for under the equity method since we do not control certain of its significant operating decisions.
XTAR was formed to construct and launch an X-band satellite 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. Spain granted
XTAR rights to an X-band license, normally reserved for government and military use, to develop a commercial business model for supplying
X-band capacity in support of military, diplomatic and security communications requirements. On February 12, 2005, XTAR’s first satellite,
XTAR-EUR, was launched and subsequently entered service in March 2005. On March 11, 2006, the Spainsat satellite, owned by Hisdesat, our
partner in XTAR, was successfully launched and is expected to enter service in April 2006. XTAR is obligated to lease eight 72 MHz
X-band transponders on Spainsat, to be designated XTAR-LANT. These transponders will provide its customers in the U.S. and abroad with
additional X-band services and greater flexibility. XTAR currently has contracts to provide X-band services to the U.S. Department of State,
the Spanish Ministry of Defense and the Danish armed forces. For more information on XTAR see Note 9 to the consolidated financial
statements.
Globalstar
Loral owns approximately a 2.7% equity interest in Globalstar LLC (“New Globalstar”), a low-earth-orbit mobile satellite telephone
operator. In addition, Loral holds various indirect ownership interests in three foreign companies that currently serve as exclusive service
providers for Globalstar satellite telephone service in Brazil, Mexico and Russia and an indirect 25% ownership interest in a
U.S.-based distributor that has the exclusive right to sell Globalstar services to certain government agencies in the United States. We do not
currently intend to invest material amounts in the Globalstar joint ventures.
6
Satmex
We own 49% of Satelites Mexicanos, S.A. de C.V. (“Satmex”), a satellite communications company providing services in Mexico and
Latin America. Satmex has two satellites in operation and a third, Satmex 6, scheduled for launch this year. In January 2006, Satmex reached
an agreement in principle with its creditors to restructure its debt, which is currently in default. As a result, we expect our ownership in Satmex
to be reduced to less than 5%. Separately, Loral reached a settlement agreement with Satmex in 2005 relating to the construction of the Satmex
6 satellite by SS/ L whereby Loral will acquire rights, upon launch, to four transponders on Satmex 6 for the life of the satellite. During 2003,
Loral wrote off its remaining investment in Satmex. For more information on Satmex see Note 9 to the consolidated financial statements.
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Telecommunications Regulation
REGULATION
As an operator of a privately owned global satellite system, we are subject to: the regulatory authority of the U.S. government; the
regulatory authority of other countries in which we operate; and the frequency coordination process of the International Telecommunication
Union (“ITU”). Our ability to provide satellite services in a particular country or region is subject also to the technical constraints of our
satellites, international coordination, local regulatory approval and any limitation to those approvals.
U.S. Regulation
The FCC regulates our U.S.-licensed satellites as well as our non-U.S. licensed satellites authorized to operate in the U.S. We are subject to
the FCC’s jurisdiction primarily for the licensing of satellites and earth stations, avoidance of interference with radio stations and compliance
with FCC rules. Violations of the FCC’s rules can result in various sanctions including fines, loss of authorizations, forfeiture of bonds, or the
denial of new or renewal authorizations. We are not regulated as a common carrier and, therefore, are not subject to rate regulation or the
obligation not to discriminate among customers. We must pay FCC filing fees in connection with our space station and earth station
applications and annual fees to defray the FCC’s regulatory expenses. We must file annual status reports with the FCC and, to the extent Loral
is deemed to be providing interstate/international telecommunications, we must contribute funds supporting universal service. Loral has
petitioned the FCC for exemptions from having to pay certain of such fees and contributions. These petitions are under review by the FCC.
Authorization to Launch and Operate Satellites
Pursuant to satellite licensing rules issued in 2003, the FCC grants satellite authorizations on a first-come, first-served basis to satellite
operators that meet its legal and technical qualification requirements. The FCC often receives multiple applications to operate a satellite at a
given orbital slot. There can be no assurance that applications will be granted. Most satellite authorizations include specific construction and
launch milestones; failure to meet them may result in license revocation. Under licensing rules, we must post a bond for up to $3,000,000 when
we are granted a satellite authorization. Some or the entire amount of the bond may be forfeited if we fail to meet any of the milestones for
satellite construction, launch and commencement of operation. In accordance with the current licensing rules, the FCC will issue new satellite
licenses for an initial fifteen-year term and will provide a licensee with an “expectancy” that a subsequent license will be granted for the
replacement of an authorized satellite using the same frequencies. At the end of a fifteen-year term, a satellite that has not been replaced, or that
has been relocated to another orbital location following its replacement, may be allowed to continue operations for a limited period of time
subject to certain restrictions.
We have final FCC authorization for two existing satellites which operate in the Ku-band: Telstar 11 at 37.5°W.L. and Telstar 12 at 15°
W.L. In addition, we have final FCC authorization for a planned satellite which will operate in the Ku-band at 37.5°W.L and replace Telstar 11.
Certain of our authorizations may be subject to pending petitions for reconsideration or review submitted to the FCC by third parties. The final
FCC authorizations for certain of the satellites that are not yet in orbit also do not cover certain possible design changes and require adherence
with FCC milestones stated within the authorizations. There can be no assurance that any design changes or milestone extensions which may
be sought will be granted by the FCC. The failure to obtain a requested milestone extension could result in the loss of the related FCC
authorization. If we are unable to obtain FCC approval to implement requested technical modifications for any particular authorization, we will
be obligated to operate the related satellite in accordance with the original authorization.
8
Coordination Requirements
The FCC requires applicants to demonstrate that their proposed satellites would be compatible with the operations of adjacent satellites.
Adjacent satellite operators must coordinate with one another to minimize frequency conflicts. The FCC reserves the right to require that an
FCC-licensed satellite be relocated if it deems such a change to be in the public interest.
Regulation by Non-U.S. National Telecommunications Authorities
Foreign laws and regulatory practices governing the provision of satellite services to licensed entities and directly to end-users vary
substantially from country to country. Some countries may require us to confirm that we have successfully completed technical consultation
with other satellite service providers before offering services on a given satellite. In addition, we may be subject to varying communications
and/or broadcasting laws with respect to our provision of international satellite services.
Foreign laws and regulatory practices may be applied or changed in ways that may adversely affect our ability to operate or provide service.
There are no guarantees that other countries will grant our applications to construct, launch, operate or provide service via satellites, or extend
construction or launch milestones, or that we will be permitted to retain or renew our authorizations. As in the U.S., violations of other
countries’ laws and rules may result in sanctions, fines, loss of authorizations or denial of applications for new or renewal authorizations.
Application and other administrative fees may be required in other countries. License terms for non-U.S. authorizations held by Loral vary but
generally authorize operation for at least the life of the satellite and include rights to operate a replacement satellite. Loral’s failure to operate or
maintain operation of a satellite pursuant to a non-U.S. authorization may result in revocation.
Many countries have liberalized their regulations for the provision of voice, data or video services. This trend should accelerate with the
commitments by many World Trade Organization (“WTO”) members, in the context of the WTO Agreement on Basic Telecommunications
Services, to open their satellite markets to competition. Other countries, however, have maintained strict monopoly regimes. In such markets,
the provision of service from Loral and other U.S.-licensed satellites may be more complicated.
In addition to the orbital slots licensed by the FCC, Loral has been assigned orbital slots by certain other countries. For example, we have
been authorized to use numerous C-, Ku- and Ka-band orbital slots by the Isle of Man government. These Isle of Man authorizations are (1) at
15° W.L. and 47° W.L. for use of the Ka-band frequencies, and (2) at 9.9° E.L., 16.1° E.L., 22.3° E.L., 115.5° E.L., 37.5° W.L., 89° W.L., 97°
W.L. and 115° W.L. for the use of C-, Ku- and Ka-band frequencies. We also have Isle of Man authorizations at 96.5° W.L. and 123.5° W.L.
for Broadcast Satellite Service.
In March 1999, Loral won Brazil’s auction for its 63° W.L. Ku-band orbital slot. Telstar 14/Estrela do Sul-1 is licensed by Brazil and is
authorized to operate in the U.S. by the FCC from this orbital slot. Pursuant to a lease, Loral operates all of the capacity (with the exception of
one transponder) on the Telstar 10/Apstar IIR C/Ku-band satellite licensed by China and located at 76.5° E.L. We also operate the C/extended
C-band and Ku-band payloads on Telstar 18 at 138° E.L. using licenses provided by Tonga and China, respectively.
Access to certain of these international orbital slots and authorizations are subject to our payment of various ongoing fees to the applicable
licensee or licensing authority, which in the case of the Isle of Man authorizations, include a revenue-based fee that would commence at the
time we place a satellite into an Isle of Man slot.
The ITU Frequency Coordination Process
All satellite systems are subject to ITU frequency coordination requirements and must obtain appropriate authority to provide service in a
given territory. The required international coordination process may limit the extent to which all or some portion of a particular authorized
orbital slot may be used for commercial operations, with a corresponding impact on the useable capacity of a satellite at that location.
9
All of our satellite registrations are or will be subject to the ITU coordination process. There may be more than one ITU filing submitted for
a particular orbital slot, or one adjacent to it, thus requiring coordination between or among the affected operators. Loral cannot guarantee
successful frequency coordination for its satellites.
Export Regulation
Commercial communication satellites and certain related items, technical data and services, are subject to United States export controls.
These laws and regulations affect the export of products and services to foreign launch providers, subcontractors, insurers, customers, potential
customers, and business partners, as well as to foreign Loral employees, foreign regulatory bodies, foreign national telecommunications
authorities and to foreign persons generally. Commercial communications satellites and certain related items, technical data and services are on
the United States Munitions List and are subject to the Arms Export Control Act and the International Traffic in Arms Regulations. Export
jurisdiction over these products and services resides in the U.S. Department of State. Other Loral exports are subject to the jurisdiction of the
U.S. Department of Commerce, pursuant to the Export Administration Act and the Export Administration Regulations.
U.S. Government licenses or other approvals generally must be obtained before satellites and related items, technical data and services are
exported and may be required before they are re-exported or transferred from one foreign person to another foreign person. There can be no
assurance that such licenses or approvals will be granted. Also, licenses or approvals may be granted with limitations, provisos or other
requirements imposed by the U.S. Government as a condition of approval, which may affect the scope of permissible activity under the license
or approval. See Item 1A — Risk Factors below.
PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position. It holds 213 patents in the
United States and has applications for 12 patents pending in the United States. SS/ L patents include those relating to communications, station
keeping, power control systems, antennae, filters and oscillators, phased arrays and thermal control as well as assembly and inspections
technology. The SS/L patents that are currently in force expire between 2006 and 2022.
Loral Skynet has 13 patents in the United States and has four patents abroad. Our satellite services segment has six patents pending in the
United States and has one patent pending abroad. Satellite services patents that are currently in force expire between 2016 and 2020.
There can be no assurance that any of our pending patent applications will be issued. Moreover, because the U.S. patent application process
is confidential, there can be no assurance that third parties, including competitors, do not have patents pending that could result in issued
patents which we would infringe. In such an event, we could be required to pay royalties to obtain a license, which could increase costs.
FOREIGN OPERATIONS
Sales to foreign customers, primarily in Asia, Europe and Mexico, represented 14%, 18% 42% and 39% of our consolidated revenues for
the periods October 2, 2005 to December 31, 2005, and January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and
2003, respectively. As of December 31, 2005 and 2004, substantially all of our long-lived assets were located in the United States with the
exception of our in-orbit satellites. See Item 1A — Risk Factors below for a discussion of the risks related to operating internationally. See
Note 20 to the consolidated financial statements for detail on our domestic and foreign sales.
As of December 31, 2005, we had approximately 1,700 full-time employees, approximately 2% of whom are subject to collective
bargaining agreements. We consider our employee relations to be good.
EMPLOYEES
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AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are
available without charge on our web site, www.loral.com, as soon as reasonably practicable after they are electronically filed with or furnished
to the Securities and Exchange Commission. Copies of these documents also are available in print, without charge, from Loral’s Investor
Relations Department, 600 Third Ave, New York, NY 10016. Loral’s web site is an inactive textual reference only, meaning that the
information contained on the web site is not part of this report and is not incorporated in this report by reference.
Item 1A. Risk Factors
I.
Financial Risk Factors
We recently emerged from Chapter 11 and have a history of losses.
We sought protection under chapter 11 of the Bankruptcy Code in July 2003. While we had $276 million of available cash and $12 million
of restricted cash as of December 31, 2005 and believe that this cash, as well as net cash provided by operating activities, will be adequate to
meet our expected cash requirements through at least the next 12 months, we have had a history of losses. We incurred net losses of
approximately $15 million, $59 million (not including the gain on discharge of pre-petition obligations and fresh-start adjustments of
$1.101 billion and the related interest expense of $13 million and a tax benefit of $15 million), for the periods October 2, 2005 to December 31,
2005 and January 1, 2005 to October 1, 2005 and net losses of $177 million and $389 million for the years ended December 31, 2004 and
2003, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There can be no assurance
that Loral will grow or achieve profitability in the near future. Although we have successfully consummated our Plan of Reorganization and
emerged from bankruptcy on November 21, 2005, there is no assurance that negative publicity surrounding our Chapter 11 reorganization will
not adversely affect our results of operations or business in the future. It may also adversely affect our ability to obtain financing, which would
in turn affect our ability to grow our business.
We are a holding company with no operations; we are dependent on cash flow from our operating subsidiaries to meet our financial
obligations.
Loral Space & Communications Inc. is a holding company whose assets consist principally of the equity interest we own in our
subsidiaries, joint ventures and affiliates. We have no independent operations or operating assets. One of our principal operating subsidiaries,
Loral Skynet, has outstanding $126 million in 14% senior secured notes due 2015 (the “Loral Skynet Notes”) and $200 million in preferred
stock which we do not own, and which is structurally senior to our Loral Skynet common stock. The ability of our subsidiaries to make
payments or distributions to us, whether as dividends or as payments under applicable management and shared services agreements, will
depend on their operating results, including their ability to satisfy their own cash flow requirements and obligations. Moreover, covenants
contained in the indenture relating to the Loral Skynet Notes impose limitations on Loral Skynet’s ability to upstream funds to us.
The indenture governing Loral Skynet’s 14% senior secured notes may restrict our current and future operations.
The limitations contained in the indenture relating to the $126 million of senior secured notes issued by Loral Skynet upon its emergence
from bankruptcy impose restrictions on our operations and limit our ability to enter into financial transactions that we may wish to pursue.
These restrictions will affect, and in many respects limit, among other things, Loral Skynet’s and its subsidiaries’ ability to pay dividends,
make investments, sell assets, make loans, repurchase equity interests or engage in mergers or other like transactions. These restrictions may
limit our flexibility in planning for and reacting to changes in our business and the industry in which we operate. Our ability to redeem these
notes in the near-term is limited. During the first two years after the Effective Date, we may redeem the notes at a redemption price of 110%
plus accrued and unpaid interest, but only if we do not receive an objection notice from holders of two-thirds of the
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principal amount of the notes. After this two-year period, the notes are redeemable at our option at a redemption price of 110%, declining over
time to 100% in 2014, plus accrued and unpaid interest.
The Loral Skynet Notes are collateralized by substantially all of Loral Skynet’s assets.
A breach of any of the restrictive covenants contained in the Loral Skynet indenture could result in an event of default, which would give
the noteholders the ability to accelerate repayment of the Loral Skynet notes. If Loral Skynet is unable to repay the notes when due, the
noteholders will have the right to proceed against the collateral granted to them to secure the Loral Skynet Notes, which consists of
substantially all of the assets of Loral Skynet and its subsidiaries.
We may in the future incur significant additional indebtedness, thereby making us more vulnerable to adverse developments.
Although the indenture governing the Loral Skynet Notes contains restrictions on the incurrence of indebtedness by Loral Skynet and its
subsidiaries, these restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance
with these restrictions could be substantial, and in certain cases, may be secured by the same assets that secure the Loral Skynet Notes.
Moreover, there are currently no restrictions on the ability of Loral or SS/ L to incur additional indebtedness. As a result, we may be able to
incur significant additional debt in the future. If new debt is added, such indebtedness would likely impose more restrictive covenants, which
may include financial ratios. If we incur significant additional indebtedness, we would be more vulnerable to, among other things, adverse
changes in general economic, industry and competitive conditions.
XTAR will have significant lease obligations, which may require us to make additional capital contributions to the venture.
XTAR has agreed to lease certain transponders on Hisdesat’s recently launched Spainsat satellite. These lease obligations initially amount
to $6.2 million per year, growing to $23 million per year in 2008. XTAR’s ability to fund these lease obligations is dependent on it generating a
significant increase in customer orders. If XTAR is unable to do so, then XTAR would seek to restructure the terms of the Spainsat lease. If
XTAR is unable to do so on terms that are acceptable to it, then we will be faced with the decision of either making additional cash
contributions to XTAR to enable it to meet its obligations or allowing XTAR to default under the lease agreement, which may result in a loss
of our investment in XTAR.
Replacing a satellite upon the end of its useful life will require us to make significant expenditures.
To ensure no disruption in Loral Skynet’s business and to prevent loss of customers, we will be required to commence construction of a
replacement satellite approximately two to three years prior to the end of life of the satellite then in orbit. For example, we will be required to
commence construction of a replacement to our Estrela do Sul satellite in 2008 to ensure a continuation of our business on this satellite. We
have also recently commenced construction of our Telstar 11N satellite and will incur substantial expenditures in connection with such effort.
Typically, it costs in excess of $200 million to construct, launch and insure a satellite. We have in the past funded this cost from a combination
of operating cash flow and financing proceeds. There is no assurance that we will be able to obtain financing to fund such expenditures on
favorable terms, if at all.
Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our statement of
operations, equity, and pension contributions in future periods.
Our statement of operations may be positively or negatively impacted by the amount of expense we record for our pension and other
postretirement benefit plans. Generally accepted accounting principles (GAAP) in the United States of America require that we calculate
expense for the plans using actuarial valuations. These valuations reflect assumptions that we make relating to financial market and other
economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The most significant year-end
assumptions used to estimate pension or other postretirement expense for the following
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year are the discount rate, the expected long-term rate of return on plan assets, and expected future medical inflation. In addition, we are
required to make an annual measurement of plan assets and liabilities. Under certain circumstances, at the time of the measurement, we may be
required to make a significant charge to equity through a reduction to other comprehensive income. For a discussion regarding how our
financial statements can be affected by pension and other postretirement plan accounting policies, see Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Critical Accounting Matters — Pensions and other employee benefits. In 2005, we
contributed $20 million to our pension plan. The amounts of our contributions in the future will depend, among other things, on the key
economic factors underlying these assumptions.
II. Operational Risk Factors
• Risk Factors Associated With Satellite Services
Launch delays or failures have delayed some of our operations in the past and may do so again in the future.
We depend on third parties in the United States and abroad to launch our satellites. Delays in launching satellites are not uncommon and
result from construction delays, the unavailability of appropriate launch vehicles and other factors. For example, the launch of the XTAR-EUR
satellite was significantly delayed while we waited for Arianespace to complete work on its ECA launch vehicle.
Satellite launches are risky, and some launch attempts have ended in complete or partial failure. On January 10, 2004, for example, our
Telstar 14/ Estrela do Sul-1 communications satellite was launched by Boeing Sea Launch, but only partially deployed its North solar array.
Although the satellite was insured and we collected insurance proceeds of $205 million, the failed solar array deployment has resulted in the
availability of only 15 of the satellite’s 41 Ku-band transponders and a life expectancy of only six years as compared to a design life of
15 years. This reduced capacity and life will affect the roll out of our Brazilian business and will reduce operating revenues pending
construction of a replacement satellite.
We ordinarily insure against launch failures but at considerable cost. The cost and the availability of insurance vary depending on market
conditions and the launch vehicle used. Replacing a lost satellite typically requires at least two years from execution of a manufacturing
contract to launch.
After launch, our satellites remain vulnerable to in-orbit failures which may result in reduced revenues and profits and other financial
consequences.
In-orbit damage to or loss of a satellite before the end of its expected life results from various causes, some random, including component
failure, degradation of solar panels, loss of power or fuel, inability to maintain the satellite’s position, solar and other astronomical events, and
space debris.
Satellites are built with redundant components or additional components to provide excess performance margins to permit their continued
operation in case of a component failure, an event that is not uncommon in complex satellites. Certain of our satellites are currently operating
using back-up components because of the failure of primary components. If the back-up components fail, however, and we are unable to restore
redundancy, these satellites could lose capacity or be total losses, which would result in a loss of revenues and profits.
For example, in July 2005, in the course of conducting our normal operations, we determined that the primary command receiver on two of
our satellites had failed. These satellites, which are equipped with redundant command receivers designed to provide full functional capability
through the full design life of the satellite, continue to function normally and service to customers has not been affected. Moreover, SS/L, the
manufacturer of the satellites, has successfully completed implementation of a software workaround that fully restored the redundant command
receiver function on both of these satellites.
In addition, three satellites operated by Loral Skynet or its affiliates that were manufactured by SS/ L have experienced minor losses of
power from their solar arrays. Although we believe the satellites will fulfill
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their designed mission lives, there can be no assurance that one or more of the satellites will not experience an additional power loss that could
lead to a lessening of transponder capacity and performance degradation. A partial or complete loss of a satellite would result in the loss of
revenues and profit for Loral Skynet and us. For further details see Note 19 to the consolidated financial statements.
Loral Skynet has in the past entered into prepaid leases, sales contracts and other arrangements relating to transponders on its satellites.
Under the terms of these agreements, Loral Skynet may be required to replace transponders that do not meet operating specifications. Failure to
replace such transponders may result in a payment obligation on the part of Loral Skynet.
It may be difficult to obtain full insurance coverage for satellites that have, or are part of a family of satellites that has, experienced
problems in the past; moreover, not all satellite-related losses will be covered by our insurance.
While we have in the past typically insured against launch and in-orbit failure of the satellites in our satellite services segment, insurance
will not protect us against all losses. For example, insurance will not protect us against business interruption, lost revenues or delay of
revenues. Our existing launch and in-orbit insurance policies also include, and future policies are expected to include, specified exclusions,
deductibles and material change limitations. Typically, these insurance policies exclude coverage for damage arising from acts of war and other
exclusions then customary in the industry. In addition, they typically exclude coverage for health-related problems affecting our satellites that
are known at the time the policy is written.
We cannot assure that, upon the expiration of an in-orbit insurance policy, which typically has a term of one year, that we will be able to
renew the policy on terms acceptable to us. As noted above, insurers may require either exclusions of certain components or may place similar
limitations on coverage in connection with insurance renewals for satellites that have experienced problems in the past. For example, the
insurance coverage for two of our satellites provides for coverage of losses due to solar array failures only in the event of a capacity loss of
75% or more for one satellite and 80% or more for the other. The loss of a satellite would likely have a material adverse effect on our financial
performance and may not be adequately mitigated by insurance coverage. Moreover, if we were to determine in the future that the terms of any
particular insurance renewal are uneconomic after taking into account factors such as cost of the insurance and scope of insurance exclusions
and limitations, we may elect to self-insure against losses of a satellite. For further details see Note 19 to the consolidated financial statements.
Like other satellite operators, we are faced with increased launch and in-orbit insurance premiums.
The cost of obtaining insurance has increased significantly, primarily due to post-September 2001 insurance industry developments. This
has increased our cost of doing business. For further details see Note 19 to the consolidated financial statements.
Our satellite services businesses compete for market share, customers and orbital slots, against competitors that are significantly larger
than us.
We face significant competition in the transponder leasing business from companies such as Intelsat/ PanAmSat, SES Global/ New Skies
Satellites and Eutelsat, all of which are larger and better capitalized than we are. We also face competition from smaller, regional operators,
which may enjoy competitive advantages in their local markets. The supply of satellite capacity has increased in recent years, making it more
difficult for us to sell our services in certain markets and to maintain our prices for the capacity that we do sell. Competition may cause further
downward pressure on prices and further reduce the utilization of our fleet capacity, both of which may have an adverse effect on our financial
performance. Our transponder leasing business also competes with fiber optic cable and other terrestrial delivery systems, which have a cost
advantage in point-to-point applications.
Similarly, our network services business faces competition not only from other satellite-based providers, but also from providers of land-
based data communications services, such as cable, DSL (digital subscriber
14
line), wireless local loop and traditional telephone service providers. We will face further price pressure from these companies as they continue
to compete for our services.
As land-based telecommunications services expand and become more sophisticated, demand for some satellite-based services may be
reduced. New technology could render satellite-based services less competitive by satisfying consumer demand in other ways. We also
compete for local regulatory approval in places where more than one provider may want to operate, and for scarce frequency assignments and
fixed orbital positions.
The content of third-party transmissions over our satellites may affect us.
Loral Skynet provides satellite capacity for transmissions by third parties. We do not decide what content is transmitted over our satellites,
although our contracts generally provide us with rights to prohibit certain types of content or to cease transmission under certain circumstances.
Issues arising from the content of transmissions by these third parties over our satellites could affect our future revenues, operations, or our
relationship with certain governments or customers.
Our business is regulated, causing uncertainty and additional costs.
Multiple authorities regulate our business, including the FCC, the International Telecommunication Union (ITU) and the European Union.
Regulatory authorities can modify, withdraw or impose charges or conditions upon, or deny or delay action on applications for the licenses we
need, and so increase our costs.
To prevent frequency interference, the regulatory process requires potentially lengthy and costly negotiations with third parties who operate
or intend to operate satellites at or near the locations of our satellites. For example, as part of our coordination effort on Telstar 12, we agreed to
provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the satellite and have retained risk of loss with respect to those
transponders. We also granted Eutelsat the right to acquire, at cost, four transponders on the replacement satellite for Telstar 12. We continue to
discuss coordination issues with other operators and may need to make additional financial concessions in connection with future coordination
efforts. The failure to reach an appropriate arrangement with a third party having priority rights at or near one of our orbital slots may result in
substantial restrictions on the use and operation of our satellite at that location. In addition, while the ITU rules require later-in-time systems to
coordinate with us, there can be no assurance that other operators will conduct their operations so as to avoid transmitting any signals that
would cause harmful interference to the operation of our satellites.
Failure to successfully coordinate our satellites’ frequencies or to resolve other required regulatory approvals could have an adverse effect
on our consolidated financial position and our results of operations, as well as the value of our business. For further details see Note 19 to the
consolidated financial statements.
The recent trend toward industry consolidation in the fixed satellite services industry may adversely affect us.
The recent industry consolidation trend will result in the formation of competitors with greater financial resources and increased coverage
and scale. While we may pursue strategic transactions on an opportunistic basis, we may not find or be able to take advantage of any suitable
opportunities. We may therefore find it difficult to compete with our competitors, many of whom are substantially larger than we are and enjoy
the benefits of the economies of scale from their fleets of satellites.
• Risk Factors Associated With Satellite Manufacturing
The satellite manufacturing market is highly competitive and fixed costs are high.
SS/L competes with several large, well-capitalized companies such as Boeing, Lockheed Martin and Orbital Sciences in the United States,
and Alcatel Alenia Space and EADS Astrium in Europe, nearly all of which are larger and better capitalized than we are. We may also face
competition in the future from emerging low-cost competitors in India, Russia and China. The number of annual satellite manufacturing awards
varies and is difficult to predict. In addition, U.S. satellite manufacturers must contend with export control
15
regulations that put them at a disadvantage when competing for foreign customers. Our financial performance is dependent on SS/L’s ability to
generate a sustainable order rate and to continue to increase its backlog. The satellite manufacturing industry has suffered from substantial
overcapacity worldwide for a number of years, resulting in extreme competitive pressure on pricing terms and other material contractual terms,
such as those allocating risk between the manufacturer and its customers.
SS/L is a large-scale systems integrator, requiring a large staff of highly-skilled and specialized workforce, as well as specialized
manufacturing and test facilities in order to perform under its satellite construction contracts. Although overhead costs at SS/ L were cut
substantially during our bankruptcy proceedings, SS/ L must continuously retain the services of a core group of specialists in a wide variety of
disciplines for each phase of the design, development, manufacture and testing of its products in order to maintain its ability to compete as one
of the leading prime contractors for technologically advanced space satellites.
SS/L’s contracts are subject to adjustments, cost overruns, risk of non-payment and termination.
SS/L’s major contracts are firm fixed-price contracts under which work performed and products shipped are paid for at a fixed price
without adjustment for actual costs incurred. While cost savings under these fixed-price contracts result in gains to SS/L, cost increases result
in reduction of margins or losses, borne solely by SS/L. Under such contracts, SS/L may receive progress payments, or it may receive partial
payments upon the occurrence of certain program milestones. If performance on these milestones is delayed, SS/L’s receipt of the
corresponding payments will also be delayed.
Non-performance, including schedule delays, can increase costs and subject us to damages claims from customers, including liquidated
damages and termination of the contract for our default. If a contract is terminated, we could be liable for a refund of payments made to date,
excess re-procurement costs and other damages incurred by our customer, although SS/L would own the satellite under construction and
attempt to recoup any losses through resale to another customer. A contract termination for default could have a material adverse effect on
SS/L and us.
In addition, many of SS/L’s contracts and subcontracts may be terminated at will by the customer or the prime contractor. In the event of
such a termination, SS/L is normally entitled to recover the purchase price for delivered items, reimbursement for allowable costs for work in
process, and an allowance for profit or an adjustment for loss, depending on whether completion of the project would have resulted in a profit
or loss.
Moreover, many of SS/L’s contracts require SS/L to provide vendor financing to its customers or, more customarily, for customers to pay a
portion of the purchase price for the satellite over time subject to performance of the satellite, i.e., orbital payments, or a combination of these
terms. In some cases these arrangements are provided to customers that are start-up companies or companies in the early stages of building
their businesses. As of December 31, 2005, SS/L had recorded vendor financing and orbital receivables of $99 million (of which $57 million
was from start-up or early stage companies). Of this $57 million, SS/L had received payments of $49 million as of March 2006. Although we
expect to be paid, there can be no assurance that these companies or their businesses will be successful and, accordingly, that they will be able
to fulfill their payment obligations under their contracts with SS/L.
SS/L’s accounting for long-term contracts requires adjustments to profit and loss based on estimates revised during the execution of the
contract. These adjustments may have a material effect on our consolidated financial position and our results of operations in the period in
which they are made. The estimates giving rise to these risks, which are inherent in long-term, fixed-price contracts, include the forecasting of
costs and schedules, contract revenues related to contract performance, and the potential for component obsolescence due to procurement long
before assembly.
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SS/L may forfeit payments from customers as a result of satellite failures or losses after launch, or may be liable for penalty payments
under certain circumstances, and these losses may be uninsured.
Most of SS/L’s satellite manufacturing contracts provide that some of the total price is contingently payable as “incentive” payments earned
over the life of the satellite, subject to satellite performance. Known as orbitals, SS/L generally does not insure for these payments and in some
cases agrees with its customers not to insure them.
SS/L records the present value of orbital payments as revenue during the construction of the satellite. SS/L generally receives the present
value of these incentive payments if there is a launch failure or a failure caused by customer error. SS/L forfeits some or all of these payments,
however, if the loss is caused by satellite failure or as a result of its own error. As of December 31, 2005, SS/L had orbital receivables of
$42 million, payable over 16 years. Since these orbital receivables could be affected by future satellite performance, there can be no assurance
that SS/L will be able to collect all or a portion of these receivables.
Some of SS/L’s contracts call for in-orbit delivery, transferring the launch risk to SS/L. SS/L generally insures against that exposure. In
addition, some of SS/L’s contracts provide that SS/L may be liable to a customer for penalty payments under certain circumstances, including
late delivery or that a portion of the price paid by the customer is subject to “warranty payback” in the event satellite anomalies were to develop
(see Note 19 to the consolidated financial statements). These contingent liabilities are not insured by SS/L. We have recorded reserves in our
financial statements based on our current estimates of SS/L’s warranty liabilities. There is no assurance that SS/L’s actual liabilities to its
customers in respect of these warranty liabilities will not be greater than the amount reserved for.
Some satellites built by SS/L, including three satellites operated by Loral Skynet or other affiliates, have experienced minor losses of
power from their solar arrays.
Twenty satellites built by SS/L have experienced minor losses of power from their solar arrays. There can be no assurance that one or more
will not experience an additional power loss that could lead to a loss of transponder capacity and performance degradation. A partial or
complete loss of a satellite could result in an incurrence of warranty payments by, or a loss of orbital incentive payments to SS/L. SS/L has
instituted remedial measures that it believes will prevent similar anomalies from occurring on satellites under construction or in development.
For further details see Note 19 to the consolidated financial statements.
Some satellites built by SS/L have the same design as another SS/L-built satellite that has experienced a partial failure.
In November 2004, Intelsat Americas 7 (formerly Telstar 7) experienced an anomaly which caused it to completely cease operations for
several days before it was partially recovered. Four other satellites manufactured by SS/L for other customers have designs similar to Intelsat
Americas 7 and, therefore, could be susceptible to similar anomalies in the future. A partial or complete loss of these satellites could result in
an incurrence of warranty payments by SS/L of up to $18 million.
We are subject to export controls, which may result in delays and additional costs.
SS/L is required by the U.S. State Department to obtain licenses and enter into technical assistance agreements to export satellites and
related equipment, and to disclose technical data to foreign persons. The delayed receipt of or the failure to obtain the necessary licenses and
agreements may interrupt the completion of a satellite contract by SS/L and could lead to a customer’s cancellation of a contract, monetary
penalties and/or the loss of incentive payments.
Some of our customers and potential customers, along with insurance underwriters and brokers have raised concerns that U.S. export
control laws and regulations excessively restrict their access to information about the satellite during construction and on-orbit. To the extent
that our non-U.S. competitors are not subject to these export control laws and regulations, they may enjoy a competitive advantage with foreign
customers, and, to the extent that our foreign competitors continue to gain market share, it could become
17
increasingly difficult for the U.S. satellite manufacturing industry, including SS/L, to recapture this lost market share.
The recent trend toward industry consolidation in the fixed satellite services industry may adversely affect us.
The recent industry consolidation trend will result in the formation of satellite operators with greater satellite resources and increased
coverage. This consolidation may reduce demand for new satellite construction as operators may need fewer satellites in orbit to provide back-
up coverage or to rationalize the amount of capacity available in certain geographic regions. It may also result in concentrating additional
bargaining power in the hands of large customers, which could increase pressure on pricing and other contractual terms.
The availability of qualified personnel and facility space may be limited; SS/L will incur costs to upgrade or expand its facility and
these costs may be substantial.
SS/L has recently won a number of satellite construction awards and its backlog has expanded significantly. In order to complete
construction of all the satellites in backlog, SS/L will need to and is in the process of hiring additional staff and will likely require an expansion
of its existing facilities. There can be no assurance that SS/L will be able to hire the employees with the requisite skills and training or to
acquire suitable facility space and, accordingly, may not be able to perform its contracts as efficiently as planned.
SS/L is in the process of performing a comprehensive evaluation of its facility requirements that takes into account various factors,
including its backlog requirements, as well as expansions or upgrades that may be required to enable the company to meet its future growth
prospects. The costs of such expansions or upgrades may be substantial.
• Risk Associated With Conducting Business Internationally
We face risks in conducting business internationally.
For the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004
and 2003, approximately 14%, 18%, 42% and 39%, respectively, of our revenue was generated from customers outside of the United States.
We could be harmed financially and operationally by changes in foreign regulations and telecommunications standards, tariffs or taxes and
other trade barriers that may be imposed on our services, or by political and economic instability in the countries in which we conduct business.
Almost all of our contracts with foreign customers require payment in U.S. dollars, and customers in developing countries could have difficulty
obtaining U.S. dollars to pay us due to currency exchange controls and other factors. Exchange rate fluctuations may adversely affect the ability
of our customers to pay us in U.S. dollars. If we need to pursue legal remedies against our foreign business partners or customers, we may have
to sue them abroad where it could be difficult for us to enforce our rights.
III Other Risks
We share control of our affiliates with third parties.
We share control of our affiliates with third parties and as a result we do not have control over management of these entities. For example,
Hisdesat enjoys substantial approval rights in regard to XTAR, our X-band joint venture. The rights of these third parties and fiduciary duties
under applicable law could result in others acting or omitting to act in ways that are not in our best interest. To the extent that these entities are
or become customers of SS/L, further conflicts of interest between us and these affiliates are likely to arise.
We rely on key personnel.
We need highly qualified personnel. Michael Targoff, our chief executive officer, has an employment contract expiring in December 2010,
and several of our key officers have two-year employment contracts expiring in November 2007. See Item 11 — Executive Compensation —
Employment Contracts, Change in
18
Control and Other Compensation Arrangements below for a description of our financial obligations to our officers. We do not maintain “key
man” life insurance. The departure of any of our key executives could have an adverse effect on our business.
MHR is our controlling shareholder and may have conflicts of interest with us in the future.
MHR Fund Management LLC (“MHR”), through its affiliated funds, beneficially owns approximately 35.9% of our common stock and is
the largest single holder of our common stock. MHR also owns 38.3% of Loral Skynet’s preferred stock and 44.6% of Loral Skynet’s senior
secured notes. Moreover, representatives of MHR occupy three of the nine seats on our board of directors, and two additional directors were
selected by the creditors’ committee in our Chapter 11 Cases, in which MHR served as the chairman. Conflicts of interests may arise in the
future between us and MHR. For example, MHR and its affiliated funds are in the business of making investments in companies and may
acquire and hold interests in businesses that compete directly or indirectly with us.
Compliance with the Sarbanes-Oxley Act increases our operating expenses.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission (“SEC”), have
required changes to some of our corporate governance practices. These changes include developing financial and disclosure processes that
satisfy Section 404 of the Sarbanes-Oxley Act. We expect that these rules and regulations will continue to make some activities more difficult,
time-consuming and costly. We also expect that these rules and regulations could make it more difficult for us to attract and retain qualified
members of our Board of Directors, particularly to serve on our audit committee, and to attract and retain qualified executive officers. If we are
unable to comply with the Sarbanes-Oxley Act and related rules and regulations, our business could be materially adversely affected.
The future use of tax attributes is limited upon emergence from bankruptcy.
As of December 31, 2005, Loral had net operating loss carryforwards, or NOLs, of approximately $1.1 billion that are available to offset
future taxable income. Since our reorganization on the Effective Date constituted an “ownership change” under Section 382 of the Internal
Revenue Code, our ability to use these NOLs, as well as certain other tax attributes existing at the Effective Date, is subject to an annual
limitation of approximately $32 million, subject to modification based on certain factors. If New Loral experiences an additional “ownership
change” during any three-year period after the Effective Date, future use of these tax attributes may become further limited. An ownership
change would be triggered if shareholders owning five percent or more of our total equity value dispose of their holdings during a three-year
period by more than 50 percent in the aggregate. Since Loral’s charter contains no restriction on the transfer of equity interests, if our existing
significant shareholders were to dispose of all of their equity interests in New Loral during this three-year period, an additional “ownership
change” will have occurred.
There is a thin trading market for our common stock.
Our common stock was first issued and listed on the NASDAQ National Market in December 2005. Since that time, trading activity in our
stock has generally been light. Moreover, over 50% of our common stock is effectively held by MHR and two other shareholders. If any of our
significant shareholders should sell some or all of their holdings, it will likely have an adverse effect on our share price. Funds affiliated with
MHR have registration rights in respect of the securities they hold in Loral and Loral Skynet, including our common stock.
The market for our stock could be adversely affected by future issuance of significant amounts of our common stock.
As of December 31, 2005, 20,000,000 shares of our common stock were outstanding. On that date, there were 1,390,452 stock options
outstanding which will become vested and exercisable over the next four years. In addition, in March 2006, subject to stockholder approval at
an annual or special meeting of our
19
stockholders, we adopted an amendment to our 2005 Stock Incentive Plan to increase by 825,000 the number of shares available for grant
thereunder. This amendment covers the grant in March 2006 (the “March 2006 Option Grant”), subject to stockholder approval of the plan
amendment, of options to purchase 825,000 shares to our Chief Executive Officer, Michael B. Targoff, in connection with his entering into an
employment agreement with us. Moreover, we intend to further amend our stock option plan in the future to provide for additional increases in
the number of shares available for grant thereunder, including, among others, an increase to cover an option grant which we have agreed,
provided he has earned his target bonus for 2006 and 2007, to grant to Mr. Targoff in 2008 with a Black-Scholes value equal to one-half of the
value of his March 2006 Option Grant and an increase to cover the component of annual fees to our directors that consists of restricted stock
awards.
In connection with a stipulation entered into with certain directors and officers of Old Loral and a stipulation entered into with the plaintiffs
in a purported class action lawsuit brought by participants in the 401(k) Savings Plan of Old Loral, certain claims aggregating $77 million may
result in the distribution of our common stock in addition to the 20 million shares being distributed under the Plan of Reorganization. For more
detail about these stipulations, see Note 19 to the consolidated financial statements.
Sales of significant amounts of our common stock to the public, or the perception that those sales could happen, could adversely affect the
market for, and the trading price of, our common stock.
IV
Litigation and Disputes
We are involved in a number of ongoing lawsuits.
We are involved in a number of lawsuits, details of which can be found in Note 19 to the consolidated financial statements. In addition, we
are involved in a number of disputes which might result in litigation. For example, we have brought an adversary proceeding against
International Launch Services in the Bankruptcy Court seeking recovery of $37.5 million of deposits held by ILS. ILS has filed counterclaims
in which it is seeking to recover damages, in an unspecified amount, as a result of our alleged failure to assign to ILS two satellite launches and
$38 million in lost revenue due to our alleged failure to comply with a contractual obligation to assign to ILS the launch of another satellite.
For further details see Note 19 to the consolidated financial statements. If any of these lawsuits or disputes are decided against us it could have
a material adverse affect on our financial condition and our results of operations.
An appeal has been filed seeking to overturn the settlement agreement we entered into with Globalstar, L.P.
In April 2003, one of Globalstar, L.P.’s creditors filed a motion seeking reconsideration of court approval of a settlement agreement
between Loral and Globalstar, L.P. and Globalstar’s official creditor’s committee in which, among other things, Globalstar granted to Loral,
subject to certain conditions, a general release of all claims it might have against Loral. The court denied this motion for reconsideration in
May 2003, and, in June 2003, the creditor filed with the Federal Appeals Court a notice of appeal of the court’s order approving the settlement
agreement. Although we believe that the appeal, which is currently pending, is without merit, no assurance can be given in this regard or as to
what relief, if any, might be granted in the event the appeal were to be successful.
20
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Corporate
We lease approximately 27,000 square feet of space for our corporate offices in New York.
Satellite Services
Loral Skynet owns two telemetry, tracking and control stations covering approximately 73,000 square feet on 218 acres in Hawley,
Pennsylvania and Mt. Jackson, Virginia. Loral Skynet leases space for three telemetry, tracking and control stations covering approximately
9,000 square feet in Rio de Janeiro, Brazil, Utive, Panama and Quito, Ecuador. Loral Skynet also leases approximately 54,000 square feet of
office space in Bedminster, New Jersey and Rockville, Maryland and 38,000 square feet in various locations around the world. In addition, in
March 2006, we sold some of our excess facilities.
Satellite Manufacturing
SS/ L’s research, production and testing are conducted in SS/ L-owned facilities covering approximately 563,000 square feet on 29 acres in
Palo Alto, California. In addition, SS/ L leases approximately 317,000 square feet of space on 21 acres from various third parties primarily in
Palo Alto, Menlo Park and Mountain View, California.
Management believes that the facilities for satellite services and satellite manufacturing are sufficient for their current operations.
Item 3.
Legal Proceedings
We discuss certain legal proceedings pending against the Company in the notes to the consolidated financial statements, and refer you to
that discussion for important information concerning those legal proceedings, including the basis for such actions and relief sought. See
Note 19 to the consolidated financial statements of this Form 10-K for this discussion.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
(a) Market Price and Dividend Information
New Loral Common Stock
New Loral has authorized 40,000,000 shares of common stock, $0.01 par value per share, 20,000,000 of which are outstanding. Subject to
the preferences and other rights of any outstanding preferred stock of New Loral (none outstanding as of December 31, 2005), holders of shares
of New Loral common stock are entitled to share equally, share for share, in dividends when and as declared by the board of directors out of
funds legally available for such dividends. Subject to the rights, powers and preferences of any outstanding New Loral preferred stock, upon a
liquidation, dissolution or winding up of New Loral, the assets of New Loral available to stockholders will be distributed equally per share to
the holders of New Loral common stock. Except as otherwise provided in the Restated Certificate of Incorporation or bylaws of New Loral,
each holder of New Loral common stock is entitled to one vote in respect of each share of New Loral common stock held
21
of record on all matters submitted to a vote of stockholders. The holders of New Loral common stock do not have any cumulative voting rights.
New Loral common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to New Loral common stock. All outstanding shares of New Loral common stock are fully paid and non-assessable.
Effective with the emergence from bankruptcy on November 21, 2005 and the consummation of the Plan of Reorganization, Old Loral
common stock was cancelled and New Loral issued 20 million shares of common stock to its distribution agent. To date, approximately
18.7 million shares have been distributed to our creditors. New Loral common stock began trading on a when-issued basis on July 27, 2005 on
the Over-The-Counter (“OTC”) Bulletin Board Service under the ticker symbol “LRALV.” Upon the initial distribution to creditors made on
December 8, 2005, the stock began trading on the NASDAQ National Market under the ticker symbol “LORL.” The table below sets forth the
high and low sales prices of New Loral common stock as reported on the OTC Bulletin Board Service and NASDAQ National Market from
July 27, 2005 through December 31, 2005.
Year ended December 31, 2005
October 1, 2005 through December 31, 2005
July 27, 2005 through September 30, 2005
Old Loral Common Stock
High
Low
$
$
29.40
28.70
$ 21.75
$ 26.50
As a result of the commencement of our Chapter 11 Cases, on July 15, 2003, the NYSE suspended trading of Old Loral’s common stock
and removed the securities from listing and registration on September 2, 2003. On July 16, 2003, Old Loral’s common stock began to be
quoted under the ticker symbol LRLSQ on the Over-The-Counter (“OTC”) Bulletin Board Service and the Pink Sheets Service (“Pink
Sheets”). In addition, on June 4, 2003, Old Loral’s Board of Directors approved a reverse stock split of the common stock at a ratio of one-for-
ten, resulting in a new par value of $0.10 per common share. The reverse stock split became effective after the close of business on June 13,
2003. The following table presents the reported high and low closing prices of Old Loral’s common stock as reported on the OTC
Bulletin Board Service for 2005 and 2004:
Year ended December 31, 2005
October 1, 2005 through November 21, 2005
Quarter ended September 30, 2005
Quarter ended June 30, 2005
Quarter ended March 31, 2005
Year ended December 31, 2004
Quarter ended December 31, 2004
Quarter ended September 30, 2004
Quarter ended June 30, 2004
Quarter ended March 31, 2004
High
Low
$ 0.43
0.30
0.53
0.23
$ 0.19
0.18
0.61
1.20
$ 0.04
0.04
0.16
0.11
$ 0.03
0.03
0.12
0.31
(b) Approximate Number of Holders of Common Stock
At March 1, 2006, there were 177 holders of record of the New Loral common stock.
(c)
Dividends
Old Loral never paid dividends on its common stock. In August 2002, Old Loral’s Board of Directors approved a plan to suspend
indefinitely the payment of dividends on Old Loral’s Series C and Series D preferred stock. Old Loral did not pay any dividends or make any
distributions during the pendency of the
22
Chapter 11 Cases and effective with the emergence from bankruptcy on November 21, 2005 and the consummation of the Plan of
Reorganization, all of Old Loral’s preferred stock was cancelled.
New Loral’s ability to pay dividends or distributions on its common stock will depend upon its earnings, financial condition and capital
needs and other factors deemed pertinent by the Board of Directors. To date, New Loral has not paid any dividends on its common stock. On
the Effective Date, Loral Skynet Corporation issued 1,000,000 shares of Series A 12% Non-Convertible Preferred Stock, $0.01 par value per
share (the “Loral Skynet Preferred Stock”), of which 987,018 shares have been distributed to the creditors to date. The Loral Skynet Preferred
Stock has an aggregate liquidation preference of $200,000,000 and dividends (if not paid or accrued as permitted under certain circumstances)
will be payable in kind (in additional shares of Loral Skynet Preferred Stock) if the amount of any dividend payment would exceed certain
thresholds.
(d)
Sales of Unregistered Securities by Registrant
Pursuant to the Plan of Reorganization, New Loral issued 20,000,000 shares of common stock, par value $.01 per share, on the Effective
Date to satisfy claims of certain creditors. As provided by Section 1145 of the Bankruptcy Code, the issuance of such securities were exempt
from registration under the Securities Act of 1933, as amended.
(e)
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Securities Authorized
for Issuance under Equity Compensation Plans.
Item 6.
Selected Financial Data
The following table sets forth our selected historical financial and operating data for the period October 2, 2005 to December 31, 2005, the
period January 1, 2005 to October 1, 2005 and each of the four years in the period ended December 31, 2004.
For all periods presented in the statement of operations, income from continuing operations excludes the results of the North American
satellites and related assets sold on March 17, 2004 to Intelsat, which have been accounted for as a discontinued operation and accordingly are
presented separately in the consolidated selected financial data (see Note 5 to the consolidated financial statements).
On August 1, 2005, the Bankruptcy Court entered its Confirmation Order confirming the Plan of Reorganization. On September 30, 2005,
the FCC approved the transfer of FCC licenses from Old Loral to New Loral, which represented the satisfaction of the last material condition
precedent to emergence from bankruptcy. Pursuant to SOP 90-7 we adopted fresh-start accounting as of October 1, 2005. We engaged an
independent appraisal firm to assist in determining the fair values of our assets and liabilities. Upon adoption, our reorganization enterprise
value was $970 million based on the Bankruptcy Court’s determination, which after reduction for the fair value of the Loral Skynet Notes and
Series A Preferred Stock, results in a reorganization equity value of approximately $642 million.
This reorganization equity value was allocated to our assets and liabilities. Our assets and liabilities were stated at fair value in accordance
with Statement of Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”). In addition, our accumulated deficit was
eliminated, and our new debt and equity were recorded in accordance with distributions pursuant to the Plan of Reorganization (see Note 4 to
the consolidated financial statements). Our consolidated financial statements as of October 1, 2005 and for dates subsequent, will not be
comparable in certain material respects to the historical consolidated financial statements for prior periods included elsewhere in this Annual
Report on Form 10-K.
References to the Predecessor Registrant refer to the period prior to October 2, 2005. References to the Successor Registrant refer to the
period on and after October 2, 2005, after giving effect to the adoption of fresh-start accounting.
23
The information set forth in the following table should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Annual
Report on Form 10-K.
LORAL SPACE & COMMUNICATIONS INC.
(In thousands, except per share data)
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Predecessor Registrant
Years Ended December 31,
2004
2003
2002
2001
$
197,165
(4,945 )
$
—
429,183
(67,095 )
1,101,453 (1)
$ 522,127
(214,345 )
$ 392,043
(388,873 )
$ 900,527
(208,368 )
$ 845,725
(158,593 )
—
—
—
—
(5,395 )
(1,752 )
1,022,651
10,901
(207,852 )
(13,284 ) (2)
(368,355 )
6,330
(237,540 )
(322,422 ) (2)
(229,851 )
40,096
(7,147 )
(5,447 )
(2,667 )
(15,261 )
—
—
1,033,552
(2,796 )
126
1,030,882
(221,136 )
46,654
135
(174,347 )
(362,025 )
(51,153 )
20
(413,158 )
(559,962 )
(76,280 )
(226 )
(636,468 )
(189,755 )
(66,677 )
461
(255,971 )
—
(2,348 )
18,803
57,566
61,252
13,967
—
—
—
—
(15,261 )
1,044,849
(176,695 )
(394,355 )
—
—
—
(1,970 )
(578,902 )
(890,309 ) (4)
(194,719 )
(1,741 )
—
(15,261 )
—
—
1,044,849
—
—
(176,695 )
—
13,615
(382,710 )
(6,719 )
—
(1,469,211 )
(89,186 )
—
(196,460 )
(80,743 )
(15,261 )
1,044,849
(176,695 )
(389,429 )
(1,558,397 )
(277,203 )
(0.76 )
—
$
23.37
0.32
$
(3.96 )
(0.05 )
$
(9.58 )
0.43
$
(19.47 )
1.55
$
(10.40 )
1.89
(0.76 )
—
23.69
—
(4.01 )
—
(9.15 )
(17.92 )
(0.05 )
(23.89 )
—
(0.76 )
$
—
23.69
—
(4.01 )
$
0.31
(8.89 )
$
—
$
(41.81 )
$
(8.51 )
(0.05 )
—
(8.56 )
$
$
24
Statement of operations data:
Revenues
Operating loss from continuing operations
Gain on discharge of pre-petition obligations and
fresh-start adjustments
(Loss) income from continuing operations before
income taxes, equity income (losses) in
affiliates and minority interest
Income tax (provision) benefit
(Loss) income from continuing operations before
equity income (losses) in affiliates and minority
interest
Equity (losses) income in affiliates (3)
Minority interest
(Loss) income from continuing operations
(Loss) income from discontinued operations, net
of taxes
Gain on sale of discontinued operations, net of
taxes
(Loss) income before cumulative effect of change
in accounting principle and extraordinary gain
on acquisition of minority interest
Cumulative effect of change in accounting
principle, net of taxes
Extraordinary gain on acquisition of minority
interest
Net (loss) income
Preferred dividends
Net (loss) income applicable to common
stockholders
Basic and diluted (loss) earnings per share:
Continuing operations
Discontinued operations
Before cumulative effect of change in
accounting principle and extraordinary
gain on acquisition of minority interest
Cumulative effect of change in accounting
principle
Extraordinary gain on acquisition of
minority interest
(Loss) earnings per share
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
$
8,062
$
65,570
Predecessor Registrant
Years Ended December 31,
2004
$ 208,809
2003
$ 389,218
2002
$ 337,019
2001
$ 315,708
(38,531 )
(5,089 )
—
120,763
—
Successor
Registrant
December 31,
2005
(143,827 )
194,707
—
—
—
66,129
906,887
—
(966,887 )
—
232,653
(157,484 )
3,852
(3,313 )
—
192,670
(138,824 )
(32,737 )
(115,122 )
—
169,818
(248,672 )
(35,687 )
(119,555 )
—
Predecessor Registrant
December 31,
2004 (7)
2003 (7)
2002 (2)(4)
2001 (8)
$
275,796
1,678,977
128,191
603,374
—
$
147,773
1,218,733
—
84,677
—
$
141,644
2,463,813
—
72,932
—
$
65,936
2,692,802
2,236,497
354,475
125,081
$
159,949
4,426,187
2,352,956
272,302
—
Deficiency of earnings to cover fixed charges
Cash flow data:
(Used in) provided by operating activities (5)
(Used in) provided by investing activities (6)
Provided by (used in) equity transactions
(Used in) provided by financing transactions
Dividends paid per common share
Balance sheet data:
Cash and cash equivalents
Total assets
Debt, including current portion
Non-current liabilities and minority interest
Convertible redeemable preferred stock
Liabilities subject to compromise (see Notes 5
and 11 to the consolidated financial statements)
Shareholders’ equity (deficit)
—
627,164
1,916,000
(1,044,101 )
2,921,680
(855,670 )
—
(354,227 )
—
1,350,868
(1) In connection with our emergence from Chapter 11 and our adoption of fresh-start accounting on October 1, 2005 we recognized a gain on discharge of pre-petition obligations
and fresh-start adjustments of $1.101 billion, related interest expense of $13.2 million related to the holders of claims to be paid in cash and a tax benefit of $15.4 million, each
of which is reflected separately in our statement of operations (see Note 4 to the consolidated financial statements).
(2) 2004 includes an $11 million increase to the deferred tax valuation allowance relating to the reversal of deferred tax liabilities arising from the write-off of our investment in
Globalstar, L.P.’s $500 million credit facility, upon Globalstar, L.P.’s dissolution in June 2004. 2002 includes an increase in the deferred tax valuation allowance of
$390 million, based upon management’s assessment that insufficient positive evidence existed substantiating recoverability of our loss carryforwards and other deferred tax
assets (see Note 14 to the consolidated financial statements).
(3) Our principal affiliate is XTAR. Loral also has investments in joint ventures providing Globalstar service, which are accounted for under the equity method. During 2004, we
recorded $47 million of equity income on the reversal of vendor financing liabilities that were non-recourse to SS/L in the event of non-payment by Globalstar, L.P. (see Note 9
to the consolidated financial statements). During 2003, we wrote off our remaining investment of $29 million in Satmex.
(4) On January 1, 2002, in compliance with the adoption of SFAS 142, we recorded a charge of $890 million to write off all of our goodwill as the cumulative effect of change in
accounting principle.
(5) Cash flow(used in) provided by operating activities includes cash flow from operating activities provided by discontinued operations.
(6) Cash flow (used in) provided by investing activities includes cash flow provided by (used in) investing activities of discontinued operations.
(7) As a result of our Chapter 11 filing, our debt obligations, preferred stock obligations and certain other liabilities existing at July 15, 2003, were classified as liabilities subject to
compromise on our balance sheets at December 31, 2004 and 2003. These obligations have been extinguished as of the Effective Date (see Note 11 to the consolidated financial
statements).
25
(8)
On December 21, 2001, Loral Orion, Inc. (now known as Loral Skynet Corporation) completed exchange offers and consent solicitations by
issuing $613 million principal amount of new senior notes guaranteed by Old Loral and 0.6 million five year warrants to purchase Old Loral
common stock in exchange for a total of $841 million principal amount of Loral Orion senior notes due 2007 and senior discount notes due
2007. These obligations have been extinguished as of the Effective Date.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements (the “financial
statements”) included in Item 15 of this Annual Report on Form 10-K.
Loral Space & Communications Inc. (“New Loral”) was formed to succeed the business conducted by its predecessor registrant, Loral
Space & Communications Ltd. (“Old Loral”), which emerged from Chapter 11 of the federal bankruptcy laws on November 21, 2005 (the
“Effective Date”) pursuant to the terms of the fourth amended joint plan of reorganization of Old Loral and its debtor subsidiaries, as modified
(the “Plan of Reorganization”).
We adopted fresh start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7, Financial Reporting of
Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”). Accordingly, our financial information disclosed under the heading
“Successor Registrant” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not
comparable to, our financial information disclosed under the heading “Predecessor Registrant” for the period ended and as of October 1, 2005
(the date we adopted fresh-start accounting) or for prior periods.
The terms, “Loral,” the “Company,” “we,” “our” and “us,” when used in this report with respect to the period prior to our emergence from
Chapter 11, are references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New
Loral. These references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context
otherwise requires.
References to full-year 2005 financial information throughout this discussion combine the periods of January 1, 2005 to October 1, 2005
with October 2, 2005 to December 31, 2005. A reconciliation is provided to that effect. Management believes that providing this financial
information is the most relevant and useful method for making comparisons to the year ended December 31, 2004.
Disclosure Regarding Forward-Looking Statements
Except for the historical information contained in the following discussion and analysis, the matters discussed below are not historical
facts, but are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we or
our representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts. These forward-
looking statements can be identified by the use of words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should,”
“anticipates,” “estimates,” “project,” “intend,” or “outlook” or other variations of these words. These statements are not guarantees of
future performance and involve risks and uncertainties that are difficult to predict or quantify. Actual events or results may differ materially as
a result of a wide variety of factors and conditions, many of which are beyond our control. For a detailed discussion of these and other factors
and conditions, please refer to the Commitments and Contingencies section below and to our other periodic reports filed with the Securities
and Exchange Commission (“SEC”). We operate in an industry sector in which the value of securities may be volatile and may be influenced
by economic and other factors beyond our control. We undertake no obligation to update any forward-looking statements.
Overview
Businesses
Loral is a leading satellite communications company organized into two operating segments: Satellite Services and Satellite Manufacturing.
26
Satellite Services
Through Loral Skynet Corporation (“Loral Skynet”) we provide satellite capacity and networking infrastructure to our commercial and
government customers for a wide range of video and data transmission services, including video and direct-to-home (“DTH”) broadcasting,
high-speed data distribution, Internet access, communications and networking services. While we compete with fiber optic cable and other
terrestrial delivery systems, primarily for point-to-point applications, Loral Skynet has been able to combine the inherent advantages of each
technology to provide its customers with complete end-to-end services. Since FSS satellites remain in a fixed point above the earth’s equator,
they are considerably more efficient than terrestrial systems for certain applications, such as broadcast or point-to-multipoint transmission of
video and broadband data. A satellite offers instant infrastructure. It can cover large geographic areas, sometimes entire hemispheres, and can
not only provide services to populated areas, but can also better serve areas with inadequate terrestrial infrastructures, low-density populations
or difficult geographic terrain.
The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once these
investments are made, however, the costs to maintain and operate the fleet are relatively low. The upfront investments are earned back through
the leasing of transponders to customers over the life of the satellite. Given the harsh and unpredictable environment in which the satellites
operate, another major cost factor is in-orbit insurance. Annual receipts from this business are fairly predictable because they are derived from
an established base of long-term customer contracts and high contract renewal rates.
On March 17, 2004, we consummated the sale of our North American satellites and related assets to certain affiliates of Intelsat, Ltd. and
Intelsat (Bermuda), Ltd. (collectively, “Intelsat”). The North American satellites and related assets sold to Intelsat have been accounted for as a
discontinued operation. Commencing on March 18, 2006, Loral Skynet resumed marketing of satellite services to the North American market,
a region in which it was precluded from doing business for two years pursuant to the terms of its sale of satellites to Intelsat in March 2004 (see
Note 5 to the consolidated financial statements).
Competition in the satellite services market has been intense in recent years due to a number of factors, including transponder over-capacity
in certain geographic regions and increased competition from fiber. This competition has put further pressure on prices already depressed by
the telecommunications industry downturn earlier this decade. A stronger economy and an increase in capital available for expanded consumer
and enterprise-level services have led to an improvement in demand. Much of Loral Skynet’s remaining available capacity, however, is over
geographic regions where the market is characterized by excess capacity, coupled with weak demand, or where regulatory obstacles are such
that we find ourselves at a competitive disadvantage versus local operators. Loral Skynet’s growth depends on its ability to successfully market
the capacity available on its international fleet of satellites, to differentiate itself from its competition through customized product offerings and
its superior customer service and to fund additional satellite acquisitions.
Satellite Manufacturing
Space Systems/ Loral, Inc. (“SS/ L”) designs and manufactures satellites, space systems and space systems components for commercial and
government customers who use the satellites for applications such as fixed satellite services, DTH broadcasting, broadband data distribution,
wireless telephony, digital radio, military communications, weather monitoring and air traffic management.
While its requirement for ongoing capital investment is relatively low, the satellite manufacturing industry is a knowledge-intensive
business, the success of which relies heavily on its technological heritage and the skills of its workforce. The breadth and depth of talent and
experience resident in SS/ L’s workforce of approximately 1,400 employees is one of our key competitive resources.
Satellite manufacturers have high fixed costs relating primarily to labor and overhead. Based on its current cost structure, we estimate that
SS/ L covers its fixed costs with an average of three to four satellite awards a year depending on the size, power and complexity of the satellite.
Cash flow in the satellite manufacturing business, however, tends to be uneven. It takes two to three years to complete a satellite project
27
and numerous assumptions are built into the estimated costs. Cash receipts are tied to the achievement of contract milestones which depend in
part on the ability of our subcontractors to deliver on time. In addition, the timing of satellite awards is difficult to predict, contributing to the
unevenness of revenue and making it more challenging to align the workforce to the workflow. For example, after an almost two-year absence
of orders, SS/ L was awarded contracts for the construction of nine satellites during the period from October 2003 to December 2005.
Satellites are extraordinarily complex devices designed to operate in the very hostile environment of space. This complexity may lead to
unanticipated costs during the design, manufacture and testing of a satellite. SS/ L establishes provisions for costs based on historical
experience and program complexity to cover anticipated costs. Since most of SS/ L’s contracts are fixed price, cost increases in excess of the
provisions reduce profitability and may result in losses borne solely by SS/ L, which may be material. The highly competitive satellite
manufacturing industry is just now recovering from a several-year period when order levels reached an unprecedented low level, resulting in
manufacturing over-capacity. Buyers, as a result, have had the advantage over suppliers in negotiating prices, terms and conditions resulting in
reduced margins and increased assumptions of risk by SS/ L. SS/ L was further handicapped while it was in Chapter 11, because of buyers’
reluctance to purchase satellites from a company in bankruptcy.
Bankruptcy Reorganization
The sustained and unprecedented decline in demand for our satellites and the transponder over-capacity in our satellite services business
exacerbated Loral’s already strained financial condition brought on primarily by the investments we had previously made in Globalstar, L.P.
and subsequently wrote-off. On July 15, 2003, Old Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Old
Loral, the “Debtors”) filed voluntary petitions for reorganization (the “Chapter 11 Cases”) under chapter 11 of title 11 (“Chapter 11”) of the
United States Code (the “Bankruptcy Code”). During the ensuing two-and-a-half year period we further increased our emphasis on cash
conservation by reducing operating expenses and closely monitoring capital expenditures.
On August 1, 2005, the Bankruptcy Court entered its Confirmation Order confirming the Plan of Reorganization. On September 30, 2005,
the FCC approved the transfer of FCC licenses from Old Loral to New Loral, which represented satisfaction of the last material condition
precedent to emergence. The Debtors emerged from their reorganization proceeding under Chapter 11 on November 21, 2005 pursuant to the
Plan of Reorganization. Pursuant to SOP 90-7 we adopted fresh-start accounting as of October 1, 2005 (see Notes 2 and 4 to the financial
statements).
Future Outlook
Following our recent emergence from Chapter 11, we have focused primarily on taking advantage of the years of experience and superior
expertise of our professional senior management team to capture opportunities in our markets and maintain an efficient stream-lined operation.
We have reorganized around SS/ L’s satellite manufacturing operations and Loral Skynet’s international fleet of satellites. We consider
these operations to be a viable foundation for the further expansion of our company.
Construction of Telstar 11N, a powerful new multi-region Ku-band communications satellite, has begun at SS/ L and upon completion will
be launched into the 37.5 degree W.L. orbital location. Scheduled to enter service in 2008, Telstar 11N will provide commercial and
governmental customers with broadband connectivity within and among the American, European and African regions. Our customers will use
Telstar 11N for video distribution and high-speed, IP-based data and voice services.
Critical success factors for both of our segments include maintaining our reputation for reliability, quality and superior customer service.
These factors are vital to securing new customers and retaining current ones. At the same time, we must continue to contain costs, and
maximize efficiencies. Loral Skynet is focused on increasing the capacity utilization of its satellite fleet and successfully rolling out new value-
added services to
28
its markets, as well as identifying opportunities for fleet expansion. SS/ L is focused on increasing bookings and backlog in 2006, while
maintaining the cost efficiencies and process improvements realized over the past several years. In addition, SS/ L must continue to align its
direct workforce with the level of awards.
See Part 1, Item 1 of this Annual Report on Form 10-K, for a complete description of Loral’s businesses, the Chapter 11 Cases and our Plan
of Reorganization.
Consolidated Operating Results
Please refer to Critical Accounting Matters set forth below in this section.
The following discussion of revenues and Adjusted EBITDA (see Note 20 to the financial statements) reflects the results of our operating
business segments for 2005, 2004 and 2003. The balance of the discussion relates to our consolidated results, unless otherwise noted. As
previously discussed, we emerged from Chapter 11 on November 21, 2005 and adopted fresh-start accounting as of October 1, 2005. As a
result of the adoption of fresh-start accounting, the Successor Registrant’s financial statements are not comparable with the Predecessor
Registrant’s financial statements. References to full-year 2005 financial information throughout this discussion combine the periods of
January 1, 2005 to October 1, 2005 with October 2, 2005 to December 31, 2005. A reconciliation is provided to that effect. Management
believes that presenting the financial information in this way is the most relevant and useful method for making comparisons to the year ended
December 31, 2004.
The sale of our North American satellites and related assets to Intelsat in March 2004, has been accounted for as a discontinued operation,
resulting in our historical statements of operations and statements of cash flows reflecting such discontinued operations separately from
continuing operations (see Note 5 to the financial statements).
Revenues:
Satellite Services
Revenues from sales-type lease arrangement (see Note 8
to the financial statements)
Satellite Manufacturing
Segment revenues
Eliminations (2)
Revenues as reported (3)
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Years Ended December 31,
2005
2004
2003
$ 37.0
$ 114.5
(in millions)
$ 151.5
$ 141.2
$ 154.3
—
161.8
198.8
(1.6 )
—
329.5
444.0
(14.8 )
—
491.3
87.2
436.6
642.8
(16.4 )
665.0
(142.9 )
—
474.0
628.3
(236.3 )
$ 197.2
$ 429.2
$ 626.4
$ 522.1
$ 392.0
29
Adjusted EBITDA:
Satellite Services (4)
Satellite Services sales-type lease arrangement (see
Note 8 to the financial statements)
Satellite Manufacturing (5)
Corporate expenses (6)
Segment Adjusted EBITDA before eliminations
Eliminations (2)
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Years Ended December 31,
2005
2004
2003
$ 11.5
$ 39.8
$ 51.3
$ 15.6
$
7.5
(in millions)
—
11.8
(11.0 )
12.3
(1.2 )
—
15.2
(17.3 )
37.7
(12.3 )
—
27.0
(28.3 )
7.7
(13.5 )
(34.9 )
50.0
(13.5 )
(25.1 )
(24.0 )
—
(158.6 )
(36.0 )
(187.1 )
(41.9 )
Adjusted EBITDA
$ 11.1
$ 25.4
$ 36.5
$ (49.1 )
$ (229.0 )
30
Reconciliation of Adjusted EBITDA to Net Loss:
Adjusted EBITDA
Depreciation and amortization (7)
Reorganization expenses due to bankruptcy
Operating loss from continuing operations
Gain on discharge of pre-petition obligations and fresh-
$
start adjustments (1)
Interest and investment income
Interest expense
Other income (expense)
Gain on investments
Income tax (provision) benefit
Equity (losses) income in affiliates
Minority interest
(Loss) income from continuing operations
Income (loss) from discontinued operations, net of
taxes
(Loss) income before cumulative effect of change in
accounting principle and extraordinary gain on
acquisition of minority interest
Cumulative effect of change in accounting principle
Extraordinary gain on acquisition of minority interest
Preferred dividends
Net (loss) income applicable to common shareholders
$
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Years Ended December 31,
2005
2004
2003
11.1
(16.0 )
—
(4.9 )
—
4.1
(4.4 )
(0.2 )
—
(1.8 )
(5.4 )
(2.7 )
(15.3 )
—
(15.3 )
—
—
—
(15.3 )
$
$
(in millions)
$
25.4
(61.3 )
(31.2 )
(67.1 )
36.5
(77.3 )
(31.2 )
(72.0 )
1,101.5
6.4
(17.2 )
(0.9 )
—
10.9
(2.8 )
0.1
1,030.9
1,101.5
10.5
(21.6 )
(1.1 )
—
9.1
(8.2 )
(2.6 )
1,015.6
$ (49.1 )
(134.8 )
(30.4 )
(214.3 )
—
9.9
(2.9 )
(0.5 )
—
(13.2 )
46.6
0.1
(174.3 )
$ (229.0 )
(134.6 )
(25.3 )
(388.9 )
—
15.2
(14.1 )
1.5
17.9
6.4
(51.2 )
—
(413.2 )
14.0
14.0
(2.4 )
18.8
1,044.9
—
—
—
1,044.9
1,029.6
—
—
—
$ 1,029.6
(176.7 )
—
—
—
$ (176.7 )
(394.4 )
(1.9)
13.6
(6.7)
$ (389.4 )
(1) In connection with our emergence from Chapter 11 and our adoption of fresh-start accounting on October 1, 2005 we recognized a gain on
discharge of pre-petition obligations and fresh-start adjustments of $1.101 billion, related interest expense of $13.2 million and a tax
benefit of $15.4 million, each of which is reflected separately in our statement of operations (see Note 4 to the financial statements).
(2) Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under construction by SS/ L
for wholly owned subsidiaries and in 2003, the reversal of cumulative satellite manufacturing sales of $83 million and cost of satellite
manufacturing of $73 million on a satellite program that was changed to a lease arrangement in the third quarter of 2003 (see Note 8 to the
financial statements).
(3) Includes revenues from affiliates of $4.1 million, $10.0 million, $7.8 million and $27.7 million for the periods October 2, 2005 to
December 31, 2005 and January 1, 2005 to October 1, 2005 and the years ended December 31, 2004 and 2003, respectively.
(4) In 2004, includes an impairment charge of $12 million for our Telstar 14/ Estrela do Sul-1 Satellite (see Note 8 to the financial statements).
31
(5) Excludes charges of $24 million for 2004, as a result of the settlement of all orbital receivables on satellites sold to Intelsat. This settlement
had the effect of reducing future orbital receipts by $25 million, including $15 million relating to a satellite under construction in 2004.
Consistent with our internal reporting for satellite manufacturing, this decrease in contract value for the satellite under construction is not
being reflected as a decrease in 2004 satellite manufacturing revenues. These charges had no effect on our consolidated results.
Satellite Manufacturing includes:
Adjusted EBITDA before specific identified charges
Accrued warranty obligations
Write-off of long-term receivables due to contract modifications
Provisions for inventory obsolescence
Loss on cancellation of deposits
Accrual for Alcatel settlement
Loss on acceleration of receipt of long-term receivables
Valuation allowance on vendor financing receivables
Settlement of satellite contract dispute
Satellite Manufacturing segment Adjusted EBITDA before eliminations
Years Ended December 31,
2005
$ 45.1
(14.5 )
—
(3.6 )
—
—
—
—
—
$ 27.0
2004
(in millions)
$ 10.8
(9.7 )
(11.3 )
(3.3 )
—
—
—
—
—
$ (13.5 )
2003
$
$
(21.3 )
(2.2 )
(20.2 )
(49.5 )
(23.5 )
(13.0 )
(10.9 )
(10.0 )
(8.0)
(158.6 )
(6) Represents corporate expenses incurred in support of our operations and for the period October 2, 2005 to December 31, 2005 includes
$3.9 million of continuing expenses related to the run out of bankruptcy related matters, which after the adoption of fresh-start accounting
are classified as corporate expenses.
(7) Includes additional depreciation expense of $9 million and $14 million for 2004 and 2003, respectively, due to accelerating the estimated
end of depreciable life of our Telstar 11 satellite to June 2004 from March 2005.
2005 Compared with 2004 and 2004 Compared with 2003
Revenues from Satellite Services
Revenues from Satellite Services
Revenues from sales-type lease arrangement
Eliminations
Revenues from Satellite Services as reported
Years Ended
December 31,
2005
$ 152
—
(5 )
$ 147
2004
(in millions)
$ 141
87
(5 )
$ 223
2003
$ 154
—
(7 )
$ 147
% Increase
(Decrease)
2005
vs.
2004
2004
vs.
2003
7 %
(8 )%
—
(34 )%
29 %
51 %
Revenues from Satellite Services before revenues from sales-type lease arrangements and eliminations increased $11 million in 2005
compared to 2004, driven by a number of factors: $6 million in increased volume from Telstar 18 which was in service for all of 2005 versus
only four months of 2004, a $6 million increase in revenues from other satellites in our fleet, plus $5 million for customers for which revenue is
recognized on a cash basis. Offsetting these contributions was a $6 million decrease in revenues from Intelsat in connection with the
discontinued operations of the North American fleet. In 2004, we recognized $87 million of revenues from a sales-type lease arrangement for
satellite capacity (see Note 8 to the financial statements). Eliminations primarily consist of revenues from leasing transponder capacity to
Satellite Manufacturing. As a result, revenues for Satellite Services as reported decreased $76 million in 2005 as compared to 2004.
32
Revenues from Satellite Services as reported increased $76 million in 2004 as compared to 2003, primarily because of the $87 million of
revenues recognized in connection with the sales-type lease arrangement for satellite capacity (see Note 8 to the financial statements) and from
higher customer lease termination and settlement fees of $7 million. This was offset by a $17 million decrease in transponder and network
utilization and a $2 million decrease due to lower rates for services.
Revenues from Satellite Manufacturing
Revenues from Satellite Manufacturing
Eliminations
Years Ended
December 31,
2005
2004
2003
% Increase
(Decrease)
2005
vs.
2004
2004
vs.
2003
$ 491
(11 )
(in millions)
$ 474
(229 )
$ 437
(137 )
13 %
91 %
(8 )%
40 %
Revenues from Satellite Manufacturing as reported
$ 480
$ 300
$ 245
61 %
22 %
Revenues from Satellite Manufacturing before eliminations increased by $54 million in 2005 as compared to 2004. Revenues in 2005
include $165 million of revenues from new satellite awards of $824 million in 2005 and $326 million of revenues from existing backlog.
Revenues in 2004 include $57 million of revenues from new satellite awards of $385 million in 2004 and $380 million of revenues from
existing backlog. Eliminations consist primarily of revenues from satellites under construction by SS/L for Satellite Services, and in 2004
include satellites under construction which have been completed. As a result, revenues from Satellite Manufacturing as reported increased
$180 million in 2005 as compared to 2004.
Revenues from Satellite Manufacturing before eliminations decreased by $37 million in 2004 as compared to 2003, primarily resulting
from a $213 million decrease in revenues from satellite programs nearing completion under the percentage of completion method, offset by a
$167 million increase in revenues from new satellite orders received in 2003 and a $9 million decrease in write-offs of long-term receivables
due to contract modifications. Eliminations consist primarily of revenues from satellites under construction by SS/L for Satellite Services, and,
in 2003, include the reversal of $83 million of cumulative sales on a satellite program that was changed to a lease arrangement in 2003 (see
Note 8 to the financial statements). As a result, revenues from Satellite Manufacturing as reported increased $55 million in 2004 as compared
to 2003.
Cost of Satellite Services
Cost of Satellite Services includes:
Cost of Satellite Services before specific identified charges
Depreciation and amortization
Impairment charge for Telstar 14/ Estrela do Sul-1 satellite
Cost of sales-type lease arrangement
% Increase
(Decrease)
2005
vs.
2004
2004
vs.
2003
(10 )%
(44 )%
(23 )%
4 %
Years Ended
December 31,
2005
2004
2003
(in millions)
$ 59 $ 65 $ 85
107
—
—
112
12
80
61
—
—
Cost of Satellite Services
$120 $ 269 $192
(55 )%
40 %
Cost of Satellite Services as a % of Satellite Services revenues as reported
82%
121%
130%
33
Cost of Satellite Services was $26 million and $94 million for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to
October 1, 2005, respectively, totaling $120 million for 2005. Cost of Satellite Services before specific identified charges decreased $6 million
in 2005 as compared to 2004, primarily because external satellite capacity costs declined $7 million and headcount and other costs declined
$4 million. These decreases were partially offset by an increase in satellite insurance expense of $3 million due to higher premiums and higher
ground operations costs of $2 million. Depreciation and amortization expense decreased by $51 million in 2005 as compared to 2004, primarily
resulting from a reduction of $42 million related to our Telstar 11 satellite which was fully depreciated in 2004 and the net effect of the fair
value adjustments in connection with the adoption of fresh-start accounting on October 1, 2005. Depreciation and amortization for 2005
includes reduced charges of depreciation and amortization of $7 million for fixed assets and a $1 million credit for amortization of intangibles
primarily resulting from the adoption of fresh-start accounting. In 2004, we incurred $80 million of costs for a sales-type lease arrangement and
recognized an impairment charge of $12 million for the Telstar 14/ Estrela do Sul-1 satellite and related assets to reduce the carrying values to
the expected proceeds from insurance of $250 million (see Note 8 to the financial statements). As a result, cost of Satellite Services decreased
$149 million in 2005 as compared to 2004.
Cost of Satellite Services before specific identified charges decreased $20 million in 2004 as compared to 2003, primarily due to reduced
external satellite capacity costs of $10 million, lower costs of $5 million due to headcount and other cost reductions and decreased insurance
costs of $5 million primarily resulting from non-renewal of insurance for Telstar 11 in the fourth quarter of 2003 and from the lower premium
on renewal for Telstar 10/ Apstar IIR due to changes to coverage, offset by the insurance cost for Telstar 18 which commenced service at the
beginning of September 2004. Depreciation and amortization expense increased $5 million in 2004 as compared to 2003, primarily resulting
from higher depreciation expense of $12 million for our Telstar 14/Estrela do Sul-1 satellite which commenced service at the end of March
2004 and our Telstar 18 satellite, offset in part by a reduction of $6 million due to our Telstar 11 satellite being fully depreciated in 2004 and a
reduction of $1 million due to the timing of assets placed in service and assets that became fully depreciated. In 2004, we incurred $80 million
of costs for a sales-type lease arrangement and recognized an impairment charge of $12 million for the Telstar 14/Estrela do Sul-1 satellite and
related assets to reduce the carrying values to the expected proceeds from insurance of $250 million (see Note 8 to the financial statements). As
a result, cost of Satellite Services increased $77 million in 2004 as compared to 2003.
34
Cost of Satellite Manufacturing
Cost of Satellite Manufacturing includes:
Cost of Satellite Manufacturing before specific identified charges
Depreciation and amortization
Accrued warranty obligations
Write-off of long-term receivables due to contract modifications
Provisions for inventory obsolescence
Loss on cancellation of deposits
Accrual for Alcatel settlement
Loss on acceleration of receipt of long-term receivables
Valuation allowance on vendor financing receivables
Settlement of satellite contract dispute
Reversal of costs on a satellite program changed to a lease
% Increase
(Decrease)
2005
vs.
2004
2004
vs.
2003
46 %
(34 )%
50 %
(18 )%
(16 )%
(44 )%
Years Ended
December 31,
2005
2004
2003
(in millions)
$396 $ 271 $330
27
2
20
50
24
13
11
10
8
(73)
23
10
11
3
—
—
—
—
—
—
15
15
—
4
—
—
—
—
—
—
Cost of Satellite Manufacturing
$430 $ 318 $422
36 %
(25 )%
Cost of Satellite Manufacturing as a % of Satellite Manufacturing revenues
as reported
90%
106%
172%
Cost of Satellite Manufacturing was $139 million and $291 million for the periods October 2, 2005 to December 31, 2005 and January 1,
2005 to October 1, 2005, respectively, totaling $430 million for 2005. Cost of Satellite Manufacturing increased $112 million in 2005 as
compared to 2004. The Cost of Satellite Manufacturing before specific identified charges increased $125 million in 2005 as compared to 2004,
primarily due to the increase in sales for the period, partially offset by the effect of improved factory performance. The Cost of Satellite
Manufacturing increase was also offset by lower depreciation and amortization expense of $8 million primarily resulting from the effects of
reduced capital spending and the adoption of fresh-start accounting on October 1, 2005. Depreciation and amortization for the Successor
Registrant includes a $5 million credit due to amortization of contract valuation adjustments, partially offset by a $3 million amortization
charge for intangibles established in connection with the adoption of fresh-start accounting.
Cost of Satellite Manufacturing decreased $104 million in 2004 as compared to 2003. Cost of Satellite Manufacturing before specific
identified charges decreased $59 million in 2004 as compared to 2003, primarily due to lower overall volume as satellite programs neared
completion under the percentage of completion method and lower costs due to headcount reductions, offset in part by $141 million of increased
costs for the satellite orders received in the fourth quarter of 2003. Cost of Satellite Manufacturing also decreased in 2004 as compared to 2003,
due to lower depreciation expense of $4 million primarily resulting from reduced capital spending and the charges incurred in 2003 as
compared to those in 2004, as detailed in the above table. These decreases were partially offset by the reversal of $73 million of costs on a
satellite program that was changed to a lease arrangement in 2003 (see Note 8 to the financial statements).
35
Selling, General and Administrative Expenses
Selling, general and administrative expenses
% of revenues as reported
Years Ended
December 31,
2005
$116
19%
2004
(in millions)
$119
23%
2003
$ 142
36%
% Increase
(Decrease)
2005
vs.
2004
2004
Vs.
2003
(2 )%
(16 )%
Selling, general and administrative expenses were $37 million and $79 million for the periods October 2, 2005 to December 31, 2005 and
January 1, 2005 to October 1, 2005 respectively, totaling $116 million for 2005. The decrease of $3 million in selling, general and
administrative expenses in 2005 as compared to 2004, was primarily due to lower headcount and employee related expenses and other cost
reductions at Satellite Services of $7 million and lower corporate expenses of $2 million, partially offset by higher Satellite Manufacturing bid
and proposal costs of $4 million and the inclusion of $4 million of continuing expenses related to the run out of bankruptcy related matters in
General and Administrative expenses after the adoption of fresh-start accounting.
Selling, general and administrative expenses decreased by $23 million in 2004 as compared to 2003. The primary reductions for Satellite
Services were decreased bad debt expense of $10 million and lower headcount and employee related expenses of $4 million. The primary
reductions for Satellite Manufacturing were lower research and development costs of $3 million, professional fees of $4 million and sales and
marketing costs of $1 million.
Reorganization Expenses Due to Bankruptcy
Year Ended
December 31,
2005
2004
July 15, 2003 to
December 31,
2003
% Increase
(Decrease)
2005
vs.
2004
2004
vs.
2003
Reorganization Expenses Due to Bankruptcy
$ 31
(in millions)
$
$ 30
25
3%
20 %
Reorganization expenses due to bankruptcy increased $1 million in 2005 as compared to 2004 primarily as a result of higher professional
fees of $11 million which was mostly due to professional fees associated with the Equity Committee that was appointed by the United States
Trustee for the Southern District of New York on March 29, 2005 and extensive legal fees associated with the confirmation hearings and
vendor settlement gains of $6 million recorded in 2004. These increases were partially offset by lower 2005 employee retention costs of
$11 million and lower severance costs of $4 million. After the adoption of fresh-start accounting on October 1, 2005, continuing expenses
related to the run out of bankruptcy related matters are recorded in General and Administrative expenses (see Note 13 to the financial
statements).
Reorganization expenses due to bankruptcy increased $5 million in 2004 as compared to 2003 primarily as a result of higher professional
fees of $5 million, higher employee retention costs and severance costs of $10 million and facility closing costs of $2 million in 2004, partially
offset by lease rejection claims of $6 million in 2003 and vendor settlement gains of $6 million in 2004.
Gain on Discharge of Pre-petition Obligations and Fresh-start Adjustments
As a result of our emergence from Chapter 11 and adopting fresh-start accounting, we recognized a gain of $1.101 billion, excluding
interest expense of $13 million and a tax benefit of $15 million, in 2005 (see Note 4 to the financial statements).
36
Interest and Investment Income
Interest and investment income
Years Ended
December 31,
2005
2004
2003
(in millions)
$ 10
$ 11
$ 15
Interest income is primarily derived from our orbital incentives on satellites in orbit manufactured by SS/L.
Interest Expense
Interest cost before capitalized interest
Capitalized interest
Interest expense
Years Ended
December 31,
2005
2004
2003
(in millions)
$ 4
(1)
$ 28
(14 )
$ 22
—
$ 22
$ 3
$ 14
Interest cost before capitalized interest increased $18 million in 2005 as compared to 2004, primarily due to $13 million of interest expense
relating to payments to pre-petition creditors in accordance with our Plan of Reorganization and $3 million of interest expense recognized on
the Loral Skynet 14% senior secured notes issued in connection with our Plan of Reorganization.
Interest expense decreased $11 million in 2004 as compared to 2003, primarily attributable to the fact that subsequent to our voluntary
petitions for reorganization on July 15, 2003, we stopped recognizing and paying interest on all outstanding prepetition debt obligations (except
our secured bank debt, for which a portion of interest expense is included in discontinued operations) and preferred stock. Capitalized interest
decreased to $1 million in 2004, which was due to us no longer incurring interest expense on our secured bank debt that we repaid in March
2004. Interest cost was minimal while we were in Chapter 11.
Other Income (Expense)
Other income (expense) represents gains and (losses) on foreign currency transactions.
Gain on Investments
During 2003, we realized an $18 million gain from the sale of all 59 million shares of common stock of Sirius Satellite Radio Inc. received
by us in settlement of the vendor financing owed to SS/ L by Sirius.
Income Tax (Provision) Benefit
During 2005, 2004 and 2003, we continued to maintain the 100% valuation allowance that had been established at December 31, 2002
against our net deferred tax assets. However, upon emergence from bankruptcy in 2005, we reversed our valuation allowance relating to
$2.0 million of deferred tax assets for AMT credit carryforwards. The valuation allowance was $337.3 million at December 31, 2005 and
$336.9 million at October 1, 2005. If, in the future we were to determine that we will be able to realize all or a portion of the benefit from our
deferred tax assets, a reduction to the valuation allowance as of October 1, 2005 will first reduce goodwill, then other intangible assets with any
excess treated as an increase to paid-in-capital.
For 2005, we recorded a current tax provision of $7.0 million and a deferred tax benefit of $16.1 million, resulting in a net benefit of
$9.1 million on pre-tax income of $1.017 billion, which included a gain on discharge of pre-petition obligations and fresh-start adjustments of
$1.101 billion. For 2004, we recorded a current tax provision of $1.1 million and a deferred tax provision of $12.2 million, resulting in a total
provision
37
of $13.3 on a pre-tax loss of $208 million. For 2003, we recorded a current tax provision of $1.0 and a deferred tax benefit of $7.3 million,
resulting in a net benefit of $6.3 million on a pre-tax loss of $368 million.
The increase to our current provision for 2005 as compared to 2004 and 2003 was primarily attributable to additional foreign income taxes,
primarily Brazil on our lease income from Estrela do Sul-1, and accruals of tax contingency reserves for potential audit issues.
In connection with our emergence from bankruptcy, Old Loral realized cancellation of debt income (“COD”) on its federal income tax
return of approximately $439 million. COD realized while in bankruptcy is excluded from federal taxable income. We are required to reduce
certain of our tax attributes, and to the extent sufficient attributes are not available on a separate company basis, reduce the tax basis in our
assets, by an amount equal to the COD excluded by Old Loral from its taxable income. This adjustment resulted in a reduction to our deferred
tax assets and the related valuation allowance. Also, as part of our fresh-start accounting and plan of reorganization adjustments, we recognized
a net income tax benefit of $15.4 million, which includes a net deferred tax benefit of $16.5 million. See Notes 4 and 14 to the financial
statements.
For 2004, the deferred income tax provision of $12.1 million related to an additional valuation allowance which was required when we
reversed the following deferred tax liabilities from accumulated other comprehensive loss: (i) With the dissolution of Globalstar on June 29,
2004, we wrote-off the remaining book value of our investment in Globalstar’s $500 million credit facility and reduced to zero the unrealized
gains and related deferred tax liabilities previously reflected in accumulated other comprehensive loss. The reversal of this deferred tax liability
resulted in a net deferred tax asset of $11.4 million against which we recorded a full valuation allowance. (ii) We also reduced the balance for
certain deferred gains on derivative transactions and the related deferred tax liability included in accumulated other comprehensive loss. The
reversal of this deferred tax liability also resulted in a net deferred tax asset of $0.7 million against which we recorded a full valuation
allowance. See Notes 6 and 9 to the financial statements.
For 2003, the deferred income tax benefit of $7.3 million related to an $11.0 million reclassification of a tax provision to income from
discontinued operations partially offset by a provision of $3.7 million for certain foreign entities.
Equity Income (Losses) in Affiliates
XTAR
Satmex
Globalstar and Globalstar service provider partnerships
Years Ended December 31,
2005
2004
2003
(in millions)
$(8.1 )
—
(0.1 )
$ 0.1
—
46.5
$ (0.2 )
(51.7 )
0.7
$(8.2 )
$46.6
$ (51.2 )
XTAR commenced commercial operations in 2005 with the launch of its satellite in February 2005. The increase in equity losses in XTAR
in 2005 represents our share of higher XTAR losses incurred in connection with its start-up, as well as, the elimination of profit related to the
construction of the Spainsat satellite by SS/L for Hisdesat, which was successfully launched on March 11, 2006.
In connection with Globalstar, L.P.’s dissolution in June 2004, we recorded equity income of $47 million relating to Globalstar, L.P. on the
reversal of vendor financing that was non-recourse to SS/ L in the event of non-payment by Globalstar, L.P. During 2004, we did not provide
for our allocated share of net losses of Satélites Mexicanos, S.A. de C.V. (“Satmex”), due to our write-off of our remaining investment in
Satmex in 2003. Our equity losses in Satmex in 2003 of $52 million include the write-off of our remaining investment in Satmex of $29 million
(see Note 9 to the financial statements).
38
Minority Interest
Minority interest increased in 2005 as compared with 2004, as a result of the $3 million dividend accrual for the Loral Skynet Series A
preferred stock issued in connection with our Plan of Reorganization (see Note 15 to the financial statements).
Discontinued Operations
Discontinued operations represents the revenues and expenses of the North American satellites and related assets sold to Intelsat on
March 17, 2004 and includes a portion of interest expense on our secured bank debt through March 18, 2004 (see Interest Expense above). As a
result of the resolution of contingencies, primarily relating to the completion of the Intelsat Americas 8 (Telstar 8) satellite, we have recognized
in our 2005 statement of operations the previously deferred gain on the sale of $14 million, net of taxes of $2 million.
In 2004, the results of the discontinued operations are for the period from January 1, 2004 to March 17, 2004, the date of the sale and
includes the write-off of approximately $11 million of debt issue costs to interest expense relating to our secured debt that was repaid and
$9 million of income in the fourth quarter of 2004 from the settlement of an insurance claim for a satellite that was sold. For the purpose of this
presentation, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets (“SFAS 144”), all indirect costs normally associated with these operations are included in continuing operations. These indirect
costs include telemetry, tracking and control, access control, maintenance and engineering, selling and marketing and general and
administrative (see Note 5 to the financial statements).
Cumulative Effect of Change in Accounting Principle
On July 1, 2003, we adopted SFAS 150, and as a result, recorded a charge of $2 million for the amortization of expenses incurred on the
issuance of our preferred stock from their issuance dates through June 30, 2003, that were not previously amortized, as a cumulative effect of
change in accounting principle.
Extraordinary Gain on Acquisition of Minority Interest
As a result of receiving Alcatel’s minority interest in CyberStar, L.P. on June 30, 2003 (as part of a settlement arrangement with Alcatel,
see Note 3 to the financial statements), we recognized an extraordinary gain of $14 million, which represents the extinguishment of the
minority interest liability less the fair value of the acquired net assets.
Preferred Dividends
Preferred dividends decreased $7 million in 2004 as compared to 2003 primarily attributed to the fact that subsequent to our voluntary
petitions for reorganization on July 15, 2003, we stopped recognizing dividends on our preferred stock.
Backlog
Backlog as of December 31, 2005 and 2004, was as follows (in millions):
2005
2004
Satellite Services
Satellite Manufacturing
Total backlog before eliminations
Satellite Services eliminations
Satellite Manufacturing eliminations
Total backlog
39
$
$
453
815
1,268
(20 )
—
1,248
$
544
483
1,027
(33 )
(12)
982
$
Critical Accounting Matters
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
amounts of revenues and expenses reported for the period. Actual results could differ from estimates.
Fresh-Start Accounting
In connection with our emergence from Chapter 11 we adopted fresh-start accounting as of October 1, 2005, which requires all of our
assets and liabilities to be stated at estimated fair value. We engaged an independent appraisal firm to assist in determining such fair values (see
Note 4 to the financial statements). Significant judgment is exercised by both the appraisal firm and by management in estimating the fair
values. We expect to finalize these fair values in the first half of 2006, as additional information becomes available.
Revenue recognition
Most of our Satellite Manufacturing revenue is associated with long-term fixed-price contracts. Revenue and profit from satellite sales
under these long-term contracts are recognized using the cost-to-cost percentage of completion method, which requires significant estimates.
We use this method because reasonably dependable estimates can be made based on historical experience and various other assumptions that
are believed to be reasonable under the circumstances. These estimates include forecasts of costs and schedules, estimating contract revenue
related to contract performance (including estimated amounts for penalties, performance incentives and orbital incentives that will be received
as the satellite performs on orbit) and the potential for component obsolescence in connection with long-term procurements. These estimates
are assessed continually during the term of the contract and revisions are reflected when the conditions become known. Provisions for losses on
contracts are recorded when estimates determine that a loss will be incurred on a contract at completion. Under firm fixed-price contracts, work
performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract;
accordingly, favorable changes in estimates in a period will result in additional revenue and profit, and unfavorable changes in estimates will
result in a reduction of revenue and profit or the recording of a loss that will be borne solely by us.
Depreciation
Depreciation is provided for on the straight-line method for satellites over the estimated useful life of the satellite, which is determined by
engineering analyses performed at the satellite’s in-service date and re-evaluated periodically. A decrease in the useful life of a satellite would
result in increased depreciation expense.
Billed receivables, vendor financing and long-term receivables
We are required to estimate the collectibility of our billed receivables, vendor financing and long-term receivables. A considerable amount
of judgment is required in assessing the collectibility of these receivables, including the current creditworthiness of each customer and related
aging of the past due balances. Charges for (recoveries of) bad debts recorded to the income statement on billed receivables during the periods
October 2, 2005 to December 31, 2005 and January 1, 2005 to December 31, 2005 and for the years ended December 31, 2004, and 2003 were
$1.0 million, $(2.9) million, $(2.1) million and $7.2 million, respectively. At December 31, 2005 and 2004, billed receivables were net of
allowances for doubtful accounts of $5.5 million and $6.4 million, respectively. We evaluate specific accounts when we become aware of a
situation where a customer may not be able to meet its financial obligations due to a deterioration of its financial condition, credit ratings or
bankruptcy. The reserve requirements are based on the best facts available to us and are re-evaluated periodically.
40
Inventories
Inventories are reviewed for estimated obsolescence or unusable items and, if appropriate, are written down to the net realizable value
based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those
we project, additional inventory write-downs may be required. These are considered permanent adjustments to the cost basis of the inventory.
Charges for inventory obsolescence recorded to the income statement during the periods October 2, 2005 to December 31, 2005 and January 1,
2005 to October 1, 2005 and for the years ended December 31, 2004, and 2003 were $1.5 million, $2.1 million, $3.3 million and $49.5 million,
respectively.
Evaluation of Satellites and Other Long-Lived Assets For Impairment
We periodically evaluate potential impairment loss relating to our satellites and other long-lived assets, when a change in circumstances
occurs, by assessing whether the carrying amount of these assets can be recovered over their remaining lives through future undiscounted
expected cash flows generated by those assets (excluding financing costs). If the expected undiscounted future cash flows are less than the
carrying value of the long-lived asset, an impairment charge would be recorded based on such asset’s estimated fair value. Changes in
estimates of future cash flows could result in a write-down of the asset in a future period. Estimated future cash flows could be impacted by,
among other things:
• Changes in estimates of the useful life of the satellite
• Changes in estimates of our ability to operate the satellite at expected levels
• Changes in the manner in which the satellite is to be used
• The loss of one or several significant customer contracts on the satellite
If an impairment loss was indicated for a satellite, such amount would be recognized in the period of occurrence, net of any insurance
proceeds to be received so long as such amounts are determinable and receipt is probable. If no impairment loss was indicated in accordance
with SFAS 144, and we received insurance proceeds, the proceeds would be recognized in our consolidated statement of operations.
Taxation
New Loral, as a Delaware company, is subject to U.S. federal, state and local income taxation on its worldwide income. Prior to the
Effective Date, Old Loral, as a Bermuda company, was subject to U.S. taxation on any income that was effectively connected with the conduct
of a U.S. trade or business as well as a withholding tax on dividends and interest received from its U.S. subsidiaries. Our U.S subsidiaries
continue to be subject to U.S. taxation on their worldwide income and foreign taxes on certain income from sources outside the United States.
Our foreign subsidiaries are subject to taxation in local jurisdictions.
We use the liability method in accounting for taxes whereby income taxes are recognized during the year in which transactions enter into
the determination of financial statement income or loss. Deferred taxes reflect the future tax effect of temporary differences between the
carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying statutory tax rates in effect for the
year during which the differences are expected to reverse. We assess the recoverability of our deferred tax assets and, based upon this analysis,
record a valuation allowance against the deferred tax assets to the extent recoverability does not satisfy the “more likely than not” recognition
criteria in SFAS 109. Based upon this analysis, we concluded during the fourth quarter of 2002 that, due to insufficient positive evidence
substantiating recoverability, a 100% valuation allowance should be established for our net deferred tax assets. As of December 31, 2005, we
had gross deferred tax assets of approximately $558.8 million, which when offset by our deferred tax liabilities of $234.4 million and our
valuation allowance of $337.3 million, resulted in a net deferred tax liability of $12.9 million on our consolidated balance sheet.
For the period October 2, 2005 to December 31, 2005, we continued to maintain the 100% valuation allowance against our net deferred tax
assets, other than the $2.0 million asset for our AMT credit carryforwards, increasing the valuation allowance at October 1, 2005 of
$336.9 million by $0.4 million to a
41
balance of $337.3 million at December 31, 2005. We will maintain the valuation allowance until sufficient positive evidence exists to support
its reversal. If, in the future we were to determine that we will be able to realize all or a portion of the benefit from our deferred tax assets, a
reduction to the valuation allowance as of October 1, 2005 will first reduce goodwill, then other intangible assets with any excess treated as an
increase to paid-in-capital.
Our policy is to establish tax contingency liabilities for potential audit issues. The tax contingency liabilities are based on our estimate of
the probable amount of additional taxes that may be due in the future. Any additional taxes due would be determined only upon completion of
current and future federal, state and international tax audits. At December 31, 2005, the Company had $41.8 million and $0.4 million of tax
contingency liabilities included in long-term liabilities and income taxes payable, respectively. At December 31, 2004, the Company had
$38.9 million of tax contingency liabilities included in liabilities subject to compromise (see Notes 3, 11 and 14 to the financial statements).
Pension and other employee benefits
We maintain a pension plan and a supplemental retirement plan. These plans are defined benefit pension plans. In addition to providing
pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents. These pension and other
employee benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate
and expected long-term rate of return on plan assets. Material changes in these pension and other employee postretirement benefit costs may
occur in the future due to changes in these assumptions, as well as our actual experience.
The discount rate is subject to change each year, consistent with changes in applicable high-quality long-term corporate bond indices, such
as the Moody’s AA Corporate Bond Index. The discount rate determined on this basis was 5.75% as of December 31, 2005, a decline of
25 basis points from December 31, 2004. This had the effect of increasing our accumulated benefit obligations (“ABO”) for pensions by
$10.7 million and for other employee benefits by $2.3 million as of December 31, 2005, as compared with December 31, 2004 .
The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the plan’s projected
benefit obligation, asset mix and the fact that its assets are actively managed to mitigate risk. Allowable investment types include equity
investments and fixed income investments. Pension plan assets are managed by Russell Investment Corp. (“Russell”), which allocates the
assets into specified Russell-designed funds as we direct. Each specified Russell fund is then managed by investment managers chosen by
Russell. The targeted short and long-term allocation of our pension plan assets is 60% in equity investments and 40% in fixed income
investments. Based on this target allocation, the fifteen-year historical return of our investment managers has been 10.5%. The expected long-
term rate of return on plan assets determined on this basis was 9.0% for 2005, 2004 and 2003.
These pension and other employee postretirement benefit costs are expected to decrease to approximately $20 million in 2006 from
$24 million in 2005, primarily due to reduced amortization expense as a result of the recognition of cumulative actuarial losses in connection
with our adoption of fresh-start accounting on October 1, 2005. Lowering the discount rate, and the expected long-term rate of return each by
0.5%, would have increased these pensions and other employee postretirement benefits costs by approximately $2.1 million and $1.2 million,
respectively, in 2005.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) requires a federal subsidy for sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. These subsidy payments will first be
payable to plan sponsors in 2006. In May 2004, the FASB released Financial Accounting Standards Board Position 106-2 (“FSP 106-2”) to
provide guidance on accounting and disclosure requirements related to MMA. We adopted FSP 106-2 effective as of the beginning of the
fourth quarter of 2004, the earliest the required actuarial information was available. As a result of the adoption of FSP 106-2 our net periodic
cost for 2005 and the fourth quarter of 2004 was reduced by $1.1 million and $0.2 million, respectively, and we estimate that it will reduce the
2006 net periodic cost by
42
$0.7 million. The accumulated benefit obligation was reduced by $8.1 million and $6.7 million as of December 31, 2005 and 2004,
respectively.
The ABO for the pension plan exceeded the fair value of plan assets by $120 million at December 31, 2005 (the “unfunded ABO”). This
was primarily due to the negative returns on the pension funds in previous years arising from the overall decline in the equity markets, and a
decline in the discount rate used to estimate the pension liability as a result of declining interest rates. Therefore, Loral was previously required
to establish a minimum liability and record an additional $19.0 million during 2004, for a total charge to equity of $88.3 million as of
December 31, 2004, for the unfunded ABO, to the extent not already reflected as a liability. As a result of the adoption of fresh-start accounting
as of October 1, 2005, we increased our recorded liability by $78 million, net of the charge to equity previously recorded, offset by a
reorganization adjustment of $19 million due to a reduction of certain benefits. The ABO was measured using a discount rate of 5.75% as of
December 31, 2005 and October 1, 2005 and 6.0% as of December 31, 2004. Lowering the discount rate by 0.5% would have increased the
ABO by approximately $21 million. Market conditions and interest rates significantly affect future assets and liabilities of Loral’s pension
plans.
Stock-Based Compensation
Effective October 1, 2005, in connection with our adoption of fresh-start accounting, we adopted the fair value method of accounting for
stock options for all options granted by us after October 1, 2005 pursuant to the prospective method provisions of SFAS No. 123(R), Share-
Based Payment (“SFAS 123R”) . We use the Black-Scholes-Merton option-pricing model to measure fair value of these stock option awards.
This is the same method we used in prior years for disclosure purposes. The Black-Scholes-Merton model requires us to make significant
judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption, the
expected life of the option award, the risk-free rate of return and dividends during the expected term. We emerged from bankruptcy on
November 21, 2005, and as a result, we do not have sufficient stock price history upon which to base our volatility assumption. In determining
the volatility used in our model, we considered the volatility of the stock prices of selected companies in the satellite industry, the nature of
those companies, our emergence from bankruptcy and other factors in determining our stock price volatility. For 2005, we used a stock price
volatility assumption of 27%. We based our estimate of the average life of a stock option of 4.75 years using the midpoint between the vesting
and expiration dates as allowed by SEC Staff Accounting Bulletin No. 107 based upon the vesting period of 4 years and the option term of
seven years. Our risk-free rate of return assumption for options granted in 2005, of 4.4%, was based on the quoted yield for five-year
U.S. treasury bonds as of the date of grant (see Note 15 to the financial statements). We assumed no dividends during the expected term.
Prior to October 1, 2005, we followed the disclosure-only provisions of SFAS No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure (“SFAS 148”) an amendment of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). We
accounted for stock-based compensation for employees using the intrinsic value method (as defined below) as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under APB 25, no
compensation expense was recognized for employee share option grants because the exercise price of the options granted equalled the market
price of the underlying shares on the date of grant (the “intrinsic value method”).
Deferred Compensation
Pursuant to the Plan of Reorganization we entered into deferred compensation arrangements for certain key employees that vest generally
over four years and expire after seven years. The initial deferred compensation awards were calculated by multiplying $9.44 by the number of
stock options granted to these key employees (see Note 15 to the financial statements). We are accreting the liability by charges to income over
the vesting period. The deferred compensation cost charged against income, net of estimated forfeitures, was $0.2 million for the period
October 2, 2005 to December 31, 2005. As of December 31, 2005, there was an additional $6.6 million of unrecognized deferred compensation
(not including an additional $5.8 million for which recognition of the awards were delayed to 2006) that will be charged to income over the
remaining
43
vesting period. The value of the deferred compensation fluctuates depending on stock price performance, within a defined range, and vesting
will accelerate if there is a change of control as defined.
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the Company’s reorganization equity value exceeded the fair value of its tangible assets and
identified intangible assets less its liabilities allocated in accordance with the provisions of SFAS 141 as of December 31, 2005. Pursuant to the
provisions of SFAS 142, goodwill is not amortized and is subject to an annual impairment test which we perform in the fourth quarter of each
fiscal year. Our 2005 test of goodwill impairment did not result in any goodwill impairment.
Intangible assets consist primarily of backlog, internally developed software and technology, orbital slots, trade names and customer
relationships all of which were recorded in connection with the adoption of fresh-start accounting. We used the work of an independent
appraiser to assist us in determining the fair value of our intangible assets. The fair values were calculated using several approaches that
encompassed the use of excess earnings, relief from royalty and the build-up methods. The excess earnings, relief from royalty and build-up
approaches are variations of the income approach. The income approach, more commonly known as the discounted cash flow approach,
estimates fair value based on the cash flows that an asset can be expected to generate over its useful life. Identifiable intangible assets with
finite useful lives are generally amortized on a straight-line basis over the estimated useful lives of the assets (see Note 10 to the financial
statements).
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. The most important contingencies affecting our financial
statements are detailed in Note 19 to the financial statements, Commitments and Contingencies.
Liquidity and Capital Resources
Cash and Available Credit
As of December 31, 2005, we had $276 million of available cash and $12 million of restricted cash ($2 million included in other current
assets and $10 million included in other assets on our consolidated balance sheet). The Company believes that cash as of December 31, 2005
and net cash provided by operating activities will be adequate to meet its expected cash requirement through at least the next 12 months.
Cash required to pay the remaining claims from the Plan of Reorganization and the expenses associated with completing the reorganization
activity, in the aggregate approximately $54 million, will be paid from existing cash on hand.
Cash flow from Satellite Services is fairly predictable because it is derived from an existing base of long-term customer contracts. The
Company believes that the Satellite Services cash flow from operations will be sufficient to provide for its maintenance capital requirements
and pay its interest and preferred dividend obligations. Cash required to fund the construction of the Telstar 11N satellite that is not available
from operations will be funded from cash on hand within the Company or through financing activity.
Cash requirements at Satellite Manufacturing are driven primarily by working capital requirements to fund long-term receivables associated
with satellite contracts and capital spending required to maintain and expand the manufacturing facility. The Company believes that the
Satellite Manufacturing cash flow from operations is sufficient to fund the capital required to maintain the current manufacturing operations
and working capital associated with typical satellite contracts. Capital requirements to expand the manufacturing facility beyond its current
capabilities, and offer customer financing terms beyond standard terms, will be funded by cash on hand within the Company or through
financing activity.
On November 21, 2005, Loral Skynet completed the sale of $126 million of Senior Secured Notes (the “Loral Skynet Notes”) at par. The
Loral Skynet Notes mature on November 15, 2015 and bear interest at
44
14% payable semi-annually beginning July 15, 2006. No principal payments prior to the maturity date are required. The Loral Skynet Notes are
guaranteed by certain of Loral Skynet’s subsidiaries. The obligations of Loral Skynet and the subsidiary guarantors are secured by a first
priority lien on certain specified assets of Loral Skynet and the guarantors pursuant to the security agreements entered into on November 21,
2005. The related indenture contains restrictive covenants that limit, subject to certain exceptions, Loral Skynet’s and its subsidiaries’ ability to
take certain actions, including restricted payments, incurrence of debt, incurrence of liens, payment of certain dividends or distributions,
issuance or sale of capital stock of subsidiaries, sale of assets, affiliate transactions and sale/leaseback and merger transactions. Proceeds from
the sale of the Loral Skynet Notes were used to acquire certain satellite services assets from Old Loral and certain of its subsidiaries and to fund
certain cash claims in accordance with the Plan of Reorganization (see Note 12 to the financial statements).
On November 21, 2005 SS/ L entered into an Amended and Restated $20.0 million Letter of Credit Reimbursement Agreement with JP
Morgan Chase Bank. As of December 31, 2005, $2.4 million in Letters of Credit were issued and outstanding.
On March 17, 2004, we repaid all $967 million of our secured bank debt and had no further available credit.
Contractual Obligations and Other Commercial Commitments
The following tables aggregate our contractual obligations and other commercial commitments as of December 31, 2005 (in thousands).
Contractual Obligations:
Debt (1)
Interest on debt (1)
Operating leases (2)
Unconditional purchase obligations (3)
Other long-term obligations (4)
Total contractual cash obligations
Other Commercial Commitments:
Standby letters of credit (5)
Payments Due by Period
Total
$ 126,000
176,106
123,767
346,270
83,894
$ 856,037
Less than
1 Year
$
—
10,780
22,225
285,941
28,739
$ 347,685
1-3 Years
4-5 Years
$
$
—
35,280
35,095
59,270
30,774
160,419
$
$
—
35,280
26,634
1,059
20,704
83,677
More than
5 Years
$ 126,000
94,766
39,813
—
3,677
$ 264,256
Amount of Commitment Expiration Per Period
Total
Amounts
Committed
$
2,427
Less than
1 Year
$
2,427
$
1-3 Years
—
4-5 Years
—
$
More than
5 Years
$ —
(1) Represents cash obligations for principal payments and interest payments on Loral Skynet 14% senior secured notes (see Note 12 to the financial statements for further detail
on our debt obligations).
(2) Represents future minimum payments under operating leases with initial or remaining terms of one year or more, net of sub-lease rentals of $0.3 million.
(3) SS/ L has entered into various purchase commitments with suppliers due to the long lead times required to produce purchased parts.
(4) Primarily represents vendor financing related amounts owed to subcontractors and amounts due to APT, representing Loral’s share of the project cost of Telstar 18 and
commitments under employment agreements.
(5) Letters of credit have a maturity of one year and are renewed annually.
45
Net Cash (Used in) Provided by Continuing Operating Activities
Net cash used in operating activities for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005 was
$38 million and $144 million, respectively, totaling $182 million for 2005. This was primarily due to $80 million of payments to creditors in
connection with our Plan of Reorganization, the reduction in customer advances of $56 million because of continued progress on the related
programs and the deferral of billings of $46 million in connection with certain SS/ L contracts (see Note 7 to the financial statements).
Net cash provided by continuing operating activities for 2004 was $40 million. This was primarily due to an increase in customer advances
of $35 million from new satellite programs receipts and a decrease of contracts-in -process of $29 million primarily resulting from net
collections on customer contracts, which was offset by the net loss adjusted for non-cash items of $59 million.
Net Cash Provided by Operating Activities of Discontinued Operations
Represents the net cash provided from the operations of the North American satellites and related equipment sold.
Net Cash (Used in) Provided By Investing Activities
Net cash (used in) provided by investing activities for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1,
2005 was $(5) million and $195 million, respectively, totaling $190 million for 2005, primarily resulting from the insurance proceeds received
for our Telstar 14 Satellite.
Net cash provided by investing activities was $907 million for 2004, primarily resulting from the $954 million of proceeds from the sale of
our North American satellites and related assets, net of expenses, offset by capital expenditures for continuing operations of $25 million and
capital expenditures for discontinued operations of $11 million, mainly for the construction of satellites, and investments in and advances to
affiliates of $6 million, primarily for XTAR.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005
was $121 million and zero, respectively, totaling $121 million for 2005, representing the debt proceeds from the Loral Skynet Notes (see
Note 12 to the financial statements).
Net cash used in financing activities was $967 million in 2004, resulting from our repayment of our secured bank debt, primarily with the
proceeds from the sale of the North America satellites and related assets.
Other
During 2005, we contributed $20 million to the qualified pension plan. During 2006, based on current estimates, we expect to contribute
approximately $2 million to the qualified pension plan and expect to fund approximately $5 million for other employee post-retirement benefit
plans.
Affiliate Matters
Loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity method of
accounting (see Notes 9 and 19 to the financial statements for further information on affiliate matters).
46
Our consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in
affiliates (in millions).
Revenues
Elimination of Loral’s proportionate share of (profits) losses relating to
affiliate transactions
Profits (losses) relating to affiliate transactions not Eliminated
Commitments and Contingencies
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
Years Ended
December 31,
2004
$ 7.8
2003
$ 27.7
$
4.1
$
10.0
(2.9 )
2.3
0.6
(0.5 )
2.4
(1.9 )
4.4
(3.6 )
Our business and operations are subject to a number of significant risks, the most significant of which are summarized in Item 1A — Risk
Factors and also in Note 19 to the financial statements, Commitments and Contingencies.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency
While we were under Chapter 11, SS/ L’s hedges with counterparties (primarily yen denominated forward contracts) were cancelled,
leaving SS/ L vulnerable to foreign currency fluctuations in the future. The inability to enter into forward contracts exposed SS/ L’s future
revenues, costs and cash associated with anticipated yen denominated receipts and payments to currency fluctuations. As of December 31,
2005, SS/ L had the following amounts denominated in Japanese Yen (which have been translated into U.S. dollars based on the December 31,
2005 exchange rate) that were unhedged (in millions):
Future revenues
Future expenditures
Contracts-in-process (unbilled receivables)
¥
Japanese Yen
U.S.$
324
2,178
69
$
2.7
18.5
0.6
At December 31, 2005, SS/ L also had future expenditures in EUROs of 119,389 ($141,410 U.S.) that were unhedged.
Loral does not enter into foreign currency transactions for trading or speculative purposes. We attempt to limit our exposure to credit risk
by executing foreign contracts with high-quality financial institutions. A discussion of our accounting policies for derivative financial
instruments is included in the notes to Loral’s consolidated financial statements.
Interest
The Company issued long-term fixed rate debt at its Loral Skynet Corporation subsidiary upon emergence from bankruptcy. Since all of
these instruments are at a fixed rate, the Company does not have any exposure to changes in interest rates. Accordingly, the Company does not
actively manage its interest rate risk through the use of derivatives or other financial instruments.
As of December 31, 2005, the carrying value of the Company’s long-term debt was $128.2 million with related debt issuance costs of
$6.2 million which is reflected in Other Assets on our Consolidated Balance Sheet. The fair value of such debt was $153.4 million and is based
on the last market trade of 2005 as reported on Bloomberg for the Loral Skynet Corporation 14% Senior Notes. The Loral Skynet Notes mature
in 2015 and have an effective interest rate of 14.6%. A hypothetical adverse change in interest rates of 100 basis points
47
would not have had any effect on interest related to the Loral Skynet Notes, as the interest rate on the notes is fixed at 14%.
As a result of emergence from Chapter 11 filing, all remaining $1.049 billion principal amount of our unsecured debt obligations at
December 31, 2004 was extinguished and was included in liabilities subject to compromise as of December 31, 2004. As of December 31,
2004, the carrying value of our debt obligations was $1.3 billion and its fair value was $475 million. The fair value of our debt obligations is
based on quoted market prices for obligations with long-term or fixed interest rates.
Item 8.
Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedules on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31,
2005, have concluded that our disclosure controls and procedures were effective and designed to ensure that information relating to Loral and
its consolidated subsidiaries required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities Exchange Commission rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our chief executive
officer and our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on
the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under such criteria, our management concluded that our internal control over financial reporting was
effective as of December 31, 2005. Our management’s assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its attestation
report which is included below.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2005 that have materially
affected or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and
48
instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-
making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are
subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
49
To the Shareholders of Loral Space & Communications Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting, that Loral Space & Communications Inc. and its subsidiaries (collectively, the “Company”) maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedules as of December 31, 2005 (Successor Registrant balance sheet) and the
related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the period from October 2, 2005 to
December 31, 2005 (Successor Registrant operations) and the period from January 1, 2005 to October 1, 2005 (Predecessor
50
Registrant operations) of the Company and our report dated March 28, 2006 expressed an unqualified opinion on those financial statements and
financial statement schedules and included explanatory paragraphs which indicate that (1) the Company adopted fresh-start reporting pursuant
to American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code , as of October 1, 2005 and as a result, the consolidated financial statements of the Successor Registrant are presented on a
different basis than those of the Predecessor Registrant and, therefore, are not comparable and (2) the Company changed its method of
accounting for stock-based compensation to adopt the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment.
/s/ DELOITTE & TOUCHE LLP
New York, NY
March 28, 2006
51
Item 9B. Other Information
None.
Item 10. Directors and Executive Officers of the Registrant
PART III
Directors
Loral has three classes of directors, with the term of the initial Class 1 directors expiring at the first annual meeting of stockholders after the
Effective Date, the term of the initial Class 2 directors expiring at the second annual meeting of stockholders after the Effective Date, and the
term of the initial Class 3 directors expiring at the third annual meeting of stockholders after the Effective Date. Thereafter, each director will
serve for a term of three years from the date of his election. The following sets forth information concerning Loral’s directors as of March 10,
2006.
Michael B. Targoff
Age:
61
Director Since: November 2005
Class: Class II
Business Experience:
Other Directorships:
Mr. Targoff is Chief Executive Officer of Loral since March 1, 2006 and Vice Chairman of
Loral since November 21, 2005. Prior to that, Mr. Targoff was founder and principal of
Michael B. Targoff & Co.
Chairman of the Board and Chairman of the Audit Committee of Communication Power
Industries, a director and Chairman of the Audit Committee of Leap Wireless International,
Inc. and a director of ViaSat, Inc.
Sai S. Devabhaktuni
Age:
34
Director Since: November 2005
Class: Class III
Business Experience: Mr. Devabhaktuni is a managing principal of MHR Fund Management LLC and affiliates.
Hal Goldstein
Age:
40
Director Since: November 2005
Class: Class III
Business Experience:
Mr. Goldstein is a co-founder and managing principal of MHR Fund Management LLC and
affiliates.
Other Directorships: Director of GF Health Products Inc.
John D. Harkey, Jr.
Age:
45
Director Since: November 2005
Class: Class I
Business Experience:
Other Directorships:
Mr. Harkey is Chairman and Chief Executive Officer of Consolidated Restaurant Companies,
Inc.
Director and member of the Audit Committees of Leap Wireless International, Inc., Energy
Transfer Partners, L.L.C. and Pizza Inn.
52
Dean Olmstead
Age:
50
Director Since: November 2005
Class: Class II
Business Experience:
Mr. Olmstead is President of Arrowhead Global Solutions, Inc. and founder and Chairman of
Satellite Development LLC since October 2004. From November 2001 to September 2004,
Mr. Olmstead was President and Chief Executive Officer of SES Americom and a member of
the SES Global Executive Committee. Prior to that, he was a member of the SES Astra
Management Committee.
Other Directorships: Chairman of the Board of Satellite Development LLC (dba BBSat)
Mark H. Rachesky, M.D.
Age:
47
Director Since: November 2005
Class: Class III
Business Experience:
Other Directorships:
Arthur L. Simon
Dr. Rachesky is non-executive Chairman of the Board of Directors of Loral since March 1,
2006. Dr. Rachesky is a co-founder and President of MHR Fund Management LLC and
affiliates
Director of Leap Wireless International, Inc., Neose Technologies, Inc., NationsHealth Inc.
and Emisphere Technologies, Inc.
Age:
74
Director Since: November 2005*
Class: Class I
Business Experience: Mr. Simon is an independent part-time consultant.
Other Directorships:
Director and member of the Audit and Governance Committees of L-3 Communications
Corporation
The Plan of Reorganization provided that the initial composition of the Board of Directors would be comprised of Mr. Schwartz (who
retired from Loral on March 1, 2006), Mr. Targoff, two persons designated by Mr. Schwartz and five persons designated by the creditors’
committee appointed in the Chapter 11 Cases of Old Loral. Mr. Simon, along with Mr. Robert Hodes, a director of Old Loral, were selected by
Mr. Schwartz, and Messrs. Devabhaktuni, Goldstein, Harkey, Olmstead and Rachesky were selected by the creditors’ committee. Mr. Hodes
resigned from the Board of Directors on February 28, 2006. As provided in Loral’s Certificate of Incorporation, the vacancies on the Board
resulting from Mr. Schwartz’s retirement and Mr. Hodes’ resignation will be filled by the Board of Directors.
* Prior to November 21, 2005, Mr. Simon served as a director of Old Loral.
Audit Committee
The Board of Directors has a standing Audit Committee, the current members of which are Messrs. Harkey and Simon. Mr. Simon is the
Chairman of the Committee. Mr. Targoff was a member of the Audit Committee between November 21, 2005 and February 9, 2006, when he
resigned after agreeing to become Chief Executive Officer on March 1, 2006 upon Mr. Schwartz’s retirement. The Board of Directors has
determined that Mr. Simon meets the requirements of a financial expert within the meaning of Section 401(h) of Regulation S-K because of,
among other things, Mr. Simon’s business experience as a former partner of Coopers & Lybrand L.L.P., Certified Public Accountants. The
Board of Directors has further determined that all members of the committee are independent, within the meaning of Schedule 14A
53
under the Exchange Act, and that Mr. Harkey’s service on the audit committees of three other companies does not impair his ability to
effectively serve on our Audit Committee.
In March 2006, the Company received a NASDAQ Staff Deficiency Letter indicating that, as a result of the appointment of Mr. Targoff as
Chief Executive Officer of the Company and his related resignation from the Company’s Audit Committee, the Company was not in
compliance with NASDAQ’s audit committee requirements which require listed companies to have audit committees composed of at least
three independent directors. The NASDAQ letter further indicated that the Company has a cure period until the earlier of the Company’s next
annual stockholders’ meeting or February 9, 2007 to regain compliance. The Company is currently considering the composition of its Audit
Committee and intends to appoint a third independent member thereto within the specified cure period.
Executive Officers of the Registrant
The following table sets forth information concerning the executive officers of Loral as of March 10, 2006.
Name
Michael B. Targoff
Eric J. Zahler
Richard J. Townsend
Patrick K. Brant
C. Patrick DeWitt
Avi Katz
Richard P. Mastoloni
Harvey B. Rein
Age
61
55
55
54
59
47
41
52
Position
Chief Executive Officer since March 1, 2006; Vice Chairman of the Board of Directors
since November 2005. Prior to that, founder of Michael B. Targoff & Co.
President and Chief Operating Officer since November 2005. President and Chief
Operating Officer of Old Loral since February 2000.
Executive Vice President and Chief Financial Officer since November 2005. Executive
Vice President and Chief Financial Officer of Old Loral since March 2003. Prior to that,
Senior Vice President and Chief Financial Officer of Old Loral since October 1998.
Vice President since November 2005. President of Loral Skynet since November 2005
and President of Loral Skynet, a division of Loral SpaceCom, since August 2004. Senior
Vice President of Iridium Satellite LLC from July 2004 to August 2004. From June 2003
to July 2004 consultant and prior to that, Chief Operating Officer of Loral Skynet since
1999.
Vice President since November 2005. Vice President of Old Loral since January 2002.
President of SS/L since November 2001. Prior to that, Executive Vice President of SS/L
since 1996.
Vice President, General Counsel and Secretary since November 2005. Vice President,
General Counsel and Secretary of Old Loral since November 1999.
Vice President and Treasurer since November 2005. Vice President and Treasurer of Old
Loral since February 2002. Prior to that, Vice President since September 2001 and
Assistant Treasurer since August 2000.
Vice President and Controller since November 2005. Vice President and Controller of Old
Loral since April 1996.
In addition to being officers and directors of Old Loral and certain of its subsidiaries which filed in July 2003 voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code, Messrs. Zahler, Townsend, Katz, Mastoloni and Rein either currently serve or have
previously served as executive officers of Globalstar and certain of its subsidiaries, Loral/ Qualcomm Satellite Services, L.P., the managing
general partner of Globalstar, its general partner, Loral/ Qualcomm Partnership, L.P., and certain of Loral’s subsidiaries that served as general
partners of Loral/ Qualcomm Partnership, L.P.
54
Procedure for Stockholder Nominations of Directors
As provided in Loral’s Amended and Restated Bylaws, nominations of persons for election to the Board of Directors may be made at a
meeting of stockholders only (a) pursuant to the Company’s notice of meeting (or any supplement thereto), (b) by or at the direction of the
Board of Directors or any committee thereof or (c) by any stockholder of the Company who was a stockholder of record when the notice of
proposed nomination is delivered to the Company, who is entitled to vote at the meeting and who complies with the notice procedures set forth
in the bylaws. Only such persons who are nominated in accordance with the procedures set forth in the bylaws are eligible to be selected at an
annual or special meeting of stockholders of the Company to serve as directors. For a complete description of the procedure for stockholder
nominations of directors, see the Company’s Amended and Restated Bylaws, filed as Exhibit 3.2 to this Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our executive officers, directors and persons who own more than 10% of our common stock, to
file reports with the SEC. An initial distribution of New Loral common stock pursuant to the Plan of Reorganization occurred on December 7,
2005. Based solely on a review of the copies of reports furnished to us, Loral believes that during 2005, all filing requirements were met on a
timely basis.
Code of Ethics
Loral has adopted a Code of Ethics for all of its employees, including all of its executive officers. This Code of Ethics is available on
Loral’s web site at www.loral.com. Any amendments or waivers to this Code of Ethics with respect to Loral’s principal executive officer,
principal financial officer, principal accounting officer or controller (or persons performing similar functions) will be posted on such web site.
One may also obtain, without charge, a copy of this Code of Ethics by contacting our Investor Relations Department at (212) 338-5347.
Item 11. Executive Compensation
Executive Compensation
The following table summarizes the compensation paid to the named executive officers set forth below (“NEOs”). For the period prior to
November 21, 2005, such compensation was paid by Loral SpaceCom
55
pursuant to a management agreement with Old Loral. Subsequent to that period, the compensation of the NEOs was paid by New Loral.
Annual Compensation
Long Term
Compensation
Name &
Principal Position
Year
Salary
Bonus
Bernard L. Schwartz,
Chairman of the Board of
Directors and Chief
Executive Officer (a)
Eric J. Zahler, President
and Chief Operating
Officer
Richard J. Townsend,
Executive Vice President
and Chief Financial
Officer
C. Patrick DeWitt, Vice
President and President
of Space Systems/
Loral, Inc.
Avi Katz, Vice President,
General Counsel and
Secretary
2005 $ 1,869,214 $ 1,043,051
2004 $ 1,518,767 (c) $
0
2003 $ 292,150 (c) $
0
2005 $ 1,232,308 $ 648,960
2004 $ 1,142,308 $ 480,000
2003 $ 1,000,000 $ 400,000
2005 $ 870,831 $ 470,063
2004 $ 838,462 $ 360,000
2003 $ 770,000 $ 360,000
2005 $ 476,415 $ 391,000
2004 $ 447,435 $ 271,109
0 (e)
2003 $ 426,675 $
2005 $ 433,901 $ 227,785
2004 $ 420,390 $ 170,000
2003 $ 400,404 $ 150,000
Other
Annual
Compensation
Securities
Restricted Underlying
Stock
Awards
Stock
Options
All Other
Compensation(b)
$
0
0
$
$ 42,763(d)
0
$
0
$
0
$
$
$
$
$
$
$
$
$
$
0
0
0
0
0
0
0
0
0
0
0
0
120,000
0
0
85,000
0
0
75,000
0
0
50,000
0
0
$ 32,560
$ 32,380
$ 32,200
$ 466,806
$ 191,626
$ 53,946
$ 351,795
$ 131,615
$ 21,435
$ 133,112
$ 139,305
$ 14,751
$ 168,156
$ 66,726
$ 15,921
(a) Mr. Schwartz retired from Loral effective March 1, 2006.
(b) For 2005, includes (i) annual Board of Directors fee from Old Loral in the amount of $25,000 to each of Messrs. Schwartz and Zahler,
(ii) Company matching contributions to the Savings Plan in the amount of $7,560 for each of Messrs. Schwartz, Zahler, Townsend and
Katz and $8,112 for Mr. DeWitt and (iii) the value of supplemental life insurance premiums in the amounts of $21,746, $14,235 and
$8,721 for Messrs. Zahler, Townsend and Katz, respectively. Also includes payments of $412,500, $330,000, $125,000 and $151,875 to
Messrs. Zahler, Townsend, Dewitt and Katz, respectively, under Old Loral’s Key Employee Retention Plan (“KERP”) approved by the
Bankruptcy Court in December 2003.
(c) At Mr. Schwartz’s request, Old Loral’s Compensation Committee agreed to amend his employment agreement to provide for no base
salary for the twelve-month period commencing March 1, 2003. Salary paid in 2003 is for the period of January 1, 2003 through
February 28, 2003. Salary paid in 2004 is for the period March 1, 2004 through December 31, 2004.
(d) Represents the aggregate incremental cost to Old Loral for use of Old Loral’s corporate jet by Mr. Schwartz.
(e) Mr. DeWitt received a $125,000 payment under the KERP in 2004 in lieu of his 2003 bonus.
Employment Contracts, Change in Control and Other Compensation Arrangements
As of the November 21, 2005, the effective date of the Plan of Reorganization, (i) Loral entered into employment agreements with Bernard
L. Schwartz and the following NEOs (the “Loral Executives”): Avi Katz, Richard J. Townsend and Eric J. Zahler; and (ii) SS/ L entered into an
employment agreement with its President, C. Patrick DeWitt.
Bernard L. Schwartz
Effective March 1, 2006, Mr. Schwartz retired from all officer and director positions he held with the Company and its subsidiaries and
affiliates, including his positions as Chairman of the Board and Chief Executive Officer of the Company. Accordingly, the Company has no
further obligations to Mr. Schwartz under his employment agreement. The following is a summary of the terms of Mr. Schwartz’s employment
agreement in effect prior to his retirement.
56
Pursuant to Mr. Schwartz’s employment agreement, Mr. Schwartz was employed as the Chief Executive Officer and Chairman of the
Board of Directors of the Company. Absent his retirement, the term of Mr. Schwartz’s employment agreement would have expired on
November 21, 2006.
Under his agreement, Mr. Schwartz was entitled to receive an annual base salary of $1,887,875, which would have been subject to increase,
effective April 22, 2006, by a percentage at least equal to the percentage change during 2005 in the Annual Average All Items Index of the
U.S. City Average Consumer Price Index for All Urban Consumers, as published the U.S. Bureau of Labor Statistics. The employment
agreement also provided that Mr. Schwartz was a participant in the Management Incentive Bonus Program of Loral, with a target annual bonus
of forty-two and one-half percent (42.5%) of his annual salary. Mr. Schwartz was entitled to participate in any benefit plans provided generally
to similarly situated employees. In addition, Loral was required to obtain life insurance coverage for Mr. Schwartz equal to the lesser of
$11,000,000 or the maximum amount of death benefit that could be obtained for an annual premium of $300,000. Pursuant to this provision of
the agreement, prior to Mr. Schwartz’s retirement, Loral obtained a one-year life insurance policy for Mr. Schwartz with a death benefit of
$10,000,000 at a premium of $291,000.
Upon Mr. Schwartz’s death or permanent disability during the contract term, Mr. Schwartz would have been entitled to, among other
payments, his accrued and unpaid bonus for the preceding year, a pro rated annual bonus for the year in which such death or permanent
disability occurred, and in the case of his death, salary through the end of the month.
In the event that, during the contract term, Mr. Schwartz’s employment were to have been terminated by Loral without “cause” or
Mr. Schwartz would have resigned for “good reason” (as such terms are defined in his employment agreement), Mr. Schwartz would have been
entitled to a severance payment, in a lump sum, of $2,000,000, plus the remaining base salary he would have earned had he remained employed
through the end of the contract term. In addition, Mr. Schwartz would have been entitled to any accrued and unpaid annual bonus for the
preceding year and a prorated annual bonus for the year in which any such termination of employment occurred. Mr. Schwartz would also have
been entitled to coverage under Loral’s medical, dental and life insurance in effect immediately prior to such termination until the first
anniversary of such termination or, if earlier, the date he commenced new employment and were eligible for comparable benefits.
Mr. Schwartz’s severance payments and benefits would have been contingent upon the execution of a release. Mr. Schwartz was not entitled to
and did not receive any of these severance benefits because he voluntarily retired from the Company.
During the term of Mr. Schwartz’s employment with Loral and for a twelve-month period following a termination of employment during
the term of the agreement, Mr. Schwartz is restricted from (i) engaging in competitive activities, (ii) directly or indirectly soliciting current and
certain former employees of Loral or any of its affiliates and (iii) knowingly soliciting, directly or indirectly, any customers or suppliers within
the twelve-month period prior to such termination of employment to terminate or diminish their relationship with Loral or any of its affiliates.
In addition, Mr. Schwartz may not disclose confidential information of Loral.
SS/ L and Loral Skynet guaranteed the payment and performance of Loral’s obligations under the employment contract with Mr. Schwartz.
The above description of Mr. Schwartz’s employment agreement is not intended to be complete and is qualified in its entirety by reference
to the full text of the agreement attached to this report as Exhibit 10.9.
Michael B. Targoff
As noted above, on March 1, 2006, Michael B. Targoff became the Chief Executive Officer of Loral. On March 28, 2006, Loral entered
into an employment agreement with Mr. Targoff.
Pursuant to Mr. Targoff’s employment agreement, Mr. Targoff is employed as the Chief Executive Officer and Vice Chairman of the Board
of Directors of Loral. The term of Mr. Targoff’s employment agreement will expire on December 31, 2010.
57
Under his agreement, Mr. Targoff is entitled to receive an annual base salary of $950,000, which is subject to annual review by the Board
of Directors. The employment agreement also provides that Mr. Targoff will participate in the Management Incentive Bonus Program of Loral,
with a target annual bonus of one hundred twenty-five percent (125%) of his base salary.
In addition to the initial stock option award Mr. Targoff received in December as a member of the Board of Directors, his employment
agreement provides for the grant of an option (the “New Option”) to purchase an additional 825,000 shares of Loral common stock with a per-
share exercise price equal to $26.915, the fair market value of one share of common stock on the date of grant. The New Option is subject to
the approval by the stockholders of Loral of an amendment to our 2005 Stock Incentive Plan to increase the number of shares of our common
stock available under the plan. We plan to submit the amendment of the plan to our stockholders for approval at an annual or special meeting of
stockholders. The New Option will not be valid unless and until the plan amendment is approved by our stockholders. The New Option will
vest over a four-year period with the first 12 1 / 2 % vesting immediately, an additional 25% vesting on the next three anniversaries of the grant
date and the remaining 12 1 / 2 % vesting on the fourth anniversary of the grant date; provided, however, that no portion of the New Option
(whether vested or not) will be exercisable prior to the date of stockholder approval of the amendment to our 2005 Stock Incentive Plan.
Mr. Targoff’s employment agreement also provides for an additional equity award to be granted in 2008, having an economic value
comparable to one-half the value of the New Option, provided Mr. Targoff has earned his target bonus for the 2006 and 2007 fiscal years.
Mr. Targoff is also entitled to participate in any benefit plans provided generally to similarly situated employees.
Upon Mr. Targoff’s death or disability during the contract term, Mr. Targoff will be entitled to, among other payments, his accrued and
unpaid bonus for the preceding year, a pro rated annual bonus for the year in which such death or permanent disability occurs, and, in the case
of his death, salary through the end of the month. In addition, a portion of Mr. Targoff’s unvested options and deferred compensation account
will become vested and, in the event of his death, his dependents will be entitled to continued medical, prescription drug and dental insurance
coverage through the end of the term.
In the event, during the contract term, Mr. Targoff’s employment is terminated by Loral without “cause” or Mr. Targoff resigns for “good
reason” (as such terms are defined in his employment agreement), Mr. Targoff will be entitled to a severance payment, in a lump sum, equal to
two (2) times the sum of his base salary and annual bonus (for the preceding year); provided, however, that if the amendment to the 2005 Stock
Incentive Plan has not been approved and there is a change in control of Loral, as defined in his employment agreement, Mr. Targoff may
terminate employment for good reason and receive a severance payment equal to the value of his base salary and annual bonus for the
remainder of the term. In addition, Mr. Targoff will be entitled to any accrued and unpaid annual bonus for the preceding year and a prorated
annual bonus for the year in which any such termination of employment occurs. Mr. Targoff and his dependents will also be entitled to
coverage under Loral’s medical, dental and life insurance in effect immediately prior to such termination for eighteen (18) months following
such termination, or until he commences new employment and becomes eligible for comparable benefits. In addition, all of Mr. Targoff’s stock
options, deferred compensation account and any other equity award then held by Mr. Targoff will become fully vested. Mr. Targoff’s severance
payments and benefits are contingent upon the execution of a release.
Mr. Targoff’s employment agreement also provides for a tax gross-up payment to Mr. Targoff in the event that he becomes subject to any
parachute payment excise taxes under Section 280G of the Internal Revenue Code.
During the term of Mr. Targoff’s employment with Loral and for a twelve-month period (or twenty-four (24) months following a change in
control of Loral) following a termination of employment, Mr. Targoff is restricted from (i) engaging in competitive activities, (ii) directly or
indirectly soliciting current and certain former employees of Loral or any of its affiliates and (iii) knowingly soliciting, directly or indirectly,
any customers or suppliers within the twelve-month period prior to such termination of employment to terminate or diminish their relationship
with Loral or any of its affiliates. In addition, Mr. Targoff may not disclose confidential information of Loral.
58
Mr. Targoff’s employment agreement also provides for the reimbursement of his attorney’s fees in connection with the negotiation of the
employment agreement and a tax gross-up payment to cover his taxes for any such reimbursement.
Loral Skynet and SS/ L guarantee the payment and performance of Loral’s obligations under the employment contract with Mr. Targoff.
The above description of Mr. Targoff’s employment agreement is not intended to be complete and is qualified in its entirety by reference to
the full text of the agreement attached to this report as Exhibit 10.10.
Other Named Executive Officers
Each of the employment agreements with the Loral Executives and the employment agreement with Mr. C. Patrick DeWitt (Mr. DeWitt,
together with the Loral Executives, the “Executives” and each an “Executive”) are substantially identical.
Each of the employment agreements with the Executives is for an initial term of two years and sets forth the Executive’s position and
duties, annual salary, target annual bonus opportunity, and entitlement to an initial stock option grant (as summarized in the table below). In
addition, each Executive is entitled to participate in employee benefits generally provided to similarly situated employees.
Executive
Eric J. Zahler
Richard J. Townsend
C. Patrick DeWitt
Avi Katz
Position
Annual Salary
President and Chief Operating Officer
Executive Vice President and Chief
Financial Officer
Vice President, and President of SS/L
Vice President, General Counsel and
Secretary
$ 1,248,000
$ 881,920
$ 485,040
$ 438,048
Target
Annual
Bonus as a
Percentage
of Salary
40.0
41.0
50.0
40.0
Initial Option
Grant
120,000
85,000
75,000
50,000
Upon any Executive’s termination of employment on account of death or permanent disability during the contract term, such Executive is
entitled to, among other payments, (i) such Executive’s accrued and unpaid bonus for the preceding year, (ii) a pro rated annual bonus for the
year of termination, (iii) accelerated vesting of stock options that would have vested on the next vesting date, and (iv) in the case of such
Executive’s death, salary through the end of the month of his death.
In the event that, during the contract term, an Executive’s employment is terminated by Loral without “cause” or the Executive resigns for
“good reason” (as such terms are defined in the employment contract), the Executive will be entitled to a severance payment, in a lump sum, of
the greater of (i) a specified percentage of the Executive’s 2003 salary, plus one week’s pay for each year of service with Loral and Old Loral
(“Base Severance Amount”), or (ii) the salary the Executive would have earned from the date the Executive terminates employment through
November 21, 2007. The Base Severance Amount for each of the Executives as of November 21, 2005, is as follows: Mr. Zahler ($1,750,000),
Mr. Townsend ($1,400,000), Mr. Katz ($708,750) and Mr. DeWitt ($425,040). Each Executive will also be entitled to any accrued and unpaid
annual bonus for the preceding year and a prorated annual bonus for the year in which any such termination of employment occurs, and to be
fully vested in all outstanding stock options and deferred compensation relating thereto. In addition, the Executive will be entitled to coverage
under Loral’s medical, dental and life insurance plans in effect immediately prior to such termination until the earlier of (i) the expiration of a
period determined by dividing the Executive’s lump sum severance payment by the Executive’s monthly salary rate and (ii) the date the
Executive commences new employment and is eligible for comparable benefits. Severance payments and benefits are contingent upon the
execution of a release.
During the term of an Executive’s employment agreement and for a twelve-month period following a termination of employment during the
term of the agreement, each Executive is restricted from (i) engaging
59
in competitive activities, (ii) directly or indirectly soliciting current and certain former employees of Loral or any of its affiliates and
(iii) knowingly soliciting, directly or indirectly, any customers or suppliers within the twelve-month period prior to such termination of
employment to terminate or diminish their relationship with Loral or any of its affiliates. In addition, the Executives may not disclose
confidential information of Loral.
Loral Skynet and SS/ L guarantee the payment and performance obligations of Loral under the employment agreements for the Loral
Executives.
The above description of the Executives’ employment agreements is not intended to be complete and is qualified in its entirety by reference
to the full text of the agreements attached to this report as Exhibits 10.11 through 10.14.
Other Arrangements
Prior to 2005, the Company established a Supplemental Life Insurance Plan for certain key employees including Messrs. Zahler,
Townsend, DeWitt and Katz. For Messrs. Zahler, Townsend, DeWitt and Katz, the Plan is funded with “universal” life insurance policies with
death benefit amounts of $1,500,000, $1,000,000, $250,000 and $1,000,000, respectively.
Option Grants in Last Fiscal Year
In December 2005, Loral granted an aggregate of 1,390,452 stock options to all employees. The following table presents the number of
such options issued to the NEOs.
Individual Grants
Number of
Securities
Underlying
Options Granted
—
120,000 (b)(c)
85,000 (b)(c)
75,000 (b)(c)
50,000 (b)(c)
% of Total
Options
Granted to
Employees in Exercise or
Base Price
Fiscal Year
Expiration Date
—
8.63 %
6.11 %
5.39 %
3.60 %
—
—
$ 28.441
December 21, 2012
$ 28.441
December 21, 2012
$ 28.441
December 21, 2012
$ 28.441
December 21, 2012
Grant Date
Present Value $
(a)
—
$ 818,400
$ 579,700
$ 511,500
$ 341,000
Name
Bernard L. Schwartz
Eric J. Zahler
Richard J. Townsend
C. Patrick DeWitt
Avi Katz
(a) Option grant date present value is calculated using the Black-Scholes-Merton method assuming: (1) a risk-free rate of return of 4.4%; (2) a
48-month vesting schedule; (3) expected volatility of the market price of the common stock of 27%; (4) a seven-year option term; and
(5) an expected option life of 4.75 years. These assumptions are the same assumptions used to determine stock-based compensation
expense included in the Company’s financial statements for 2005.
(b) One-fourth of such options vests on November 21, 2006 and one-fourth of such options vest on each successive anniversary through
November 21, 2009.
(c) On December 21, 2005, a deferred compensation account was established for each individual crediting such accounts with an amount equal
to the number of options granted above multiplied by $9.441 (difference between $19.00 and the market value at December 21, 2005).
These deferred compensation awards vest according to the same vesting schedule for the options as described in footnote (b) above.
60
Option exercises and Year-End Value Table
There were no option exercises by the NEOs in 2005. The following table presents the year-end values of options held by the NEOs at the
end of 2005.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Name
Bernard L. Schwartz
Eric J. Zahler
Richard J. Townsend
C. Patrick DeWitt
Avi Katz
Pension Plan
Number of Securities
Underlying Unexercised
Options at Fiscal Year-End
Value of Unexercised In-the-
Money Options at Fiscal
Year-End
Exercisable
Unexercisable
Exercisable
Unexercisable
—
—
—
—
—
—
120,000
85,000
75,000
50,000
—
—
—
—
—
—
—
—
—
—
Loral maintains a defined benefit pension plan and trust (the “Pension Plan”) that is qualified under Section 401(a) of the Internal Revenue
Code. The Pension Plan provides retirement benefits for eligible employees of Loral and its operating affiliates, including executive officers.
Executive officers also participate in a supplemental executive retirement plan (the “SERP”) which provides supplemental retirement benefits
to cover certain reductions in retirement benefits under the Pension Plan that are caused by various limitations imposed by the Internal Revenue
Code. Loral recognizes all credited service, contributory service and compensation of Old Loral for purposes of these benefits. The benefit
formulas differ by operating affiliate. Compensation used in determining benefits under the Pension Plan and SERP includes annual salary and
bonus for executives employed by Loral and Loral Skynet and annual salary only for employees of SS/ L. Compensation is the same salary and
bonus as disclosed in the summary compensation table except for employees of SS/ L. For these employees, the salary on December 31 is
annualized and recognized as compensation for that year.
The benefit formula for executive officers employed by Loral, such as Messrs. Schwartz, Zahler, Townsend and Katz, for the period ending
December 31, 1996 will generally provide an annual benefit equal to the greater of (A) or (B), where (A) equals (i) 1.2% of compensation up to
the Social Security Wage Base and 1.45% of compensation in excess of the Social Security Wage Base for each year prior to the calendar year
in which a participant completes 15 years of employment, plus (ii) 1.5% of compensation up to the Social Security Wage Base and 1.75% of
compensation in excess of the Social Security Wage Base for the calendar year in which the participant has completed 15 years of employment
and for each year thereafter; and (B) equals (i) 1.2% of average annual compensation paid during 1992-1996 up to the 1996 Social Security
Wage Base and 1.45% of average annual compensation paid during 1992-1996 in excess of the 1996 Social Security Wage Base for each year
prior to the calendar year in which a participant completes 15 years of employment, plus (ii) 1.5% of average annual compensation paid during
1992-1996 up to the 1996 Social Security Wage Base and 1.75% of average annual compensation paid during 1992-1996 in excess of the 1996
Social Security Wage Base for the calendar year in which the participant has completed 15 years of employment and for each year thereafter.
The benefit for periods subsequent to December 31, 1996 will be based on (A) above. The estimated credited years of service through
December 31, 2005 for Messrs. Schwartz, Zahler, Townsend and Katz are 33.75, 13.75, 7.25 and 9.37, respectively.
For executive officers employed by SS/ L, such as Mr. DeWitt, the benefit formula for contributory service (in which a 1% post-tax
contribution is required) provides an annual benefit equal to 1.3% of the final five year average salary times years of contributory service plus
0.45% of final five year average salary over 150% of the Social Security Covered Compensation for each year up to 35 years. The benefit
formula for non-contributory service provides an annual benefit of $252 for each year of credited service. (See also the
61
explanation and table below.) The estimated credited years of contributory service through December 31, 2005 for Mr. DeWitt is 24. The
estimated credited years of non-contributory service through December 31, 2005 for Mr. DeWitt is 8.25 years. The following table illustrates
the amounts of annual retirement benefits that would be payable at normal retirement for executives who are employed by SS/ L. Benefits are
shown for various rates of final average salary, assuming that employee contributions were made for the periods indicated.
Final Average Salary
10
15
20
25
30
35
Years of Contributory Service
$100,000
125,000
150,000
175,000
200,000
225,000
250,000
275,000
300,000
350,000
400,000
450,000
500,000
$ 14,350 $ 21,530 $ 28,700 $ 35,880 $ 43,050 $ 50,230
65,540
80,850
96,160
111,480
126,790
142,100
157,410
172,730
203,350
233,980
264,600
295,230
37,450
46,200
54,950
63,700
72,450
81,200
89,950
98,700
116,200
133,700
151,200
168,700
28,090
34,650
41,210
47,780
54,340
60,900
67,460
74,030
87,150
100,280
113,400
126,530
46,810
57,750
68,690
79,630
90,560
101,500
112,440
123,380
145,250
167,130
189,000
210,880
56,180
69,300
82,430
95,550
108,680
121,800
134,930
148,050
174,300
200,550
226,800
253,050
18,730
23,100
27,480
31,850
36,230
40,600
44,980
49,350
58,100
66,850
75,600
84,350
The table above shows estimated benefits payable under the Plan and SERP including amounts attributable to employee contributions,
determined on a straight life annuity basis. Such estimated benefits shown have been offset by Social Security Covered Compensation.
Annual Benefits
Bernard L. Schwartz
Bernard L. Schwartz is a participant in the Pension Plan as well as the SERP. Effective April 1, 1997 and prior to March 1, 2004 (the
“Suspension Date”), under the minimum distribution rules prescribed by the Internal Revenue Code, Mr. Schwartz began receiving an annual
benefit under the Pension Plan and SERP of $2,165,700, determined on a joint and 50% survivor basis. Effective as of the Suspension Date,
benefits payable to Mr. Schwartz under the SERP were suspended, but his annual Pension Plan benefit of $166,633 continued. In connection
with the Plan of Reorganization, Mr. Schwartz and Loral agreed to amend the SERP to provide for a reduction of Mr. Schwartz’s benefit under
the SERP to $250,000 annually (the “Reduced Rate”). This amendment was effective as of the Suspension Date. Pursuant to this amendment,
the monthly annuity benefit payable to Mr. Schwartz under the SERP resumed at the Reduced Rate commencing on the first normal monthly
benefit payment date under the SERP following November 21, 2005, the date on which Loral emerged from Chapter 11 (the “Resumption
Date”). The first such monthly payment included a lump sum payment equal to the benefit amounts owed to Mr. Schwartz under the SERP at
the Reduced Rate from the Suspension Date through the Resumption Date. In addition, to the extent that, at the time of his death, Mr. Schwartz
has received $1.5 million or more in benefits under the SERP after the Suspension Date (the “Minimum Amount”), neither his estate nor his
beneficiaries will be entitled to any post-retirement death benefits or any other benefits under the SERP following Mr. Schwartz’s death. To the
extent that Mr. Schwartz has received less than the Minimum Amount from the Suspension Date through the date of his death, following his
death his beneficiaries shall be entitled to the post-retirement death benefits provided for under the SERP in an aggregate amount not to exceed
the excess of the Minimum Amount over the amount actually received by Mr. Schwartz from the Suspension Date through the date of his
death. This amendment relates solely to the participation of and benefits payable to Mr. Schwartz under the SERP and has no effect on the
participation of or benefits payable to any other participant under the SERP.
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As a Loral retiree, Mr. Schwartz is entitled to a death benefit under the Loral Retiree Life program. The amount of this benefit at
commencement is $686,000 with a 2% monthly reduction until the benefit value attains $382,295. He is eligible to participate in the Loral
Retiree Medical Plan.
Other Named Executive Officers
Messrs. Zahler, Townsend, Katz and DeWitt are participants in the SERP. The projected annual benefit under the Pension Plan and SERP
upon retirement is $547,474 for Mr. Zahler, $313,084 for Mr. Townsend, $277,384 for Mr. Katz and $197,280 for Mr. DeWitt. These projected
benefits have been computed assuming that (i) employment will be continued until normal retirement, (ii) current levels of creditable
compensation continue without increases or adjustments throughout the remainder of the computation period, (iii) Social Security Wage Base
increases with an assumed inflation rate, (iv) contributions will continue to be made toward a contributory benefit and (v) payments will be
made on a life annuity basis.
Director Compensation
All directors of New Loral receive an annual fee of $25,000. Directors, other than those who are employees or consultants of the Company,
receive a fee of $1,500 for each meeting attended in person and a fee of $1,000 for each telephonic meeting of at least 30 minutes in duration,
provided, however, that per meeting fees may be paid for telephonic meetings of less than 30 minutes in duration, if, in the discretion of the
Chairman of the Board, meaningful preparation was required in advance of the meeting. Directors, other than those who are employees or
consultants of the Company, receive an annual award of 2,000 shares of restricted stock, and the non-executive chairman receives an annual
award of 5,000 shares of restricted stock. The restricted stock awards will vest in one-half increments over two years. Directors who are not
otherwise employed full-time are also eligible to participate in our medical plan. Awards of restricted stock to the directors are subject to
stockholder approval at an annual or special meeting of stockholders to approve an amendment to our 2005 Stock Incentive Plan to increase the
number of shares available for grant thereunder.
Directors who serve on our Audit Committee, Compensation Committee and Nominating Committee receive an annual fee of $5,000,
$2,000 and $2,000, respectively, with the chairman of each of those committees receiving an annual fee of $15,000, $5,000 and $5,000,
respectively. Committee members also receive a fee of $1,000 for each meeting attended in person and a fee of $500 for each telephonic
meeting of at least 30 minutes in duration, provided, however, that per meeting fees may be paid for telephonic meetings of less than 30
minutes in duration, if, in the discretion of the Chairman of the Committee, meaningful preparation was required in advance of the meeting.
We also reimburse members of our Board of Directors for reasonable travel and other out-of -pocket expenses incurred in attending board
and committee meetings.
Board members of New Loral will be paid in 2006 for meetings held in 2005. Accordingly, Mr. Simon is entitled to a payment of $3,000,
Messrs. Harkey, Hodes and Targoff are each entitled to a payment of $2,500 and Dr. Rachesky and Messrs. Devabhaktuni, Goldstein and
Olmstead are each entitled to a payment of $2,000 with respect to their participation in board and committee meetings held in 2005. Also, in
connection with the Company’s emergence from chapter 11 on November 21, 2005 and Mr. Targoff’s election as non-executive Vice
Chairman of the Company on that date, Mr. Targoff was granted, on December 21, 2005, 106,952 seven-year options to purchase common
stock of the Company at an exercise price of $28.441 per share and a deferred compensation account having an initial value equal to $9.441
multiplied by the number of options granted. The terms and conditions of these options and the deferred compensation account are described
below in “Equity Compensation Plan Not Approved by Security Holders: 2005 Stock Incentive Plan.”
In 2005, Messrs. Hodes and Simon received $55,000 and $82,500, respectively, in fees for their service on the Board of Directors and
committees thereof of Old Loral. In addition, Mr. Hodes received life insurance and medical benefits in the amount of $45,671, of which
$42,404 was paid by Old Loral and $3,267 was paid by New Loral. In 2005, Mr. Simon received life insurance benefits from Old Loral in the
amount of $12,500.
63
Indemnification of Directors and Officers
Indemnification Agreements
As of November 21, 2005, the effective date of the Plan of Reorganization, Loral entered into Officers’ and Directors’ Indemnification
Agreements (each, an “Indemnification Agreement”) with the NEOs and other officers of Loral who entered into employment agreements with
Loral. In addition, Loral entered into Indemnification Agreements with each director of Loral as of the date such person became a director
(each officer and director with an Indemnification Agreement, an “Indemnitee”). The Indemnification Agreement requires Loral to indemnify
the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (as that term is
used in the Indemnification Agreement), except with regard to any Proceeding by or in the right of Loral to procure a judgment in its favor,
against all Expenses and Losses (as those terms are used in the Indemnification Agreement), including judgments, fines, penalties and amounts
paid in settlement, subject to certain conditions, actually and reasonably incurred in connection with such Proceeding, if the Indemnitee acted
in good faith for a purpose which he or she reasonably believed to be in or not opposed to the best interests of Loral. With regard to
Proceedings by or in the right of Loral, the Indemnification Agreement provides similar terms of indemnification; however no indemnification
will be made with respect to any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to Loral, unless a court
determines that the Indemnitee is entitled to indemnification for such portion of the Expenses as the court deems proper, all as detailed further
in the Indemnification Agreement. The Indemnification Agreement also requires Loral to indemnify an Indemnitee where the Indemnitee is
successful, on the merits or otherwise, in the defense of any claim, issue or matter therein, as well as in other circumstances delineated in the
Indemnification Agreement. The indemnification provided for by the Indemnification Agreement is subject to certain exclusions detailed
therein. SS/ L and Loral Skynet both guarantee the due and punctual payment of all of Loral’s obligations under the Indemnification
Agreement. This brief description of the Indemnification Agreement is not intended to be complete and is qualified in its entirety by reference
to the full text of the form of Indemnification Agreement attached as Exhibit 10.15 to this Form 10-K.
As of November 21, 2005, SS/ L entered into an Officers’ and Directors’ Indemnification Agreement with Mr. DeWitt, its President,
attached hereto as Exhibit 10.16 and incorporated by reference herein. The Indemnification Agreement for Mr. DeWitt is substantially identical
to the Indemnification Agreement entered into with the Loral officers and directors.
D&O Insurance
We have purchased insurance from various insurance companies insuring us against obligations we might incur as a result of our
indemnification of officers and directors for certain liabilities they might incur, and insuring such officers and directors for additional liabilities
for which they might not be indemnified by us. The cost to Loral for the annual insurance premiums covering the period ending November
2006 was approximately $1,548,000.
Compensation Committee Interlocks and Insider Participation
The Board of Directors has a standing Compensation Committee, consisting of Dr. Mark Rachesky, as Chairman, and Mr. Harkey. None of
the members of the Compensation Committee of the Company are present or former officers or employed by the Company or its subsidiaries.
Michael B. Targoff was a member of this committee between November 21, 2005 and March 1, 2006, when he resigned after becoming Chief
Executive Officer upon Mr. Schwartz’s retirement. Mr. Hodes was a member of the Compensation Committee prior to his resignation on
February 28, 2006. The members of the Compensation Committee of the Board of Directors of Old Loral were Donald H. Shapiro, as
Chairman, and Arthur L. Simon and Sally Minard. None of the members of the Compensation Committee of Old Loral were present or former
officers or employed by Old Loral or its subsidiaries.
64
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table shows, based upon filings made with the Company, certain information concerning persons who may be deemed
beneficial owners of 5% or more of the outstanding shares of Loral common stock because they possessed or shared voting or investment
power with respect to the shares of Loral common stock:
Name and Address
Various funds affiliated with MHR Fund Management LLC (2)
40 West 57th Street, 24th Floor, New York, NY 10019
MacKay Shields LLC (3)
9 West 57th Street, New York, NY 10019
EchoStar Communications Corporation and Charles W. Ergen (4)
9601 S. Meridian Blvd., Englewood, Colorado 80112
Amount and Nature of Beneficial
Ownership
Percent of
Class (1)
7,180,629
1,500,122
1,401,485
35.9 %
7.5%
7.0%
(1)
Percent of class refers to percentage of class beneficially owned as the term beneficial ownership is defined in Rule 13d-3 under the
Exchange Act and is based upon the 20,000,000 shares of Loral common stock issued pursuant to the Plan of Reorganization. An initial
distribution of 18,668,177 shares of Loral common stock occurred on December 7, 2005. The remaining balance of the 20,000,000 shares
will be distributed in accordance with the Plan of Reorganization upon resolution of disputed claims.
(2)
Information based on a Schedule 13D and Form 3, filed with the SEC on November 30, 2005 and November 22, 2005, respectively, relating
to securities held for the accounts of MHR Capital Partners (500) LP (1,040,153 shares), MHR Capital Partners (100) LP (138,927 shares),
MHR Institutional Partners II LP (“Institutional Partners II”) (958,132 shares), MHR Institutional Partners IIA, LP (2,413,827 shares), MHR
Institutional Partners, LP (2,119,585 shares), MHRA LP (205,073 shares) and MHRM LP (304,932 shares), each a Delaware limited
partnership. MHR Advisors LLC, MHR Institutional Advisors II LLC, MHR Institutional Advisors LLC and Institutional Partners II serve
as the general partner of one or more of the above-named partnerships and, accordingly, may be deemed to be the beneficial owner of
securities held by the partnerships. Similarly, Dr. Mark Rachesky may be deemed to be a beneficial owner of such securities because he is a
managing member of each of such general partner entities. According to the Schedule 13D, (i) each of the reporting persons has sole
dispositive and voting power with respect to the shares reported and (ii) the total number of shares of Loral common stock described therein
represent the number of shares of Loral common stock expected to be issued to the reporting persons pursuant to the Plan of Reorganization.
(3)
Information based solely on a Schedule 13G, filed with the SEC on January 11, 2005, by MacKay Shields LLC. MacKay Shields, an
investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is deemed to be the beneficial owner of such shares
as a result of its acting as investment adviser to various clients. According to the Schedule 13G, MacKay Shields has sole voting and
dispositive power with respect to all of the shares set forth in the table.
(4)
Information based solely on a Schedule 13G, filed with the SEC on December 19, 2005, by EchoStar Communications Corporation
(“EchoStar”) and Charles W. Ergen. The Schedule 13G provides that Mr. Ergen is the beneficial owner of 1,401,485 shares, of which
EchoStar owns 1,350,532 of such shares. According to the Schedule 13G, each reporting person has sole voting and dispositive power with
respect to the shares of common stock indicated to be held by such person.
65
The following table presents the number of shares of Loral common stock beneficially owned by the directors, the NEOs and all directors,
NEOs and all other executive officers as a group as of March 10, 2006. Individuals have sole voting and dispositve power over the stock unless
otherwise indicated in the footnotes:
Name of Individual
Bernard L. Schwartz
Patrick K. Brant
C. Patrick DeWitt
Sai S. Devabhaktuni
Hal Goldstein
John D. Harkey, Jr
Robert B. Hodes (3)
Avi Katz
Richard P. Mastoloni
Dean Olmstead
Mark H. Rachesky, M.D.
Harvey Rein
Arthur L. Simon
Michael B. Targoff
Richard J. Townsend
Eric J. Zahler
All directors, NEOS and other executive officers as a group (16 persons)
Amount and Nature of Beneficial
Ownership
Percent of
Class (2)
%
*
35.9%
*
*
72
7,180,629 (1)
72
35,961
7,216,734
36.1%
* Represents holdings of less than one percent.
(1)
Dr. Rachesky is deemed to be the beneficial owner of 7,180,629 shares of Loral common stock by virtue of his status as a managing
principal of various entities affiliated with funds that hold such shares. See discussion in Footnote 2 of the table above.
(2)
Percent of class refers to percentage of class beneficially owned as the term beneficial ownership is defined in Rule 13d-3 under the
Securities Exchange Act of 1934 and is based upon the 20,000,000 shares of Loral common stock issued pursuant to the Plan of
Reorganization. An initial distribution of 18,668,177 shares of Loral common stock occurred on December 7, 2005. The remaining balance
of the 20,000,000 shares will be distributed in accordance with the Plan of Reorganization upon resolution of disputed claims.
(3)
Mr. Hodes resigned from the Board of Directors effective February 28, 2006.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights (b)
Number of
securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
(c)
1,390,452
$28.441
0
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
1,390,452
$28.441
0
66
Equity Compensation Plan Not Approved by Security Holders: 2005 Stock Incentive Plan
On November 21, 2005, the Loral Space & Communications Inc. 2005 Stock Incentive Plan (the “Stock Incentive Plan”) became effective
pursuant to the Plan of Reorganization. The purpose of the Stock Incentive Plan is to attract, retain, motivate and reward employees, directors
and other service providers who are providing substantial services to Loral and to promote the creation of long-term value for stockholders of
Loral.
The Stock Incentive Plan allows for the grant of several forms of stock-based compensation awards including stock options, stock
appreciation rights, restricted stock, restricted stock units, stock bonuses and other stock-based awards (collectively, the “Awards”). The total
number of shares of Loral common stock reserved and available for delivery in connection with Awards under the Stock Incentive Plan is
1,390,452 shares; provided, however, that the number of shares available is subject to adjustment for recapitalization, merger and other similar
events. In addition, shares of Loral common stock that expire, are forfeited or canceled, or withheld in payment of the exercise price or taxes
relating to an Award, will again be available for Awards under the Stock Incentive Plan.
The Compensation Committee of Loral (the “Compensation Committee”) administers the Stock Incentive Plan. The Compensation
Committee may select persons to receive Awards, determine the type, size and terms of such Awards and determine the number of shares
covered by the Awards; provided, however, that in no event may options or stock appreciation rights be granted to any one individual in any
calendar year in excess of 500,000 shares. The Compensation Committee also has the authority to interpret and construe the Stock Incentive
Plan and any Award agreements and will make all other decisions necessary or advisable for the administration of the Stock Incentive Plan.
The Stock Incentive Plan provided for an automatic initial grant of options (the “Automatic Option Grant”) to purchase 1,390,452 shares of
Loral common stock to certain designated individuals on the date that was thirty (30) days following the date on which Loral emerged from
Chapter 11. Accordingly, on December 21, 2005 (the “Grant Date”), Loral granted options to purchase a total of 1,390,452 shares of Common
Stock to certain executives and employees and the Vice Chairman of the Board. Twenty-five percent (25%) of the Automatic Option Grant
vests on each of the first four anniversaries of the date on which Loral emerged from Chapter 11, subject to earlier vesting upon certain
corporate transactions, as discussed below, or upon a termination of employment without Cause or for Good Reason, each, as defined in the
Award holder’s employment agreement, if such Award holder is party to an employment agreement, and if not, as defined in the Stock
Incentive Plan. The Automatic Option Grant has an exercise price per share equal to $28.441 which was the fair market value of a share of
Loral common stock on the Grant Date determined pursuant to the Stock Incentive Plan. The Automatic Option Grant expires seven years
following the Grant Date, subject to earlier expiration, in accordance with the Stock Incentive Plan, following the Award holder’s termination
of employment.
If Loral undergoes a Change of Control (as defined in the Stock Incentive Plan), all outstanding Awards will become immediately vested
and exercisable, any restrictions on such Awards will lapse and all such Awards will become immediately payable or subject to settlement. In
the event of a Change in Control, the Compensation Committee may cancel any or all outstanding Awards in exchange for a cash payment to
each Award holder having a value equal to the value of each such Award at the time of such Change in Control (or without any payment in the
event that an outstanding Award has no value at the time of such Change in Control).
Following a sale of all or substantially all of the common stock or assets of Loral Skynet (a “Skynet Sale Event”) or SS/ L (a “SS/ L Sale
Event”), all outstanding Awards held by employees or service providers of Loral Skynet or SS/ L, as applicable, will become immediately
vested and exercisable, any restrictions on such Awards will lapse and all such Awards will become immediately payable or subject to
settlement. In addition, options held by employees or service providers of Loral Skynet or SS/ L, as applicable, will remain exercisable
following the sale for the shorter of (i) one year following the sale or (ii) the remaining term of the stock option as set forth in the applicable
Award Agreement. For employees of Loral assigned to Loral’s corporate headquarters, if the Skynet Sale Event or SS/ L Sale Event occurs on
or prior to the first anniversary of the
67
Effective Date, fifty percent (50%) of all outstanding unvested Awards held by such employees will become immediately vested and
exercisable, any restrictions on such Awards will lapse and all such Awards will become immediately payable or subject to settlement. If such
sale occurs after the first anniversary but on or prior to the second anniversary of the Effective Date, one-third ( 1/3) of all outstanding unvested
Awards held by employees of Loral assigned to Loral’s corporate headquarters will become immediately vested and exercisable, any
restrictions on such Awards will lapse and all such Awards will become immediately payable or subject to settlement.
The Board of Directors may amend the Stock Incentive Plan at any time, provided, that any such amendment may not increase the
maximum number of shares of Loral common stock that may be issued (other than as a result of an adjustment for recapitalization, merger, and
other similar events) without shareholder approval. Additionally, amendments may not impair the rights of any Award holder without such
Award holder’s written consent. The Stock Incentive Plan will terminate on the day before the tenth anniversary of the date the plan was
adopted by the Board of Directors; however, the Stock Incentive Plan will continue to be administered with respect to outstanding Awards until
all such Awards have been fully exercised, paid or otherwise expire by their terms.
The Stock Incentive Plan provided that if the fair market value of a share of Loral common stock on the Grant Date is greater than $19, an
individual selected to receive an Automatic Option Grant would receive an additional deferred compensation award in an amount equal to
(i) the difference between the fair market value of a share of Loral common stock on the Grant Date and $19, multiplied by (ii) the number of
shares of Loral common stock underlying such individual’s Automatic Option Grant. Accordingly, on December 21, 2005, concurrently with
the Automatic Option Grant, the Company established deferred compensation bookkeeping accounts on behalf of each Award holder and
credited to such accounts $9.441 multiplied by the number of shares of Loral common stock underlying such Award holder’s Automatic Option
Grant.
In March 2006, we adopted an amendment to the Stock Incentive Plan to increase by 825,000 the number of shares available for grant
thereunder and to increase to 1,000,000 the number of shares that may be granted to any one employee during any calendar year. This
amendment is subject to stockholder approval at an annual or special meeting of our stockholders.
The description of the Stock Incentive Plan is not intended to be complete and is qualified in its entirety by reference to the full text of the
Stock Incentive Plan and Form of Non-Qualified Stock Option Agreement under the Stock Incentive Plan for Senior Management attached as
Exhibits 10.19 and 10.20, respectively, to this Form 10-K.
Item 13. Certain Relationships and Related Transactions
K&F Industries, Inc.
In 2005, we provided administrative and certain other services to K&F Industries, Inc. (“K&F”), a subsidiary of K&F Industries Holdings,
Inc., and a company of which Bernard L. Schwartz was Chairman of the Board. K&F paid us a fee based on the cost of such services plus out
of pocket expenses. For the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, we billed K&F $12,000
and $146,000, respectively.
In addition, K&F charged us $44,000 and $108,000 for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to
October 1, 2005, respectively, for certain expenses and services.
MHR Fund Management LLC
Pursuant to the Plan of Reorganization, on November 21, 2005, Loral and Loral Skynet entered into a registration rights agreement with
seven affiliated funds of MHR Fund Management LLC (“MHR”). Pursuant to the Plan of Reorganization, each holder of an Allowed Claim, as
that term is used in the Plan of Reorganization, that receives a distribution pursuant to the plan of ten percent (10%) or greater of any of
(i) Loral common stock, (ii) Loral Skynet preferred stock or (iii) Loral Skynet notes (collectively, the “Registrable Securities”) is entitled to
receive certain registration rights under the registration rights
68
agreement (each such holder, and any future holder of such securities who becomes a party to the registration rights agreement, a “Registration
Rights Holder”). Pursuant to the registration rights agreement, in addition to certain piggy-back registration rights granted to the Registration
Rights Holders, certain Registration Rights Holders may also demand, under certain circumstances, that the Registrable Securities be registered
under the Securities Act of 1933, as amended, in each case subject to the terms and conditions of the registration rights agreement. This
description of the registration rights agreement is not intended to be complete and is qualified in its entirety by reference to the full text of the
agreement attached as Exhibit 10.5 to this Form 10-K.
Pursuant to the Plan of Reorganization, holders of certain claims at Loral Orion, Inc. were entitled to subscribe for up to $120 million of
Loral Skynet notes. MHR and P. Schoenfeld Asset Management LLC agreed to backstop 95% and 5%, respectively, of the rights offering, in
consideration of a $6 million fee, paid in additional Loral Skynet notes, as well as reimbursement of certain related costs and expenses. In
connection with this backstop agreement, MHR received $5.7 million principal amount of Loral Skynet notes for its backstop commitment.
We have reimbursed fees and out-of-pocket expenses incurred by legal counsel to MHR in connection with our reorganization.
Dr. Rachesky and Mr. Goldstein are co-founders and managing principals of MHR. Mr. Devabhaktuni is also a managing principal of
MHR. Dr. Rachesky, Mr. Goldstein and Mr. Devabhaktuni are directors of Loral.
Other Relationships
During 2005, we incurred $176,000 of expenses paid or payable to companies associated with Mr. Schwartz in connection with our use of
his corporate jet.
Robert B. Hodes, a director and a member of the Compensation Committee until his resignation from the Board of Directors on
February 28, 2006, is counsel to the law firm of Willkie Farr & Gallagher LLP, which acts as counsel to us.
For the year ended December 31, 2005, we paid fees and disbursements in the amount of approximately $91,000 for corporate
communications consultations and related services to Kekst & Company Incorporated, of which company Gershon Kekst is President and
principal stockholder. Prior to November 21, 2005, Mr. Kekst was a director of Old Loral.
Item 14. Principal Accountant Fees and Services
During 2005 and 2004, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, the “Deloitte Entities”) billed or expected to bill the amounts listed below for each category of professional services rendered to
us:
Audit Fees (a)
Audit Related Fees (b)
Tax Consultation Fees
All Other Fees (c)
Total
2005
2004
$ 6,258,000
75,900
194,000
380,000
$3,366,000
352,000
167,000
574,000
$ 6,907,900
$4,459,000
(a) Includes professional services rendered for the audit of our annual consolidated financial statements for the fiscal years ended
December 31, 2005 and 2004, for the reviews of the condensed consolidated financial statements included in our Quarterly Reports on
Form 10-Q for the 2005 and 2004 fiscal years, stand-alone and statutory audits of our subsidiaries and accounting research and
consultation related to the audits and reviews.
(b) Relates primarily to research and consultation on a transfer of interest transaction and various other filings with the Securities and
Exchange Commission.
(c) Relates primarily to our Chapter 11 filing and related filings and activities.
69
In accordance with the Audit Committee’s charter, the Audit Committee pre-approves all services provided by the Deloitte Entities and
subsequently approves all fees charged for such services. These services are pre-approved annually and updates are provided on a regular basis.
All services provided by and fees paid to the Deloitte Entities were approved by the Audit Committee. Fees for 2005 and 2004 included fees
related to the audit of management’s assessment of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley
Act of 2002.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
Index to Financial Statements and Financial Statement Schedule
Loral Space & Communications Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 (Successor Registrant) and 2004 (Predecessor
Registrant)
Consolidated Statements of Operations for the period October 2, 2005 to December 31, 2005 (Successor
Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003
(Predecessor Registrant)
Consolidated Statements of Shareholders’ (Deficit) Equity for the period October 2, 2005 to December 31,
2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31,
2004 and 2003 (Predecessor Registrant)
Consolidated Statements of Cash Flows for the period October 2, 2005 to December 31, 2005 (Successor
Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003
(Predecessor Registrant)
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Schedule I
Schedule II
70
F-1
F-2
F-4
F-5
F-6
F-7
F-8
F-69
F-73
Exhibit
Number
2 .1
2 .2
3 .1
3 .2
10 .1
10 .2
10 .3
10 .4
10 .5
10 .6
10 .7
10 .8
10 .9
10 .10
10 .11
10 .12
INDEX TO EXHIBITS
Description
Debtors’ Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated June 3,
2005(1)
Modification to Debtors’ Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code
dated August 1, 2005(2)
Restated Certificate of Incorporation of Loral Space & Communications Inc. dated November 21, 2005(3)
Loral Space & Communications Inc. Amended and Restated Bylaws dated November 21, 2005(3)
Restated Certificate of Incorporation of Loral Skynet Corporation dated November 21, 2005(3)
Indenture in respect of Loral Skynet Corporation’s 14% Senior Secured Cash/ PIK Notes Due 2015 dated
November 21, 2005(3)
Security Agreement in respect of Loral Skynet Corporation’s 14% Senior Secured Cash/ PIK Notes due 2015
dated November 21, 2005(3)
Hong Kong Security Agreement in respect of Loral Skynet Corporation’s 14% Senior Secured Cash/ PIK Notes
due 2015 dated November 21, 2005(3)
Registration Rights Agreement among Loral Space & Communications Inc., Loral Skynet Corporation, MHR
Capital Partners (500) LP, MHR Capital Partners (100) LP, MHR Institutional Partners II LP, MHR Institutional
Partners LP, MHR Institutional Partner III LP, MHR Institutional Partner IIA LP, MHRM LP and MHRA LP
dated November 21, 2005(3)
Lease Agreement by and between Loral Asia Pacific Satellite (HK) Limited and APT Satellite Company Limited
dated as of August 18, 1999(4)
Consent Agreement among the United States Department of State, Loral Space & Communications Ltd. and Space
Systems/ Loral, Inc. dated January 9, 2002(5)
Form of Conformed as Amended Apstar V Satellite Agreement between APT Satellite company Limited and
Loral Orion, Inc. dated as of November 16, 2003(6)
Employment Agreement between Loral Space & Communications Inc. and Bernard L. Schwartz dated
November 21, 2005(3)‡
Employment Agreement between Loral Space & Communications Inc. and Michael B. Targoff dated March 28,
2006†‡
Employment Agreement between Loral Space & Communications Inc. and Eric J. Zahler dated November 21,
2005†‡
Employment Agreement between Loral Space & Communications Inc. and Richard J. Townsend dated
November 21, 2005†‡
10 .13
Employment Agreement between Loral Space & Communications Inc. and Avi Katz dated November 21, 2005†‡
10 .14
Employment Agreement between Space Systems/ Loral, Inc. and C. Patrick DeWitt dated November 21, 2005(3)‡
10 .15
10 .16
10 .17
10 .18
Form of Officers’ and Directors’ Indemnification Agreement between Loral Space & Communications Inc. and
Loral Executives(3)‡
Officers’ and Directors’ Indemnification Agreement between Space/ Systems Loral, Inc. and C. Patrick DeWitt
dated November 21, 2005(3)‡
Space Systems/ Loral, Inc. Supplemental Executive Retirement Plan dated January 7, 2003†‡
Amendment to the Space Systems/ Loral, Inc. Supplemental Executive Retirement Plan dated November 21, 2005
(3)‡
10 .19
Loral Space & Communications Inc. 2005 Stock Incentive Plan(3)‡
10 .20
Form of Non-Qualified Stock Option Agreement under Loral Space & Communications Inc. 2005 Stock Incentive
Plan for Senior Management(3)‡
71
Exhibit
Number
10 .21
10 .22
Description
Non-Qualified Stock Option Agreement under Loral Space & Communications Inc. 2005 Stock Incentive Plan for
Michael B. Targoff dated March 28, 2006†‡
$20,000,000 Amended and Restated Letter of Credit Reimbursement Agreement between Space Systems/ Loral,
Inc. and JP Morgan Chase Bank, N.A. dated November 21, 2005(3)
10 .23
Amended and Restated Cash Collateral Agreement dated November 21, 2005(3)
12 .1
14 .1
21 .1
31 .1
31 .2
32 .1
32 .2
Statement Re: Computation of Ratios†
Code of Conduct(3)
List of Subsidiaries of the Registrant†
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the
Sarbanes-Oxley Act of 2002†
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the
Sarbanes-Oxley Act of 2002†
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002†
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002†
(1) Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 8, 2005.
(2) Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 5, 2005.
(3) Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 23, 2005.
(4) Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 23, 1999.
(5) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 9, 2002.
(6) Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
†
‡ Management compensation plan.
Filed herewith.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
Dated: March 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Vice Chairman of the Board and Chief Executive
Officer
March 28,
2006
/s/ MARK H. RACHESKY, M.D.
Director, Non-Executive Chairman of the Board
Mark H. Rachesky, M.D.
/s/ SAI S. DEVABHAKTUNI
Sai S. Devabhaktuni
/s/ HAL GOLDSTEIN
Hal Goldstein
/s/ JOHN D. HARKEY, JR.
John D. Harkey, Jr.
/s/ DEAN OLMSTEAD
Dean Olmstead
/s/ ARTHUR L. SIMON
Arthur L. Simon
/s/ RICHARD J. TOWNSEND
Richard J. Townsend
/s/ HARVEY B. REIN
Harvey B. Rein
Director
Director
Director
Director
Director
March 28,
2006
March 28,
2006
March 28,
2006
March 28,
2006
March 28,
2006
March 28,
2006
Executive Vice President and CFO (Principal
Financial Officer)
March 28,
2006
Vice President and Controller (Principal
Accounting Officer)
March 28,
2006
73
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Loral Space & Communications Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 (Successor Registrant) and 2004 (Predecessor Registrant)
Consolidated Statements of Operations for the period October 2, 2005 to December 31, 2005 (Successor Registrant),
January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant)
Consolidated Statements of Shareholders’ (Deficit) Equity for the period October 2, 2005 to December 31, 2005 (Successor
Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor
Registrant)
Consolidated Statements of Cash Flows for the period October 2, 2005 to December 31, 2005 (Successor Registrant),
January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant)
Notes to Consolidated Financial Statements
Schedule I
Schedule II
F-1
F-2
F-4
F-5
F-6
F-7
F-8
F-69
F-73
To the Shareholders of Loral Space & Communications Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Loral Space & Communications Inc. and its subsidiaries (collectively,
the “Company”) as of December 31, 2005 (Successor Registrant balance sheet) and 2004 (Predecessor Registrant balance sheet), and the
related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the period from October 2, 2005 to
December 31, 2005 (Successor Registrant operations), the period from January 1, 2005 to October 1, 2005 and for each of the two years in the
period ended December 31, 2004 (Predecessor Registrant operations). Our audits also included the financial statement schedules listed in the
Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Successor Registrant consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2005, and the results of its operations and its cash flows for the period from October 2,
2005 to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Further, in our
opinion, the Predecessor Registrant consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Predecessor Registrant as of December 31, 2004, and the results of its operations and its cash flows for the period from
January 1, 2005 to October 1, 2005 and for each of the two years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 28, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over
financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, the Company emerged from bankruptcy on November 21, 2005. In
connection with its emergence, the Company adopted fresh-start reporting pursuant to American Institute of Certified Public Accountants
Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, as of October 1, 2005. As a result,
the consolidated financial statements of the Successor Registrant are presented on a different basis than those of the Predecessor Registrant and,
therefore, are not comparable.
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for stock-based
compensation to adopt the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, effective October 1,
2005.
As discussed in Note 5 to the consolidated financial statements, in March 2004 the Company completed the sale of its North American
satellites and related assets. The Company has classified the related operations as discontinued operations in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
F-2
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for its convertible
redeemable preferred stock to adopt the provisions of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, effective July 1, 2003.
/s/ DELOITTE & TOUCHE LLP
New York, NY
March 28, 2006
F-3
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
Successor
Registrant
December 31,
2005
Predecessor
Registrant
December 31,
2004
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Contracts-in-process
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Long-term receivables
Investments in and advances to affiliates
Deposits
Goodwill
Other assets
Total assets
$
$
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Accrued employment costs
Customer advances and billings in excess of costs and profits
Deferred gain on sale of assets (Note 5)
Income taxes payable
Accrued interest and preferred dividends
Other current liabilities
Total current liabilities
Pension and other postretirement liabilities (Note 17)
Long-term debt
Long-term liabilities
Liabilities subject to compromise (Note 11)
Total liabilities
Minority interest (Note 15)
Commitments and contingencies (Notes 2, 8, 9, 11, 17, 18 and 19)
Shareholders’ equity (deficit):
Common stock, $.10 par value; 125,000,000 shares authorized, 44,125,202 shares
issued and outstanding at December 31, 2004
Common stock, $.01 par value; 40,000,000 shares authorized, 20,000,000 shares issued
and outstanding at December 31, 2005
Paid-in capital
Treasury stock, at cost; 17,420 shares at December 31, 2004
Unearned compensation
Retained deficit
Accumulated other comprehensive income (loss)
Total shareholders’ equity (deficit)
Total liabilities and shareholders’ equity (deficit)
See notes to consolidated financial statements
F-4
$
$
$
$
$
275,796
59,347
73,584
51,871
31,066
491,664
520,503
48,155
104,616
9,840
340,094
164,105
1,678,977
72,594
35,277
172,995
—
2,177
4,881
32,324
320,248
237,948
128,191
165,426
—
851,813
200,000
147,773
12,132
19,040
37,412
21,096
237,453
798,908
74,851
49,181
9,832
—
48,508
1,218,733
33,248
34,385
164,981
10,545
2,359
—
16,639
262,157
942
—
81,355
1,916,000
2,260,454
2,380
—
4,413
200
642,210
—
—
(15,261 )
15
627,164
1,678,977
$
—
3,392,825
(3,360 )
(87)
(4,348,231 )
(89,661 )
(1,044,101 )
1,218,733
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenues from satellite services
Revenues from sales-type lease arrangement — satellite services (Note 8)
Revenues from satellite manufacturing
Total revenues
Cost of satellite services
Cost of sales-type lease arrangement — satellite services (Note 8)
Cost of satellite manufacturing
Selling, general and administrative expenses
Loss from continuing operations before reorganization expenses due to bankruptcy
Reorganization expenses due to bankruptcy
Operating loss from continuing operations
Gain on discharge of pre-petition obligations and fresh-start adjustments
Interest and investment income
Interest expense (contractual interest was $36,610 for the period ended October 1, 2005
and $46,451 and $34,020 for the years ended December 31, 2004 and 2003,
respectively (Note 12))
Other income (expense)
Gain on investments
(Loss) income from continuing operations before income taxes, equity (losses) income
in affiliates and minority interest
Income tax (provision) benefit
(Loss) income from continuing operations before equity income (losses) in affiliates
and minority interest
Equity (losses) income in affiliates
Minority interest
(Loss) income from continuing operations
(Loss) income from discontinued operations, net of taxes
Gain on sale of discontinued operations, net of taxes (Note 5)
(Loss) income before cumulative effect of change in accounting principle and
extraordinary gain on acquisition of minority interest
Cumulative effect of change in accounting principle (Note 3)
Extraordinary gain on acquisition of minority interest
Net (loss) income
Preferred dividends
Net (loss) income applicable to common shareholders
Basic and diluted (loss) earnings per share (Note 16):
Continuing operations
Discontinued operations
(Loss) income before cumulative effect of change in accounting principle and
extraordinary gain on acquisition of minority interest
Cumulative effect of change in accounting principle
Extraordinary gain on acquisition of minority interest
(Loss) earnings per share
Weighted average shares outstanding:
Basic and diluted
$
$
$
$
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
36,096
—
161,069
197,165
26,386
—
138,882
36,842
(4,945 )
—
(4,945 )
—
4,128
(4,408 )
(170 )
—
(5,395 )
(1,752 )
(7,147 )
(5,447 )
(2,667 )
(15,261 )
—
—
(15,261 )
—
—
(15,261 )
—
(15,261 )
(0.76 )
—
(0.76 )
—
—
(0.76 )
$
$
$
$
Predecessor Registrant
Years Ended
December 31,
For the Period
January 1,
2005 to
October 1,
2005
110,596
—
318,587
429,183
94,169
—
291,454
79,419
(35,859 )
(31,236)
(67,095 )
1,101,453
6,438
2004
$ 135,319
87,200
299,608
522,127
189,330
79,543
318,295
118,848
(183,889 )
(30,456 )
(214,345 )
—
9,953
(17,214 )
(931 )
—
(2,947 )
(513 )
—
1,022,651
10,901
(207,852 )
(13,284 )
1,033,552
(2,796 )
126
1,030,882
—
13,967
1,044,849
—
—
1,044,849
—
1,044,849
(221,136 )
46,654
135
(174,347 )
(2,348 )
—
(176,695 )
—
—
(176,695 )
—
$ (176,695 )
23.37
0.32
$
(3.96 )
(0.05 )
23.69
—
—
23.69
(4.01 )
—
—
(4.01 )
$
2003
147,156
—
244,887
392,043
191,989
—
422,091
141,552
(363,589 )
(25,284 )
(388,873 )
—
15,203
(14,080 )
1,495
17,900
(368,355 )
6,330
(362,025 )
(51,153 )
20
(413,158 )
18,803
—
(394,355 )
(1,970 )
13,615
(382,710 )
(6,719 )
(389,429 )
(9.58 )
0.43
(9.15 )
(0.05 )
0.31
(8.89 )
$
$
$
$
20,000
44,108
44,108
43,819
See notes to consolidated financial statements.
F-5
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
(in thousands, except per share amounts)
6% Series C&D
Convertible
Redeemable Preferred
Stock
Common Stock
Shares
Issued
Amount
Shares
Issued
Amount
Paid-In
Capital
Unearned
Treasury Compen-
Stock
sation
Accumulated
Other
Total
Comprehensive Shareholders’
Retained
Deficit
Income
(Loss)
(Deficit)
Equity
4,479
$ 95,296
42,926 $ 4,293 $ 3,389,035 $ (3,360 ) $
(151 ) $ (3,782,107 ) $
(57,233 ) $
(354,227 )
1,167
117
3,880
30
2
3
(109 )
(4,479 )
(95,296 )
75
(92 )
(42 )
92
(27 )
—
—
44,125
4,413 3,392,829
(3,360 )
(168 )
(4,171,536 )
(77,848 )
(6,719 )
(382,710 )
(20,615 )
81
(4 )
(176,695 )
(11,813 )
—
—
44,125
4,413 3,392,825
(3,360 )
(87 )
(4,348,231 )
(89,661 )
60
1,044,849
3,997
3
(109 )
(95,296 )
75
(42 )
—
(27 )
(6,719 )
(403,325 )
(855,670 )
81
(4 )
(188,508 )
(1,044,101 )
60
(808)
1,044,041
(44,125 )
(4,413 )
4,413
20,000
200
642,068
—
—
20,000
(3,397,238 )
642,068
200
3,360
—
27
—
3,303,382
—
90,469
—
(15,261 )
15
142
642,210 $
— $ — $
(15,261 ) $
15 $
—
642,268
—
642,268
(15,246 )
142
627,164
Predecessor Registrant
Balance, January 1, 2003
Shares issued:
Employee savings plan
Restricted stock option
exercise
Reverse stock split
Reclassification of preferred
stock on adoption of
SFAS 150
Amortization of unearned
compensation
Costs associated with
conversion of preferred stock
to common stock
Restricted stock grant
Unearned compensation on
grants to non-employees,
including mark-to-market
adjustment
Preferred dividends $3.00 per
share
Net loss
Other comprehensive loss
Comprehensive loss
Balance, December 31, 2003
Amortization of unearned
compensation
Cost associated with conversion
of preferred stock to common
stock
Net loss
Other comprehensive loss
Comprehensive loss
Balance, December 31, 2004
Amortization of unearned
compensation
Net income
Other comprehensive loss
Comprehensive income
Cancellation of Predecessor
Registrant common stock
Issuance of common stock to
creditors
Fresh-start adjustment
Balance, October 1, 2005
Successor Registrant
Net loss
Other comprehensive loss
Comprehensive loss
Amortization of stock option
compensation
Balance, December 31, 2005
—
$
—
20,000 $ 200 $
See notes to consolidated financial statements.
F-6
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Successor
Registrant
Predecessor Registrant
For the Period
October 2, 2005 to
December 31, 2005
For the Period
January 1, 2005 to
October 1, 2005
Years ended
December 31,
2004
2003
$
(15,261 )
$
1,044,849
$ (176,695)
$ (382,710)
Operating activities:
Net (loss) income
Non-cash items:
Gain on discharge of pre-petition obligations and fresh-start adjustments
Gain on sale of discontinued operations, net of tax, (Note 5)
(Income) loss from discontinued operations, net of taxes
Cumulative effect of change in accounting principle
Extraordinary gain on acquisition of minority interest
Equity losses (income) in affiliates
Minority interest
Deferred taxes
Depreciation and amortization
Write-off of long-term receivables due to contract modifications
Impairment charge on satellite and related assets
Profit on sales-type lease arrangement (Note 8)
Provisions for inventory obsolescence
Valuation allowance on vendor financing receivables
Warranty accruals
Loss on cancellation of deposits
Loss on acceleration of receipt of long-term receivables
Charge on conversion of sales arrangement to lease arrangement (Note 8)
Accrual for Alcatel settlement
(Recoveries of) provisions for bad debts on billed receivables
Adjustment to revenue straightlining assessment
Loss on equipment disposals
Gain on investments
Non cash net interest and (gain) loss on foreign currency transactions
Changes in operating assets and liabilities:
Accounts receivable, net
Contracts-in-process
Inventories
Long-term receivables
Deposits
Other current assets and other assets
Accounts payable
Accrued expenses and other current liabilities
Customer advances
Income taxes payable
Pension and other postretirement liabilities
Long-term liabilities
Other
Net cash (used in) provided by operating activities of continuing operations
Net cash provided by operating activities of discontinued operations
Net cash (used in) provided by operating activities
Investing activities:
Capital expenditures for continuing operations
(Increase) decrease in restricted cash restricted
Insurance proceeds received
Proceeds from the sale of investments
Investments in and advances to affiliates
Net cash (used in) provided by investing activities of continuing operations
Proceeds from the sale of assets, net of expenses (Note 5)
Capital expenditures for discontinued operations
Net cash provided by (used in) investing activities of discontinued operations
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from Skynet Notes
Repayments of term loans
Repayments of revolving credit facilities
Borrowings under revolving credit facilities
Interest payments on 10% senior notes
Repayments of export-import facility
Proceeds from other stock issuances
Payment of bank amendment costs
Net cash provided by (used in) financing activities of continuing operations
Net cash provided by financing activities of discontinued operations
Net cash provided by (used in) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents — beginning of period
Cash and cash equivalents — end of period
—
—
—
—
—
5,447
2,667
—
16,024
—
—
—
1,525
—
2,704
—
—
—
—
953
46
—
—
—
1,855
42,459
(7,899 )
(13,833 )
(35 )
(9,914 )
(13,250 )
(64,039 )
5,739
1,389
3,077
335
1,480
(38,531 )
—
(38,531 )
(4,972 )
(54 )
—
—
(63 )
(5,089 )
—
—
—
(5,089 )
120,763
—
—
—
—
—
—
—
120,763
—
120,763
77,143
198,653
275,796
(1,101,453 )
(13,967 )
—
—
—
2,796
(126 )
(16,134 )
61,277
—
—
—
2,127
—
11,850
—
—
—
—
(2,880 )
1,031
3,456
—
693
557
(76,464 )
(10,212 )
(22,361 )
—
11,981
(1,285 )
21,573
(62,212 )
3,079
(3,650 )
1,844
(196 )
(143,827 )
—
(143,827 )
(4,649 )
1,566
205,000
—
(7,354 )
194,563
144
—
144
194,707
—
—
—
—
—
—
—
—
—
—
—
50,880
147,773
198,653
2,348
—
—
(46,654 )
(135 )
12,153
134,796
11,265
11,989
(7,657 )
3,324
—
9,692
—
—
—
—
(2,144 )
1,149
394
—
(2,808 )
10,423
29,082
1,720
2,911
—
7,533
1,755
(948 )
35,249
(2,814 )
10,503
(7,080 )
216
39,567
26,562
66,129
(24,786 )
(5,049 )
—
—
(5,712 )
(35,547 )
953,619
(11,185 )
942,434
906,887
—
(576,500 )
(390,387 )
—
—
—
—
—
(966,887 )
—
(966,887 )
6,129
141,644
$ 147,773
(18,803 )
1,970
(13,615 )
51,153
(20 )
(7,321 )
134,663
20,177
—
—
49,546
10,008
2,200
23,500
10,893
10,098
8,000
7,221
9,034
4,804
(17,900 )
4,887
(1,478 )
33,988
3,731
60,774
25,750
35,930
41,148
1,139
38,632
1,847
13,245
(11,927 )
501
151,065
81,588
232,653
(115,362)
(7,628 )
—
45,908
(19,200 )
(96,282 )
—
(61,202 )
(61,202 )
(157,484)
—
(32,500 )
—
71,387
(30,635 )
(6,434)
3,852
(5,131)
539
—
539
75,708
65,936
$ 141,644
$
$
See notes to consolidated financial statements
F-7
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Principal Business
Loral Space & Communications Inc. (“New Loral”) together with its subsidiaries is a leading satellite communications company with
substantial activities in satellite-based communications services and satellite manufacturing. New Loral was formed to succeed the business
conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal
bankruptcy laws on November 21, 2005 (the “Effective Date”).
We adopted fresh-start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7, Financial Reporting of
Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”). Accordingly, our financial information disclosed under the heading
“Successor Registrant” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not
comparable to, our financial information disclosed under the heading “Predecessor Registrant” for the period ended and as of October 1, 2005
(the date we adopted fresh-start accounting) or for prior periods.
The terms, “Loral,” the “Company,” “we,” “our” and “us,” when used in this report with respect to the period prior to our emergence, are
references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New Loral. These
references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context otherwise requires.
Loral is organized into two operating segments:
Satellite Services, conducted by our subsidiary Loral Skynet Corporation (“Loral Skynet”), generates its revenues and cash flows from
leasing satellite capacity on its four-satellite fleet to commercial and governmental customers for video and direct to home (“DTH”)
broadcasting, high-speed data distribution, Internet access and communications, as well as providing satellite-based networking services. It also
provides professional services to other satellite operators including satellite construction oversight and fleet operating services.
Satellite Manufacturing, conducted by our subsidiary, Space Systems/ Loral, Inc. (“SS/ L”), generates its revenues and cash flows from
designing and manufacturing satellites, space systems and space system components for commercial and government customers whose
applications include fixed satellite services, DTH broadcasting, broadband data distribution, wireless telephony, digital radio, military
communications, weather monitoring and air traffic management.
2. Bankruptcy Filings and Reorganization
Bankruptcy Filings
On July 15, 2003, Old Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Old Loral, the “Debtors”),
including Loral Space & Communications Holdings Corporation (formerly known as Loral Space & Communications Corporation), Loral
SpaceCom Corporation (“Loral SpaceCom”), SS/ L and Loral Orion, Inc. (now known as Loral Skynet Corporation), filed voluntary petitions
for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court
for the Southern District of New York (the “Bankruptcy Court”) (Lead Case No. 03-41710 (RDD), Case Nos. 03-41709 (RDD) through 03-
41728 (RDD)) (the “Chapter 11 Cases”). Also on July 15, 2003, Old Loral and one of its Bermuda subsidiaries (the “Bermuda Group”) filed
parallel insolvency proceedings in the Supreme Court of Bermuda (the “Bermuda Court”), and, on that date, the Bermuda Court entered an
order appointing certain partners of KPMG as Joint Provisional Liquidators (“JPLs”) in respect of the Bermuda Group (see Basis of
Presentation Note 3).
As a result of our voluntary petitions for reorganization, all of our prepetition debt obligations were accelerated (see below and Note 11).
On July 15, 2003, we also suspended interest payments on all of our
F-8
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
prepetition unsecured debt obligations. A creditors’ committee (the “Creditors’ Committee”) was appointed in the Chapter 11 Cases to
represent all unsecured creditors, including all debt holders. On March 29, 2005, the United States Trustee for the Southern District of New
York appointed an official committee of equity security holders (the “Equity Committee”) (as amended on April 7, 2005 and April 11, 2005).
In accordance with the provisions of the Bankruptcy Code, both the Creditors’ Committee and the Equity Committee had the right to be heard
on all matters that came before the Bankruptcy Court.
Reorganization
The Debtors emerged from Chapter 11 on November 21, 2005 pursuant to the terms of their fourth amended joint plan of reorganization, as
modified (the “Plan of Reorganization”). The Plan of Reorganization had previously been confirmed by order (the “Confirmation Order”) of
the Bankruptcy Court entered on August 1, 2005.
Pursuant to the Plan of Reorganization:
• The business and operations of Old Loral have been transferred to New Loral, and Loral Skynet and SS/ L have
emerged intact as separate subsidiaries of reorganized Loral.
• Our new common stock has been listed on NASDAQ under the symbol “LORL.”
• SS/ L has emerged debt-free.
• The initial distributions to creditors of Old Loral and its subsidiaries have been completed in accordance with the
Plan of Reorganization as follows:
• All holders of allowed claims against SS/ L and Loral SpaceCom have been, or will be paid in cash in full,
including interest from the petition date to the Effective Date.
• 20 million shares of New Loral common stock were issued to our distribution agent on the Effective Date,
18.7 million of which have been distributed to creditors.
• $200 million of Loral Skynet preferred stock was issued to our distribution agent on the Effective Date,
$197.4 million of which has been distributed to creditors.
• The remaining undistributed shares of New Loral common stock and Loral Skynet preferred stock have been
reserved to cover disputed claims and will be distributed quarterly in accordance with the Plan of
Reorganization upon resolutions of those claims.
• Pursuant to a rights offering, Loral Skynet issued on the Effective Date, $126 million of senior secured notes
(the “Loral Skynet Notes”, see Note 12) to certain creditors who subscribed for the notes and to certain creditors
who committed to purchase any unsubscribed notes (i.e., “backstopped” the offering).
• Old Loral will be liquidated; the common and preferred stock of Old Loral were cancelled on the Effective
Date, and no distribution was made to the holders of such stock.
Old Loral shareholders acting on behalf of the self-styled Loral Stockholders Protective Committee (“LSPC”) have filed appeals seeking to
revoke the Confirmation Order, to overturn the Bankruptcy Court’s denial of the LSPC’s motion to compel Old Loral to hold a shareholders’
meeting and to rescind the approval of the Federal Communications Commission (“FCC”) of the transfer of our FCC licenses from Old Loral
to New Loral (the “Appeals”). We believe that the Appeals are completely without merit and will not have any effect on the completed
reorganization. For further details about the Appeals see Note 19.
F-9
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Basis of Presentation
Loral has a December 31 year end. The consolidated financial statements for the periods October 2, 2005 to December 31, 2005 and
January 1, 2005 to October 1, 2005, and for each of the two years in the period ended December 31, 2004, include the results of Loral and its
subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany
transactions have been eliminated. References in these consolidated financial statements to the Predecessor Registrant refer to Loral until
October 1, 2005 and references to the Successor Registrant refer to Loral after October 1, 2005 and after giving effect to the adoption of fresh-
start accounting.
The accompanying consolidated financial statements for the Predecessor Registrant have been prepared in accordance with SOP 90-7 and
on a going concern basis, which contemplates continuing operations, realization of assets and liquidation of liabilities in the ordinary course of
business. SOP 90-7 requires us to distinguish prepetition liabilities subject to compromise from postpetition liabilities in our consolidated
balance sheets. The caption “liabilities subject to compromise” reflects the carrying value of prepetition claims that were restructured in our
Chapter 11 Cases. In addition, the consolidated statements of operations of the Predecessor Registrant portray our results of operations during
the Chapter 11 proceedings. As a result, any revenue, expenses, realized gains and losses, and provision for losses resulting directly from the
reorganization and restructuring of the organization are reported separately as reorganization items, except those required to be reported as
discontinued operations and extraordinary items in conformity with Statement of Financial Accounting Standards (“SFAS”) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) and SFAS No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). We did not prepare combining financial statements
for Loral and its Debtor Subsidiaries, since the subsidiaries that did not file voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code were immaterial to our consolidated financial statements.
As noted above, we emerged from bankruptcy on November 21, 2005 and pursuant to SOP 90-7, we adopted fresh-start accounting as of
October 1, 2005. We engaged an independent appraisal firm to assist us in determining the fair value of our assets and liabilities. Upon
emergence, our reorganization enterprise value as determined by the Bankruptcy Court was approximately $970 million, which after reduction
for the fair value of the Loral Skynet Notes and Series A Preferred Stock (see Notes 12 and 15), results in a reorganization equity value of
approximately $642 million. This reorganization enterprise value was allocated to our assets and liabilities (see Note 4). Our assets and
liabilities were stated at fair value in accordance with SFAS No. 141, Business Combinations (“SFAS 141”). In addition, our accumulated
deficit was eliminated, and our new debt and equity were recorded in accordance with distributions pursuant to the Plan of Reorganization.
Investments in XTAR, L.L.C. (“XTAR”), as well as other affiliates, are accounted for using the equity method, due to our inability to
control significant operating decisions. Income and losses of affiliates are recorded based on our beneficial interest. Intercompany profit arising
from transactions with affiliates is eliminated to the extent of our beneficial interest. Advances to affiliates generally consist of amounts due
under extended payment terms. 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 obligations exist. We capitalize interest cost on our investments, until such entities
commence commercial operations. Capitalized interest on investments is amortized over the life of the primary asset of the affiliate. Certain of
our affiliates are subject to the risks associated with new businesses (see Note 9).
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
F-10
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported for the period. Actual
results could differ from estimates.
Most of our satellite manufacturing revenue is associated with long-term contracts which require significant estimates. These estimates
include forecasts of costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the
potential for component obsolescence in connection with long-term procurements. Significant estimates also include the estimated useful lives
of our satellites.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. As of
December 31, 2005, we had $276 million of available cash and $12 million of restricted cash ($2 million included in other current assets and
$10 million included in other assets on our consolidated balance sheet). As of December 31, 2004, we had $148 million of available cash and
$13 million of restricted cash ($1 million included in other current assets and $12 million included in other assets on our consolidated balance
sheet).
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, foreign
exchange contracts, contracts-in-process, long-term receivables and advances and loans to affiliates (see Note 9). Our cash and cash equivalents
are maintained with high-credit-quality financial institutions. Historically, our customers have been primarily large multinational corporations
and U.S. and foreign governments for which the creditworthiness was generally substantial. In recent years, we have added commercial
customers which include companies in emerging markets or the development stage, some of which are highly leveraged or partially funded.
Management believes that its credit evaluation, approval and monitoring processes combined with negotiated billing arrangements mitigate
potential credit risks with regard to our current customer base.
Receivables
As of December 31, 2005 and 2004, billed receivables (including accounts receivable) were reduced by an allowance for doubtful accounts
of $5.5 million and $6.4 million, respectively.
Inventories
Inventories consist principally of parts and subassemblies used in the manufacture of satellites which have not been specifically identified
to contracts-in-process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost
method. As of December 31, 2005 and 2004, inventory was reduced by an allowance for obsolescence of $33.7 million and $34.0 million,
respectively.
Property, Plant and Equipment
As of October 1, 2005, we adopted fresh-start accounting and our property, plant and equipment were recorded at their fair values based
upon the appraised values of such assets. We used the work of an independent appraisal firm to assist us in determining the fair value of our
property, plant and equipment. We and the independent appraiser determined the fair value of our property, plant and equipment using the
planned future use of each asset or group of assets, quoted market prices for assets where a market exists for such assets, the expected future
revenue and profitability of the business unit utilizing such assets and the expected future life of such assets. In our determination of fair value,
we also considered whether an asset would be sold either individually or with other assets and the proceeds we expected to receive from such a
sale.
F-11
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumptions relating to the expected future use of individual assets could affect the fair value of such assets and the depreciation expense
recorded related to such assets in the future. Depreciation is provided on the straight-line method for satellites and related equipment over the
estimated useful lives of the related assets. Depreciation is provided primarily on an accelerated method and straight line for other owned assets
over the estimated useful life of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated
useful life of the improvements. Below are the estimated useful lives of our property, plant and equipment as of December 31, 2005:
Land improvements
Buildings
Leasehold improvements
Satellites-in-orbit
Earth stations
Equipment, furniture and fixtures
Years
20
25 to 45
5 to 25
5 to 13
5 to 15
3 to 20
Costs incurred in connection with the construction and successful deployment of Loral Skynet satellites and related equipment are
capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch and in-orbit test insurance and construction
period interest. Capitalized interest related to the construction of satellites for 2005, 2004 and 2003 was zero, $0.5 million and $12.9 million,
respectively. All capitalized satellite costs are amortized over the estimated useful life of the related satellite. The estimated useful life of the
satellites was determined by engineering analyses performed at the satellite’s in-service date. Satellite lives are reevaluated periodically. Losses
from unsuccessful launches and in-orbit failures of our satellites, net of insurance proceeds (so long as such amounts are determinable and
receipt is probable), are recorded in the period a loss occurs (see Valuation of Satellites, Long-Lived Assets and Investments in and Advances
to Affiliates below).
Valuation of Satellites, Long-Lived Assets and Investments in and Advances to Affiliates
The carrying value of our satellites, long-lived assets and investments in and advances to affiliates is reviewed for impairment in
accordance with SFAS 144 and Accounting Principles Board (“APB”) Opinion No. 18, Equity Method of Accounting for Investments in
Common Stock , respectively. We periodically evaluate potential impairment loss relating to our satellites and other long-lived assets, when a
change in circumstances occurs, by assessing whether the carrying amount of these assets can be recovered over their remaining lives through
future undiscounted expected cash flows generated by those assets (excluding financing costs). If the expected undiscounted future cash flows
were less than the carrying value of the long-lived asset, an impairment charge would be recorded based on such asset’s estimated fair value.
Changes in estimates of future cash flows could result in a write-down of the asset in a future period. Estimated future cash flows from our
satellites could be impacted by, among other things:
• Changes in estimates of the useful life of the satellite
• Changes in estimates of our ability to operate the satellite at expected levels
• Changes in the manner in which the satellite is to be used
• The loss of one or several significant customer contracts on the satellite
If an impairment loss was indicated for a satellite, such amount would be recognized in the period of occurrence, net of any insurance
proceeds to be received so long as such amounts are determinable and receipt is probable. If no impairment loss was indicated in accordance
with SFAS 144, and we received insurance proceeds, the proceeds would be recognized in our consolidated statement of operations.
F-12
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deposits
Deposits primarily represent prepaid amounts on satellite launch vehicles.
Investments
Investments in publicly traded common stock are classified as available-for-sale, and are recorded at fair value, with the resulting
unrealized gain or loss excluded from net loss and reported as a component of other comprehensive loss until realized (see Notes 6 and 18).
Our Predecessor Registrant’s investment in Globalstar, L.P.’s $500 million credit facility was accounted for at fair value, with changes in the
value (net of tax) recorded as a component of other comprehensive loss (see Note 9).
On March 7, 2003, Sirius Satellite Radio, Inc. (“Sirius”) completed its recapitalization plan and as part of this recapitalization, SS/L
converted its entire vendor financing receivables of approximately $76 million into 59 million shares of common stock of Sirius. For the year
ended December 31, 2003, SS/L realized net proceeds of $46 million from the sale of all of the shares of Sirius common stock that it received
in the recapitalization, and realized gains on such sales of $18 million. In the first quarter of 2003, SS/L recorded a charge on the vendor
financing receivables due from Sirius of $10 million, representing the difference between the carrying value of SS/L’s receivables of
$38 million, and the value of the common shares received by SS/L based on the trading price of Sirius’s common stock on March 7, 2003 of
$28 million.
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the Company’s reorganization equity value exceeded the fair value of its tangible assets and
identified intangible assets less its liabilities allocated in accordance with the provisions of SFAS 141, as of October 1, 2005. Pursuant to the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill is not amortized and is subject to an annual
impairment test which the Company performs on an annual basis in the fourth quarter of each fiscal year. Our test of goodwill impairment for
2005 did not result in any goodwill impairment. Goodwill was allocated to our reporting unit level (operating segment or one level below an
operating segment). SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis
to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded
to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value (see Note 4).
Intangible assets consist primarily of backlog, internally developed software and technology, orbital slots, trade names and customer
relationships, all of which were recorded in connection with the adoption of fresh-start accounting. We used the work of an independent
appraiser to assist us in determining the fair value of our intangible assets. The fair values were calculated using several approaches that
encompassed the use of excess earnings, relief from royalty and the build-up methods. The excess earnings, relief from royalty and build-up
approaches are variations of the income approach. The income approach, more commonly known as the discounted cash flow approach,
estimates fair value based on the cash flows that an asset can be expected to generate over its useful life. Identifiable intangible assets with
finite useful lives are amortized on a straight-line basis over the estimated useful lives of the assets.
Revenue Recognition
Revenue from satellite sales under long-term fixed-price contracts is recognized following the provisions of Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts , using the cost-to-cost percentage-of-completion
method. Revenue includes the basic contract price and estimated amounts for penalties and incentive payments, including award fees,
performance incentives, and estimated orbital incentives discounted to their present value at launch date. Costs include the
F-13
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
development effort required for the production of high-technology satellites, non-recurring engineering and design efforts in early periods of
contract performance, as well as the cost of qualification testing requirements. Contracts are typically subject to termination for convenience or
for default. If a contract is terminated for convenience by a customer or due to a customer’s default, we are generally entitled to our costs
incurred plus a reasonable profit.
Revenue under cost-reimbursable type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the
contract term.
U.S. government contract risks include dependence on future appropriations and administrative allotment of funds and changes in
government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will
not have a material effect on Loral’s financial position or its results of operations.
Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that
require the revision become known and are estimable. In accordance with industry practice, contracts-in-process include unbilled amounts
relating to contracts and programs with long production cycles, a portion of which may not be billable within one year.
We provide satellite capacity and network services under lease agreements that generally provide for the use of satellite transponders and,
in certain cases, earth stations and other terrestrial communications equipment for periods generally ranging from one year to the end of life of
the satellite. Some of these agreements have certain obligations, including providing spare or substitute capacity, if available, in the event of
satellite failure. If no spare or substitute capacity is available, the agreement may be terminated. Revenue under transponder lease and network
services agreements is recognized as services are performed, provided that a contract exists, the price is fixed or determinable and collectibility
is reasonably assured. Revenues under contracts that include fixed lease payment increases are recognized on a straight-line basis over the life
of the lease.
Lease contracts qualifying for capital lease treatment are accounted for as sales-type leases.
Other terrestrial communications equipment represents network elements (antennas, transmission equipment, etc.) necessary to enable
communication between multiple terrestrial locations through a customer-selected satellite communications service provider. Revenue from
equipment sales is primarily recognized upon acceptance by the customer, provided that a contract exists, the price is fixed or determinable and
collectibility is reasonably assured. Revenue from equipment sales under long-term fixed price contracts is recognized using the cost-to-cost
percentage-of-completion method. Losses on contracts are recognized when determined and revisions in profit estimates are reflected in the
period in which the conditions that require the revision become known and are estimable. Revenues under arrangements that include both
services and equipment elements are allocated based on the relative fair values of the elements of the arrangement; otherwise, revenue is
recognized as services are provided over the life of the arrangement.
Research and Development
Independent research and development costs, which are expensed as incurred, were $7 million and $5 million for the periods January 1,
2005 to October 1, 2005 and from October 2, 2005 to December 31, 2005, respectively, and $9 million and $9 million for 2004 and 2003,
respectively, and are included in selling, general and administrative expenses.
Foreign Exchange Contracts
We enter into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable
under contracts-in-process which are denominated in foreign currencies. We
F-14
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
follow SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) as amended by SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities , which among other things requires that all derivative instruments be
recorded on the balance sheet at their fair value.
Stock-Based Compensation
Effective October 1, 2005, in connection with our adoption of fresh-start accounting, we adopted the fair value method of accounting for
stock options for all options granted by us after October 1, 2005 pursuant to the prospective method provisions of SFAS No. 123(R), Share-
Based Payment (“SFAS 123R”). We use the Black-Scholes-Merton option-pricing model to measure fair value of these stock option awards.
This is the same method we used in prior years for disclosure purposes. The Black-Scholes-Merton model requires us to make significant
judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption, the
expected life of the option award, the risk-free rate of return and dividends during the expected term. We emerged from bankruptcy on
November 21, 2005, and as a result, we do not have sufficient stock price history upon which to base our volatility assumption. In determining
the volatility used in our model, we considered the volatility of the stock prices of selected companies in the satellite industry, the nature of
those companies, our emergence from bankruptcy and other factors in determining our stock price volatility. For 2005, we used a stock price
volatility assumption of 27%. We based our estimate of the average life of a stock option of 4.75 years using the midpoint between the vesting
and expiration dates as allowed by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, based upon the vesting period of 4 years and
the option term of seven years. Our risk-free rate of return assumption for options granted in 2005 of 4.4% was based on the quoted yield for
five-year U.S. treasury bonds as of the date of grant (see Note 15). We assumed no dividends during the expected term.
Prior to October 1, 2005, we followed the disclosure-only provisions of SFAS No. 148, Accounting for Stock-Based Compensation —
Transition and Disclosure (“SFAS 148”) an amendment of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). We
accounted for stock-based compensation for employees using the intrinsic value method (as defined below) as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under APB 25, no
compensation expense was recognized for employee share option grants because the exercise price of the options granted equaled the market
price of the underlying shares on the date of grant (the “intrinsic value method”). We used the Black-Scholes-Merton option pricing model to
determine the pro forma effect with the following weighted average assumptions in our calculations: expected life, six to twelve months
following vesting; stock volatility, 90%; risk free interest rate, 2.4% to 6.6% based on date of grant; and dividends, none during the expected
term. Our calculations were based on a multiple option valuation approach and forfeitures were recognized as they occurred. The following
table summarizes what our pro
F-15
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
forma net loss and pro forma loss per share would have been if we used the fair value method under SFAS 123 (in millions, except per share
amounts):
Predecessor Registrant
Reported income (loss) from continuing operations
Less: Total stock based employee benefit (compensation) determined under the fair
$
1,030.9
For the Period
January 1,
2005 to
October 1,
2005
Years Ended
December 31,
2004
$ (174.3 )
2003
(413.2 )
$
value method for all awards
Pro forma income (loss) from continuing operations
(Loss) income from discontinued operations, net of taxes
Gain on sale of discontinued operations, net of taxes
Pro forma net income (loss) before cumulative effect of change in accounting principle
and extraordinary gain on acquisition of minority interest
Cumulative effect of change in accounting principle
Extraordinary gain on acquisition of minority interest
Pro forma net income (loss)
Preferred dividends
Pro forma net income (loss) applicable to common shareholders
Reported basic and diluted income (loss) per share from continuing operations
Pro forma basic and diluted income (loss) per share from continuing operations
Reported basic and diluted income (loss) per share before cumulative effect of change
in accounting principle and extraordinary gain on acquisition of minority interest
Pro forma basic and diluted income (loss) per share before cumulative effect of change
in accounting principle and extraordinary gain on acquisition of minority interest
Reported income (loss) per share applicable to common shareholders
Pro forma income (loss) per share applicable to common shareholders
$
$
—
1,030.9
—
14.0
(0.6)
(174.9 )
(2.3)
—
1,044.9
—
—
1,044.9
—
1,044.9
23.37
23.37
(177.2 )
—
—
(177.2 )
—
$ (177.2 )
$ (3.96 )
(3.97 )
23.69
(4.01 )
23.69
23.69
23.69
(4.02 )
(4.01 )
(4.02 )
7.6
(405.6 )
18.8
—
(386.8 )
(2.0)
13.6
(375.2 )
(6.7)
(381.9 )
(9.58 )
(9.41 )
(9.15 )
(8.98 )
(8.89 )
(8.72 )
$
$
The Plan of Reorganization did not provide for participation or recovery by Old Loral common shareholders and, accordingly, Old Loral
stock options had no value to the employees. The fair values of stock-based employee compensation above were calculated based on the
relative values of the options at the date of grant. These stock options were cancelled upon our emergence in accordance with our Plan of
Reorganization.
Deferred Compensation
Pursuant to the Plan of Reorganization we entered into deferred compensation arrangements for certain key employees that vest generally
over four years and expire after seven years. The initial deferred compensation awards were calculated by multiplying $9.44 by the number of
stock options granted to these key employees (see Note 15). We are accreting the liability by charges to income over the vesting period. The
deferred compensation cost charged against income, net of estimated forfeitures, was $0.2 million for the period October 2, 2005 to
December 31, 2005. As of December 31, 2005, there was an additional $6.6 million
F-16
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of unrecognized deferred compensation (not including an additional $5.8 million for which recognition of the awards were delayed to 2006)
that will be charged to income over the remaining vesting period. The value of the deferred compensation fluctuates depending on stock price
performance, within a defined range, and vesting will accelerate if there is a change of control as defined.
Extraordinary Gain on Acquisition of Minority Interest
On June 30, 2003, Loral entered into a master settlement agreement with Alcatel Space and Alcatel Space Industries (collectively,
“Alcatel”) which resolved all claims among the parties. In connection with that agreement, Loral, among other things, acquired Alcatel’s
minority interest in CyberStar, resulting in the recognition in the second quarter of 2003 of an extraordinary gain of $14 million, which
represents the extinguishment of the minority interest liability less the fair value of the acquired net assets.
Income Taxes
Deferred income taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for
financial and income tax reporting and are measured by applying statutory tax rates in effect for the year during which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it is more likely than not that the deferred tax assets
will not be realized (see Note 14).
In addition, our policy is to establish tax contingency liabilities for potential audit issues. The tax contingency liabilities are based on our
estimate of the probable amount of additional taxes that may be due in the future. Any additional taxes due would be determined only upon
completion of current and future federal, state and international tax audits. At December 31, 2005, the Company had $41.8 million and
$0.4 million of tax contingency liabilities included in long-term liabilities and income taxes payable, respectively. At December 31, 2004, the
Company had $38.9 million of tax contingency liabilities included in liabilities subject to compromise.
F-17
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional Cash Flow Information
The following represents non-cash activities and supplemental information to the consolidated statements of cash flows (in thousands):
Non-cash activities:
Minimum pension liability adjustment
Unrealized gains (losses) on available-for-sale securities, net
of taxes
Unrealized net losses on derivatives, net of taxes
Increase in restricted cash related to debt proceeds
Insurance proceeds receivable recorded for satellite loss and
warranty obligations
Accrual of preferred dividends
Supplemental information:
Interest paid, net of capitalized interest
Taxes paid, net of refunds
Cash (paid) received for reorganization items:
Professional fees
Employee retention costs
Severance costs
Restructuring costs
Interest income
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
Years Ended
December 31,
2004
2003
$
$
$
$
$
$
$
$
$
$
$
—
$ (19,049 )
$
(4,526 )
(99 )
(487 )
98,736
$ 8,142
$ (1,046 )
$ (16,815 )
(244 )
$
$ 122,770
6,719
$
—
2,166
$ 23,550
$ 4,318
$ 83,062
1,342
$
(17,533 )
—
—
(55 )
2,536
$ (18,745 )
$ (6,468 )
$ (1,722 )
$
$
(7,598 )
(2,680 )
$ 1,740
$
708
$
$
$
$
15,548
(418 )
(9,650 )
(4,790 )
During 2004 and 2003, the Company included increases in restricted cash of $5,049,000 and $7,628,000, respectively, as part of net cash
flows from operating activities instead of net cash flows from investing activities. As a result of this reclassification, net cash provided by
operating activities changed from $61,080,000 (as reported) to $66,129,000 (as revised), during 2004, and from $225,025,000 (as reported) to
$232,653,000 (as revised), during 2003. Additionally, net cash provided by (used in) investing activities changed from $911,936,000 (as
reported) to $906,877,000 (as revised), during 2004, and from $(149,856,000) (as reported) to $(157,484,000) (as revised), during 2003. These
changes were not considered to be material to the Company’s consolidated statement of cash flows.
F-18
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
New Accounting Pronouncements
FSP 13-1
In October 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS 13-1 (“FSP 13-1”), Accounting for
Rental Costs Incurred during a Construction Period, which requires rental costs associated with land or building operating leases that are
incurred during a construction period to be recognized as rental expense. We were required to adopt the Staff Position upon the adoption of
fresh-start accounting requirements under SOP 90-7. The adoption of FSP 13-1 had no impact on our consolidated financial statements.
FIN 47
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”). FIN 47
provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. FIN 47
requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be
reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. We were required to adopt FIN 47 upon the adoption of fresh-start accounting requirements under SOP 90-7. The
adoption of FIN 47 had no impact on our consolidated financial statements.
SFAS 154
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, (“SFAS 154”) a replacement of APB Opinion
No. 20 and FASB Statement No. 3. This statement changes the requirements for the accounting and reporting of a change in accounting
principle. It requires retrospective application to prior periods’ financial statements of changes in accounting principles as opposed to
recognizing the change in the period of adoption as a cumulative effect of a change in accounting principle, as previously required. We were
required to adopt this statement upon the adoption of fresh-start accounting requirements under SOP-97. We were not required to apply
SFAS 154 retrospectively since we were exempt under the fresh-start accounting requirements. The adoption of SFAS 154 had no impact on
our consolidated financial statements.
SFAS 153
In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, (“SFAS 153”) an amendment of Accounting
Principles Board No. 29 (“APB No. 29”). It eliminates the exception from fair value measurement for nonmonetary exchanges of similar
productive asset in paragraph 21(b) of APB No. 29 and replaces it with an exception for exchanges that do not have commercial substance.
This statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of this statement were effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS 153 had no impact on our consolidated financial statements.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is
within the scope as a liability (or an asset in some circumstances) because that financial instrument
F-19
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
embodies an obligation of the issuer. As a result of our adoption of SFAS 150 on July 1, 2003, we reclassified our redeemable convertible
preferred stock to liabilities and increased the recorded values to their redemption values (with an offsetting increase to other assets) and
recorded a cumulative effect of accounting change of $2 million during the third quarter of 2003, which represents the amortization of expenses
incurred on the issuance of the securities from their issuance dates through June 30, 2003, that were not previously amortized.
SFAS 151
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, (“SFAS 151”) an amendment of Accounting Research
Bulletin No. 43, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criteria of “so abnormal”. In
addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. We were required to adopt the provisions of this statement upon the adoption of fresh-start accounting requirements under
SOP-97. The adoption of SFAS 151 had no impact on our consolidated financial statements.
FSP 109-1
In December 2004, the FASB staff issued FASB Staff Position No. FAS 109-1 (“FSP 109-1”), Accounting for Income Taxes to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (the “Job Creation Act”). The Job Creation
Act replaced the export incentives of the extraterritorial income exclusion provision with a tax deduction for income from qualified domestic
production activities. FSP 109-1 provides guidance on accounting for the impact of this tax deduction. Since we are projecting a net tax loss for
2005, we expect no benefit from this deduction in the current year.
4.
Fresh-Start Accounting
On August 1, 2005, the Bankruptcy Court entered its Confirmation Order confirming the Company’s Plan of Reorganization. On
September 30, 2005, the FCC approved the transfer of FCC licenses from Old Loral to New Loral, which represented the satisfaction of the last
material condition precedent to the Debtors’ emergence from bankruptcy. Our emergence from Chapter 11 proceedings on November 21, 2005
resulted in a new reporting entity and adoption of fresh-start accounting in accordance with SOP 90-7 as of October 1, 2005, as reflected in the
following financial information. Reorganization adjustments have been made in the financial information to reflect the discharge of certain pre-
petition liabilities and the adoption of fresh-start accounting. These adjustments are based upon the work of Loral and our financial consultants
to determine the relative fair values of our assets and liabilities. The allocation of the reorganization enterprise value to individual assets and
liabilities may change based upon completion of the fair valuation process, as additional information becomes available, and may result in
differences to the fresh-start adjustments presented in this financial information. The Company expects to finalize this allocation in the first half
of 2006.
F-20
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATED BALANCE SHEET (a)
Plan
Reorganization
Adjustments
Fresh-Start
Valuation
Adjustments (e)
Successor
October 1,
2005
(in millions)
Current assets:
Cash and cash equivalents
Accounts receivable, net
Contracts-in-process
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Long-term receivables
Investments in and advances to affiliates
Deposits
Goodwill
Other assets
Predecessor
October 1,
2005
ASSETS
$
198.7
14.4
91.4
45.5
41.3
391.3
536.5
67.6
53.7
9.8
—
42.1
$ 1,101.0
$
$
—
—
—
—
97.5 (b)
97.5
(3.5 ) (i)
—
—
—
—
2.1(b)(j)
96.1
$
$
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable
Accrued employment costs
Customer advances and billings in excess of costs and
$
36.1
33.9
$
45.1 (c)(h)
0.5(c)
$
profits
Interest payable
Vendor financing payable
Income taxes payable
Other current liabilities
Total current liabilities
Pension and other postretirement liabilities
Long-term liabilities
Long-term debt
Total liabilities
Liabilities subject to compromise
Minority interest
Shareholders’ equity:
Common stock, par value $.01 and Paid-in capital
Other
Retained (deficit) earnings
Total shareholders’ (deficit) equity
108.4
—
—
—
25.5
203.9
—
84.5
—
288.4
1,914.0
2.3
3,397.2
(93.8 )
(4,407.1 )
(1,103.7 )
$ 1,101.0
24.9 (c)(h)
19.1 (c)(h)
37.1 (c)(h)
0.8(c)
17.9 (c)(h)
145.4
156.6 (c)
34.6 (c)
103.4 (b)
440.0
(1,914.0 ) (c)
200.0 (b)
642.3 (d)
—
727.8 (c)(d)
1,370.1
96.1
$
$
—
—
(14.3 )
—
3.4
(10.9 )
0.2
(23.8 )
56.3
—
340.1 (g)
126.7
488.6
$
198.7
14.4
77.1
45.5
142.2
477.9
533.2
43.8
110.0
9.8
340.1
170.9
$ 1,685.7
1.2
—
(3.2 )
—
—
—
(1.7 )
(3.7 )
78.2
40.5
—
115.0
—
(2.3 )
$
82.4
34.4
130.1
19.1
37.1
0.8
41.7
345.6
234.8
159.6
103.4
843.4
—
200.0
(3,397.2 ) (f)
93.8 (f)
3,679.3(f)
375.9
488.6
642.3
—
—
642.3
$ 1,685.7
(a) The Condensed Consolidated Balance Sheet reflects a reorganization enterprise value of $970 million based on the Bankruptcy Court’s determination (see Note 2), which,
after reduction for the fair value of the Loral Skynet Notes and Series A Preferred
F-21
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock (see Notes 12 and 15), results in a reorganization equity value of approximately $642 million. This results in goodwill equal to the excess of reorganization equity value
over fair value of identifiable net assets.
(b) Reflects $98.7 million of proceeds from the rights offering of Loral Skynet Notes held in escrow as of October 1, 2005, and the related deferred debt issuance costs of
$4.7 million and $200 million of Loral Skynet Preferred Stock pursuant to the Plan of Reorganization (see Notes 12 and 15).
(c) Reflects the discharge of prepetition liabilities in accordance with the Plan of Reorganization and the reclassification of the remaining liabilities subject to compromise to the
appropriate liability accounts in accordance with the Plan of Reorganization. Discharge of Loral’s pre-petition liabilities is summarized as follows (in millions):
To be exchanged for stock
To be cancelled
To be reinstated and/or paid in cash
$
$
1,298.0
292.2
323.8
1,914.0
Additionally, in accordance with the Plan of Reorganization, holders of claims to be paid in cash were paid interest at the rate of 6% per annum for the period from the petition
date to the Effective Date of the Plan of Reorganization. This interest of $13.2 million was recorded as interest expense for the period ended October 1, 2005.
(d) Reflects the issuance of New Loral common stock to pre-petition creditors and the gain on the discharge of liabilities subject to compromise.
(e) Reflects changes to carrying values of assets and liabilities to reflect estimated fair values.
(f) Reflects the revaluation gain and the elimination of the retained deficit and other equity balances.
(g) Reflects goodwill equal to the excess of reorganization equity value over the estimated fair value of identifiable net assets.
(h) Amounts payable upon emergence are included in current liabilities.
(i) Reflects agreement to return certain fixed assets in settlement of certain pre-petition obligations.
(j) Reflects elimination of deferred charges related to the Old Loral debt and preferred stock, which were discharged in accordance with the Plan of Reorganization.
As a result of the above we recognized the following (in millions);
Gain on discharge of pre-petition obligations
Gain on fresh-start valuation adjustments
Total gain on discharge of pre-petition obligations and fresh-start adjustments
Add interest expense to holders of claims paid in cash
Less tax benefit on Plan of Reorganization and fresh-start valuation adjustments
Total gain on discharge of pre-petition obligations and fresh-start adjustments excluding interest expense and income tax benefit
$
$
727.8
375.9
1,103.7
13.2
(15.4 )
1,101.5
5. Discontinued Operations
On March 17, 2004, we consummated the sale of our North American satellites and related assets to certain affiliates of Intelsat, Ltd. and
Intelsat (Bermuda), Ltd. (collectively, “Intelsat”). At closing, we received approximately $1.011 billion, consisting of approximately
$961 million for the North American satellites and related assets, after adjustments, and $50 million for an advance on a new satellite to be
built for Intelsat by SS/ L. We used a significant portion of the funds received to repay all $967 million of our outstanding secured bank debt.
In addition, after closing, we received approximately $16 million from Intelsat to reimburse us for a deposit made for the launch of Intelsat
Americas 8 (Telstar 8), and we received an additional $4 million in May 2004 as a purchase price adjustment resulting from resolution of a
regulatory issue. The operating revenues and expenses of these assets and a portion of interest expense on our secured debt through March 18,
2004 have been classified as discontinued operations under SFAS 144 for all periods presented. As a result of the resolution of the
contingencies primarily relating to the completion of the Intelsat Americas 8 (Telstar 8) satellite, which was successfully launched on June 23,
2005, we have recognized on
F-22
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
our statement of operations the previously deferred gain on the sale of $11.4 million, net of taxes of $4.3 million, during the quarter ended
June 30, 2005. The tax provision on the gain was reduced by $2.6 million in the quarter ended September 30, 2005, as a result of finalization of
our 2004 tax returns, resulting in a net gain recorded of $14.0 million.
The following table summarizes certain statement of operations data for the discontinued operations. In 2004, the operating results of the
discontinued operations are for the period from January 1, 2004 to March 17, 2004, the date of the sale. The 2004 results include the write-off
of approximately $11 million of debt issuance costs to interest expense relating to secured bank debt that we repaid in March 2004 and
$9 million of operating income due to an insurance claim received with respect to a satellite that was sold. For the purposes of this presentation,
in accordance with SFAS 144, continuing operations includes all indirect costs normally associated with these operations, including telemetry,
tracking and control, access control, maintenance and engineering, selling and marketing, and general and administrative.
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
Years Ended
December 31,
2004
(in thousands)
Revenues of discontinued operations
Operating income
Interest expense on secured bank debt (Note 12)
Income (loss) before income taxes
Income tax provision
Gain on sale of discontinued operations, net of tax
Income (loss) from discontinued operations
$
$
$
—
—
—
—
—
13,967
13,967
$ 29,149
$ 22,408
(24,756)
(2,348 )
—
—
(2,348 )
$
The satellites sold had a net book value of $935 million, including insurance proceeds receivable of $123 million, on our consolidated
balance sheet at December 31, 2003. The other related assets and liabilities sold had a net book value of $30 million and $31 million,
respectively, as of December 31, 2003.
F-23
2003
$ 143,564
$ 78,958
(49,178 )
29,780
(10,977)
—
$ 18,803
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Accumulated Other Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in thousands):
Consolidated Balance Sheet
Successor
Registrant
Predecessor
Registrant
December 31,
2005
December 31,
2004
Consolidated Statement of Operations
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
Years Ended
December 31,
2004
2003
$
15
$
(799 )
$
15
$
(222 )
$
140
$
970
—
—
551
(487 )
(1,046 )
(355 )
—
(487 )
—
(1,046 )
(440 )
(244 )
(99 )
8,142
(19,049 )
(16,815 )
(4,526 )
(604 )
—
(88,258 )
Cumulative translation adjustment
Derivatives classified as cash flow hedges,
net of taxes:
Net (decrease) increase in foreign
currency exchange contracts
Reclassifications into revenues, cost of
sales and income taxes from other
comprehensive income
Reclassifications into interest expense
from other comprehensive income
for anticipated transactions that are
no longer probable
Unrealized net gains (losses) on derivatives
Unrealized (losses) gains on available-for-
sale securities, net of taxes
Minimum pension liability adjustment
Accumulated other comprehensive income
(loss)
$
15
$
(89,661 )
$
15
$
(808 )
$ (11,813 )
$ (20,615 )
As described in Note 9, with the dissolution of Globalstar, L.P. on June 29, 2004, we wrote-off the remaining book value of our investment
in Globalstar, L.P.’s $500 million credit facility and reduced to zero the unrealized gains and related deferred tax liabilities previously reflected
in accumulated other comprehensive loss. The unrealized gains reflected above for the year ended December 31, 2004, include the reversal of
$11.4 million of deferred tax liabilities relating to our investment in Globalstar, L.P.’s $500 million credit facility.
F-24
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Contracts-in -Process and Long-Term Receivables
Contracts-in -Process
Contracts-in -Process consists of (in thousands):
U.S. government contracts:
Amounts billed
Unbilled receivables
Commercial contracts:
Amounts billed
Unbilled receivables
Successor
Registrant
Predecessor
Registrant
December 31,
2005
2004
$
$
124
4,287
4,411
38,789
30,384
69,173
73,584
$
$
1,936
4,818
6,754
6,210
6,076
12,286
19,040
Unbilled amounts include recoverable costs and accrued profit on progress completed, which have not been billed. Such amounts are billed
in accordance with the contract terms, typically upon shipment of the product, achievement of contractual milestones, or completion of the
contract and, at such time, are reclassified to billed receivables. Fresh-start fair value adjustments relating to contracts-in -process are amortized
on a percentage of completion basis as performance under the related contract is completed.
Certain contracts that SS/ L had recently entered into provided that SS/ L’s customers may defer milestone payments otherwise due until
after SS/ L emerges from Chapter 11. Accordingly, SS/ L deferred milestone billings to these customers of approximately $108 million as of
November 21, 2005. Upon emergence from bankruptcy, SS/ L billed and received $62 million of these milestones with the remaining amount
to be billed following successful disposition of the Appeals. As of March 10, 2006, the balance of $46 million, has been substantially received.
Long-Term Receivables
Billed receivables relating to long-term contracts are expected to be collected within one year. We classify billings deferred and the orbital
component of unbilled receivables expected to be collected beyond one year as long-term. Fresh-start fair value adjustments relating to long-
term receivables are amortized on the effective interest method over the life of the related orbital stream.
F-25
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivable balances related to satellite orbital incentive payments and billings deferred as of December 31, 2005 are scheduled to be
received as follows (in thousands):
2006
2007
2008
2009
2010
Thereafter
Less, current portion included in contracts-in-process
Long-term receivables
Long-Term
Receivables
50,214
10,255
734
2,024
2,437
32,705
98,369
(50,214 )
48,155
$
$
Amortization of fresh-start accounting fair value adjustments relating to contracts-in-process, long-term receivables, customer advances and
billings in excess of costs and profits and deferred revenue was $(7.9) million during the period October 2, 2005 to December 31, 2005.
During 2004, we wrote-off $11.3 million of long-term receivables due to a contract modification.
8.
Property, Plant and Equipment (see Note 3)
Property, Plant & Equipment consists of (in thousands):
Land and land improvements
Buildings
Leasehold improvements
Satellites in-orbit, including satellite transponder rights of $116.7 million and $279.6 million in
2005 and 2004, respectively
Satellites under construction
Earth stations
Equipment, furniture and fixtures
Other construction in progress
Accumulated depreciation and amortization
Successor
Registrant
Predecessor
Registrant
December 31,
2005
2004
$
$
$
27,833
52,873
6,352
366,196
197
17,710
61,937
5,096
538,194
(17,691 )
520,503
$
24,827
87,133
15,638
1,093,951
—
82,577
276,948
2,337
1,583,411
(784,503 )
798,908
Depreciation and amortization expense for property, plant and equipment was $17.7 million and $61.2 million for the periods October 2,
2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, respectively, and $131.2 million and $131.1 million in 2004 and 2003,
respectively. Accumulated depreciation and amortization as of December 31, 2005 and 2004 includes $3.3 million and $112.9 million,
respectively,
F-26
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
related to satellite transponders where Loral has the rights to transponders for the remaining life of the related satellite.
On March 17, 2004 we sold our North American satellites and related assets (see Note 5).
In January 2004, our Telstar 14/ Estrela do Sul-1 (“EDS”) satellite’s North solar array only partially deployed after launch, diminishing the
power and life expectancy of the satellite. SS/ L had submitted to its insurers a claim for a total constructive loss of the satellite, seeking
recovery for the insured value of $250 million. At the end of March 2004, the satellite began commercial service able to operate 15 of its 41
transponders. The satellite’s life expectancy is now approximately six years, as compared to a design life of 15 years. During March 2004, we
recorded an impairment charge of $12 million to reduce the carrying value of the satellite and related assets to the expected proceeds from
insurance of $250 million. On May 10, 2005, the Bankruptcy Court approved the terms of a settlement arrangement between SS/ L and the
insurers pursuant to which SS/ L would be paid 82% of the insured amount and the insurers would waive any rights they may have to obtain
title to EDS as a result of payment on the insurance claim. As of October 1, 2005, SS/ L had received $205 million in insurance proceeds,
representing the full settlement amount, from the insurers. We expect that the net cash flow of EDS over its six-year life will exceed its
carrying value.
On September 20, 2002, and as further amended in March 2003, we agreed with APT Satellite Company Limited (“APT”) to jointly
acquire the Apstar V satellite (now known as Telstar 18). Under this agreement, we were initially to acquire 23% of the satellite in return for
paying 25% of the project cost, and were to pay APT over time an additional 25% of the project cost to acquire an additional 23% interest in
the satellite. In August 2003, we amended our various agreements with APT, converting our arrangement from joint ownership to a lease, but
leaving unchanged the cost allocation between the parties relating to the project cost of the satellite. Under this arrangement, we retain title to
the entire satellite. The number of transponders leased to APT is reduced over time upon repayment by us of the second 25% of the satellite’s
project cost, ultimately to 54% of the satellite’s transponder capacity. As a result of this conversion from joint ownership to a lease
arrangement, in the third quarter of 2003 we (a) reversed the cumulative sales of $83 million and cost of satellite manufacturing of $73 million
and (b) recorded an increase to self-constructed assets of $73 million and recorded deferred revenue of $80 million from APT. In November
2003, we agreed with APT to further revise our existing arrangement. Under this revised arrangement, we agreed, among other things, to
accelerate the termination of APT’s leasehold interest in 4.5 transponders by assuming $20.4 million of project cost which otherwise would
have been initially paid by APT, decreasing APT’s initial leased transponder capacity from 77% to 69% (or 37 transponders). In addition, we
agreed to provide to APT, at no additional cost, certain unused capacity on Telstar 10/ Apstar IIR during an interim period (which has since
expired).
During September 2004, our Telstar 18 satellite began commercial service and we recognized $87 million of sales and $80 million of cost
of sales relating to the sales-type lease element of our agreement with APT. In addition, as of December 31, 2005, we have recorded $4 million
of deferred revenue relating to the operating lease and service elements of the agreement (primarily APT’s lease of four transponders for four
years and four additional transponders for five years and our providing APT with telemetry, tracking and control services for the life of the
satellite), which is being recognized on a straight-line basis over the life of the related element being provided. Also, at December 31, 2005, our
long-term liabilities included $25 million, representing the present value of our obligation to make future payments of $18.1 million to APT on
each of the fourth and fifth in-service anniversaries of Telstar 18, whereupon APT’s leasehold interest in the related transponders described in
the preceding sentence, would be terminated.
F-27
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The transponder capacity on satellites in orbit is either leased by customers or held for lease by us. Future minimum lease receipts due from
customers under long-term operating leases for transponder capacity on our satellites in orbit and for service agreements as of December 31,
2005 are as follows (in thousands):
2006
2007
2008
2009
2010
Thereafter
$
$
109,570
70,293
61,565
55,809
40,967
95,019
433,223
9.
Investments in and Advances to Affiliates
Investments in and advances to affiliates consists of (in thousands):
XTAR equity investment
Equity (losses) income in affiliates consists of (in thousands):
XTAR
Satmex
Globalstar, L.P. and Globalstar service provider partnerships
Other
Successor
Registrant
Predecessor
Registrant
December 31,
2005
104,616
$
$
2004
49,181
Predecessor Registrant
For the Period
October 2,
2005 to
DeSuccessor,
Registrant
For the Period
January 1,
2005 to
October 1,
2005
$
$
(5,384 )
—
—
(63 )
(5,447 )
$
$
(2,796 )
—
—
—
(2,796 )
Years Ended
December 31,
2004
$
87
—
46,567
—
$ 46,654
2003
$
(230 )
(51,699 ) (1)
776
—
$ (51,153 )
(1) Includes the write-off of our remaining investment in Satélites Mexicanos, S.A. de C.V. (“Satmex”) of $29 million due to the financial difficulties that Satmex is having (see
below).
F-28
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in affiliates
(in thousands):
Revenues
Investment income
Interest expense capitalized on development stage enterprises
Elimination of Loral’s proportionate share of (profits) losses relating to
$
affiliate transactions
Profits (losses) relating to affiliate transactions not eliminated
Amortization of deferred credit and profits relating to investments in
affiliates
XTAR
For the Period
October 2,
2005 to
DSuccessor1,
Registrant
4,148
—
—
(2,949 )
2,318
—
Predecessor Registrant
For the
Period
January 1,
2005 to
October 1,
2005
$
10,025
—
—
Years Ended
December 31,
2004
$ 7,779
—
478
2003
$ 27,716
886
1,196
593
(466 )
2,440
(1,917 )
4,444
(3,621 )
—
—
(783 )
XTAR, L.L.C. (“XTAR”), is a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”), a consortium comprised of
leading Spanish telecommunications companies, including Hispasat, S.A., and agencies of the Spanish government. XTAR was formed to
construct and launch an X-band satellite 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 currently has contracts to
provide X-band services to the U.S. Department of State, the Spanish Ministry of Defense and the Danish armed forces. XTAR’s satellite was
successfully launched on February 12, 2005 and commenced service in March 2005.
We own 56% of XTAR (accounted for under the equity method since we do not control certain significant operating decisions) and
Hisdesat owns 44%. During the first quarter of 2005, we made an equity contribution of $7.35 million to XTAR, which was matched by
$5.78 million from Hisdesat. To date, the partners have contributed $109.6 million to XTAR in proportion to their respective ownership
interests.
XTAR and Loral Skynet have entered into agreements whereby Loral Skynet provides to XTAR (i) certain selling, general and
administrative services, (ii) telemetry, tracking and control services for the XTAR satellite, (iii) transponder engineering and regulatory support
services as needed and (iv) satellite construction oversight services.
In May 2005, XTAR signed a contract with the U.S. Department of State for the lease of transponder capacity. The State Department is
authorized pursuant to its procurement guidelines to lease up to $137.0 million of capacity under this contract, to the extent that capacity is
available. To date, the U.S. Department of State has committed to a three-year lease of one transponder under this contract, having a total lease
value of $13.5 million, and has the right, at its option, to renew the lease for two additional years, which would bring the total value of the lease
to $22.5 million. There can be no assurance as to how much, if any, additional capacity the U.S. Department of State may lease from XTAR
under this contract.
In January 2005, Hisdesat provided XTAR with a convertible loan in the amount of $10.8 million, for which Hisdesat received enhanced
governance rights in XTAR. Moreover, if Hisdesat were to convert the loan into XTAR equity, our equity interest in XTAR would be reduced
to 51%.
F-29
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
XTAR entered into a Launch Services Agreement with Arianespace, S.A. (“Arianespace”) providing for launch of its satellite on
Arianespace’s Ariane 5 ECA launch vehicle. Arianespace provided a one-year, $15.8 million, 10% interest paid-in -kind loan for a portion of
the launch price, secured by certain of XTAR’s assets, including the satellite, ground equipment and rights to the orbital slot. The remainder of
the launch price consists of a revenue-based fee to be paid over time following commencement of operations by XTAR. If XTAR is unable to
repay the Arianespace loan when due, Arianespace may have the right to foreclose on the XTAR assets pledged as collateral, which would
adversely affect our investment in XTAR. On October 25, 2005, XTAR and Arianespace entered into an amendment to the loan agreement
pursuant to which Arianespace agreed to extend the maturity date of the loan to November 2006 in return for XTAR’s agreement to make
certain amortization and excess cash payments to Arianespace. As of December 31, 2005, $13.7 million was outstanding under the Arianespace
loan.
XTAR has agreed to lease certain transponders on the Spainsat satellite, which has been constructed by SS/ L for Hisdesat. Spainsat was
successfully launched on March 11, 2006 and is expected to commence service in April 2006. XTAR’s lease obligations for such service would
initially amount to $6.2 million per year, growing to $23 million per year. Under this lease agreement, Hisdesat may also be entitled under
certain circumstances to a share of the revenues generated on the Spainsat transponders leased by XTAR.
The following table presents summary financial data for XTAR as of and for the year ended December 31, 2005 (in millions):
Statement of Operations Data:
Revenues
Operating loss
Net loss
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Long-term liabilities
Members equity
Satmex
Year Ended
December 31,
2005
$
9.4
(5.4 )
(9.6 )
December 31,
2005
$
7.4
142.8
21.1
30.2
91.5
In 1997, in connection with the privatization of Satmex by the Mexican Government of its satellite services business, Loral and Principia
S.A. de C.V. (“Principia”) formed a joint venture that acquired 75% of the outstanding capital stock of Satmex. In addition to the $647 million
of cash that was given to the Mexican Government for this 75% interest, as part of the acquisition, a wholly owned subsidiary of the joint
venture, Servicios Corporativos Satelitales S.A. de C.V. (“Servicios”), was required to issue a seven-year government obligation (“Government
Obligation”) to the Mexican Government. The Government Obligation had an initial face amount of $125 million and accreted at 6.03% to
$189 million as of December 30, 2004, its maturity date. There is no guarantee of this debt by Satmex; however, Loral and Principia have
pledged their respective membership interests in the joint venture in a collateral trust to support this obligation. As Servicios did not repay the
Government Obligation when it was due, the Mexican Government could foreclose on these
F-30
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares, which would result in Loral losing nearly all of its investment stake in Satmex. A small portion of our ownership is comprised of direct
equity interests in Satmex and such interest has not been pledged.
On June 30, 2004, Satmex’s floating rate notes came due and Satmex did not make the required principal payment of $203.4 million. On
November 1, 2004, the fixed rate notes came due and Satmex did not make the required principal payment of $320.0 million. Also, Satmex did
not make the August 1, 2003, February 1, 2004, and August 1, 2004 interest payments on the fixed rate notes or the interest due on maturity of
the fixed rate notes. The aggregate amount of interest payment due was $56.7 million.
On December 29, 2004, the Government Obligation of approximately $125.1 million plus accrued interest of approximately $63 million
came due and Servicios did not make payment of such amounts. As a result of the payment defaults under the Government Obligation, the
Mexican government could initiate proceedings against Servicios, which may include foreclosure on the joint venture shares held by Loral and
Principia which would result in a change of control of Satmex. The Mexican government is seeking to commence an involuntary proceeding
against Servicios under applicable Mexican bankruptcy laws.
As a consequence of the defaults described above, on May 25, 2005, certain holders of Satmex fixed rate notes and the floating rate notes
(the “Petitioning Creditors”) filed an involuntary petition (the “Involuntary Petition”) commencing a Chapter 11 case under the Bankruptcy
Code against Satmex in the U.S. Bankruptcy Court. On June 29, 2005, Satmex filed a petition for reorganization in Mexico (the “Concurso
Mercantil”). On July 7, 2005, Satmex filed a motion in the U.S. Bankruptcy Court to dismiss the bankruptcy filing for Satmex made by its
U.S. creditors. Satmex subsequently reached a settlement agreement with the Petitioning Creditors premised upon, among other things, the
parties consenting to Satmex commencing a case under section 304 of the Bankruptcy Code in the Bankruptcy Court, as a case ancillary to the
Concurso Mercantil, and the voluntary dismissal of the involuntary Chapter 11 case commenced by the Petitioning Creditors. In January 2006,
Satmex reached an agreement in principle with its creditors to restructure its debt, which is currently in default. As a result, we expect our
ownership in Satmex to be reduced to less than five percent.
As of December 31, 2005, we had a 49% indirect economic interest in Satmex. We account for Satmex using the equity method. In the
third quarter of 2003, we wrote off our remaining investment in Satmex of $29 million (as an increase to its equity loss), due to the financial
difficulties that Satmex was having. As a result, and because we have no future funding requirements relating to this investment, there is no
requirement for us to provide for our allocated share of Satmex’s net losses subsequent to September 30, 2003. In addition, Loral recorded
reductions in estimated contract revenues from Satmex, resulting in an increase to our operating loss of approximately $24 million in 2003.
As a result of writing off our remaining investment in Satmex in the third quarter of 2003, the following table presents summary statement
of operations data for Satmex for the nine months ended September 30, 2003 (in thousands):
Revenues
Operating (loss) income
Net loss
Net loss applicable to common stockholders
Satmex Settlement Agreement
Nine Months
Ended
September 30,
2003
$ 59,212
(4,195 )
(31,687 )
(32,818 )
On June 14, 2005, Loral Space & Communications Holdings Corporation (“LSCC”), Loral SpaceCom, a division of Loral SpaceCom,
Loral Skynet Network Services, Inc. (“LSNS”) and SS/L (collectively the
F-31
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
“Loral Entities”) and Satmex entered into an agreement to be implemented through various amendments and agreements with respect to
various transactions involving the Loral Entities and Satmex (the “Settlement Agreement”), including but not limited to the contract for the
procurement of Satmex 6 between SS/L and Satmex (the “Satmex 6 SPA”), the management services agreement among Loral SpaceCom,
Principia and Satmex (the “Management Services Agreement”), the license agreement between Loral SpaceCom and Satmex (the “License
Agreement”), and various transponder agreements between certain of the Loral entities or LSNS and Satmex. Pursuant to the terms of the
Settlement Agreement, Satmex and the Loral Entities agreed to offset certain amounts owing between them, and SS/L agreed to give Satmex an
allowed claim of $3.7 million in SS/L’s Chapter 11 Case. In addition, SS/L and Satmex terminated their respective obligations under the
Satmex 6 SPA, and entered into a new contract pursuant to which SS/L agreed to perform certain additional work, as well as renewed its
commitment to provide its continued support for the launch of Satmex 6 provided that SS/L’s obligation to provide certain services under the
new contract is expressly subject to certain conditions, including Satmex obtaining the approval of the Settlement Agreement and the
underlying transactions with any court(s) and other authorities with jurisdiction over its reorganization proceeding. Also pursuant to the
Settlement Agreement, Loral SpaceCom and Satmex agreed to terminate the Management Services Agreement and the License Agreement. As
part of the consideration for the various benefits conferred by the Loral Entities to Satmex under the terms of the Settlement Agreement,
including without limitation, the elimination of Satmex’s obligation to make orbital incentive and end of life bonus payments in respect of
Satmex 6, Satmex has agreed to lease to LSCC for the life of the satellite, without any further consideration, two 36 MHz Ku-band
transponders and two 36 MHz C-band transponders on Satmex 6. Upon emergence from bankruptcy, LSCC assigned its rights under this lease
agreement to SS/L. The Settlement Agreement was approved by the Bankruptcy Court on July 26, 2005 and became effective on August 5,
2005. Upon receipt of Bankruptcy Court approval, Loral Skynet recorded income of $4.6 million representing the reversal of reserves and
accruals recorded in previous periods. In February 2006, the conciliador in Satmex’s Mexican reorganization proceedings approved the
Settlement Agreement. We have not recorded the financial benefit of the transponder lease pending the launch of Satmex 6.
Globalstar Related Activities
We accounted for our investment in Globalstar, L.P.’s $500 million credit facility at fair value, with changes in the value (net of tax)
recorded as a component of other comprehensive loss (see Note 6). We recorded unrealized net gains (losses) after taxes as a component of
other comprehensive loss of $8 million and $(17) million in 2004 and 2003, respectively, in connection with this security.
On April 14, 2004, Globalstar, L.P. announced the completion of its financial restructuring following the formal acquisition of its main
business operations and assets by Thermo Capital Partners LLC (“Thermo”), effectively resulting in Globalstar, L.P. exiting from bankruptcy.
Thermo invested $43 million in the newly formed Globalstar company (“New Globalstar”) in exchange for an 81.25% equity interest, with the
remaining 18.75% of the equity to be distributed to the creditors of Globalstar, L.P. Our share of the equity interest is approximately 2.7% of
New Globalstar, to which we assigned no value. Upon receipt of our equity interest in New Globalstar in June 2004, we reversed the
$2.8 million unrealized gain included in accumulated other comprehensive income against the remaining $2.8 million investment in Globalstar,
L.P.’s $500 million credit facility, which had no impact on our consolidated results of operations.
On June 29, 2004, Globalstar, L.P. was dissolved. As a result of Globalstar, L.P.’s liquidation, we recorded equity income of $47 million on
the reversal of vendor financing liabilities that were non-recourse to SS/L in the event of non-payment by Globalstar, L.P..
Loral holds various indirect ownership interests in three foreign companies that currently serve as exclusive service providers for Globalstar
service in Brazil, Mexico and Russia and an indirect ownership in a
F-32
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
U.S.-based distributor that has the exclusive right to sell Globalstar services to certain government agencies in the United States.
10. Accounting for Goodwill and Other Intangible Assets
Goodwill
Goodwill was established in connection with our adoption of fresh-start accounting (see Notes 3 and 4).
Other Intangible Assets
Other Intangible Assets were established in connection with our adoption of fresh-start accounting (see Notes 3 and 4). Intangible assets are
included in Other Assets on our consolidated balance sheet (in millions, except years):
Internally developed software and technology
Orbital slots
Trade names
Customer relationships
Customer contracts
Regulatory fees
Other intangibles
Total
5
7
20
14
7
4
Successor Registrant
December 31, 2005
Predecessor Registrant
December 31, 2004
Weighted Average
Remaining
Amortization Period
(Years)
Gross
Amount
$ 59.8
15.8
13.2
20.0
32.0
—
2.7
$ 143.5
Accumulated
Amortization
(2.7 )
$
(0.8 )
(0.2 )
(0.3 )
(2.1 )
—
(0.1 )
(6.2 )
$
Gross
Amount
$ —
20.0
—
—
Accumulated
Amortization
$
—
(5.8 )
—
—
2.5
13.0
$ 35.5
$
(1.9 )
(12.0 )
(19.7 )
Total pre-tax amortization for intangible assets of $6.2 million for the period October 2, 2005 to December 31, 2005 primarily reflects the
net amortization of the fair value adjustments recorded in connection with our adoption of fresh start accounting (see Note 4). Total pre-tax
amortization expense was $2.6 million for the period January 1, 2005 to October 1, 2005 and $3.3 million for each of the years ended
December 31, 2004 and 2003. Annual pre-tax amortization expense for intangible assets for the five years ended December 31, 2010 is
estimated to be as follows (in millions):
2006
2007
2008
2009
2010
$ 20.8
19.9
19.3
18.3
14.6
11.
Liabilities Subject to Compromise — Predecessor Registrant
Liabilities subject to compromise included debt, accounts payable, accrued expenses and other liabilities that were discharged as part of our
emergence from bankruptcy. Creditors received distributions consisting of cash, debt, preferred stock and common stock in settlement of their
bankruptcy claims. The ratio of cash, debt, preferred stock and common stock that individual creditors received depended upon the priority of
the claim allowed for each creditor. We recorded a gain on the estimated settlement of these liabilities of $727.8 million (including interest
expense and tax benefit) in the period January 1, 2005 to October 1, 2005
F-33
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(see Note 4). Liabilities subject to compromise at December 31, 2004 which were discharged upon our emergence from bankruptcy consisted
of the following (in thousands):
Debt obligations (see Note 12)
Accounts payable
Accrued employment costs
Customer advances
Accrued interest and preferred dividends
Income taxes payable
Pension and other postretirement liabilities
Other liabilities
6% Series C convertible redeemable preferred stock
6% Series D convertible redeemable preferred stock
12. Debt Obligations
Debt consists of (in thousands):
Loral Skynet 14.0% senior secured notes due 2015 (principal amount $126 million)
Loral Orion 10.0% senior notes due 2006:
Principal amount
Accrued interest (deferred gain on debt exchanges)
9.50% senior notes due 2006
Non-recourse debt of Loral Orion:
11.25% senior notes due 2007 (principal amount $37 million)
12.50% senior discount notes due 2007 (principal amount $49 million)
Successor Registrant
Loral Skynet Notes
December 31,
2004
1,269,977
52,728
542
30,837
40,428
38,934
178,647
79,926
187,274
36,707
1,916,000
$
$
Successor
Registrant
December 31,
2005
Predecessor
Registrant
December 31,
2004
$
128,191
$
—
—
—
—
—
—
128,191
$
$
612,704
214,446
350,000
39,402
53,425
1,269,977
On November 21, 2005, pursuant to the Plan of Reorganization, Loral Skynet issued $126 million of 14% Senior Secured Notes due 2015
(the “Loral Skynet Notes”) which notes are guaranteed on a senior secured basis by our subsidiary Loral Asia Pacific Satellite (HK) Limited
and all of Loral Skynet’s existing domestic, wholly-owned subsidiaries, and will be guaranteed on the same basis by all future domestic
wholly-owned, and subject to obtaining all required consents, majority-owned, subsidiaries of Loral Skynet (collectively, the “Subsidiary
Guarantees”). The Loral Skynet Notes and the Subsidiary Guarantees are secured by all the assets of the obligors, subject to certain exclusions.
The indenture covering the Loral Skynet Notes (the “Indenture”) permits Loral Skynet to obtain additional borrowings on both an unsecured
and
F-34
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
secured basis, in certain cases utilizing the same assets that secure the Loral Skynet Notes and the Subsidiary Guarantees.
The Loral Skynet Notes mature in 2015, subject, in certain instances, to earlier repayment in whole or in part. During the first two years
after the Effective Date, we may redeem the notes at a redemption price of 110% plus accrued and unpaid interest, but only if we do not receive
an objection notice from holders of two-thirds of the principal amount of the notes. After this two-year period, the notes are redeemable at our
option at a redemption price of 110%, declining over time to 100% in 2014, plus accrued and unpaid interest. The Loral Skynet Notes bear
interest at a rate of 14% per annum payable in cash semi-annually, provided that, if the amount of any interest payment would exceed certain
thresholds calculated as specified in the Indenture, or under other circumstances at the determination of the Board of Directors of Loral Skynet
unless two thirds of the holders of principal amount of the Loral Skynet Notes duly object, interest will be paid in kind by the issuance of
additional Loral Skynet Notes. The proceeds from the Loral Skynet Notes have been used by Loral Skynet to finance, in part, the
consummation of the Plan of Reorganization and the payment of the fees and expenses relating thereto. The Indenture also contains restrictive
covenants that limit Loral Skynet’s and its subsidiaries’ ability to take certain actions, including certain restricted payments, incurrence of debt,
incurrence of liens, payment of certain dividends or distributions, issuance or sale of capital stock of subsidiaries, sale of assets, affiliate
transactions and sale/leaseback and merger transactions.
Certain creditors were offered the right to subscribe to purchase their pro rata share of $120 million of the Loral Skynet Notes, which
offering was underwritten by certain other creditors who received a $6 million fee paid in additional Loral Skynet Notes. As of October 1,
2005, there was $98.7 million (including $0.4 million of earned interest) deposited in an escrow account by subscribing creditors. The
remaining $21.7 million was received upon issuance of the Loral Skynet Notes. As a result of the interest free period between October 1, 2005
and November 21, 2005, a premium of approximately $2.2 million was imputed. This premium and the total debt issuance costs of $6.2 million
are being amortized to interest expense using the effective interest rate method resulting in an effective interest rate of $14.6%.
SS/L Letter of Credit Facility
On November 21, 2005, SS/L entered into the $20,000,000 letter of credit agreement with JPMorgan Chase Bank. The agreement provides,
among other things, for the amendment and restatement of SS/L’s then existing letter of credit facility such that any existing letters of credit
issued and outstanding became letters of credit under this new letter of credit agreement. The letters of credit are available from November 21,
2005 until the earlier of the termination by SS/L of the $20,000,000 commitment, or December 31, 2006. Outstanding letters of credit are fully
cash collateralized. As of December 31, 2005, $2.4 million of letters of credit under this facility were issued and outstanding.
Predecessor Registrant (see Note 11)
As a result of our voluntary petitions for reorganization, all of our prepetition debt obligations were accelerated. These debt obligations
have been discharged pursuant to the Plan of Reorganization (see Note 2).
On March 17, 2004, we repaid all $967 million of our outstanding secured bank debt (see Notes 2 and 5). As of December 31, 2004, the
principal amounts of our prepetition debt obligations were $1.049 billion.
Subsequent to our voluntary petitions for reorganization on July 15, 2003, we only recognized and paid interest on our bank debt through
March 18, 2004 and stopped recognizing and paying interest on all other outstanding debt obligations. While we were in Chapter 11, we only
recognized interest expense to the extent paid. For the period ended October 1, 2005 and the years ended December 31, 2004 and 2003, we did
not recognize $32.6 million, $43.5 million and $19.9 million, respectively, of interest expense on our senior notes
F-35
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(excluding our 10% senior notes) and $46.0 million, $61.3 million and $28.1 million, respectively, of a reduction to accrued interest on our
10% senior notes, as a result of the suspension of interest payments on our debt obligations.
13. Reorganization Expenses Due to Bankruptcy
Reorganization expenses due to bankruptcy for the period ended October 1, 2005, year ended December 31, 2004 and for the period from
July 15, 2003 (filing date) to December 31, 2003 were as follows (in thousands):
Professional fees
Employee retention costs
Severance costs
Facility closing costs
Lease rejection claims (gains)
Vendor settlement losses (gains)
Restructuring costs
Interest income
Total reorganization expenses due to bankruptcy
14.
Income Taxes
For the Period
January 1,
2005 to
October 1,
2005
Predecessor Registrant
Year Ended
December 31,
2004
July 15, 2003
(Filing Date) to
December 31,
2003
$
$
32,240
(917 )
972
—
(265 )
289
1,503
(2,586 )
31,236
$
$
20,898
10,035
4,641
1,963
220
(5,561 )
—
(1,740 )
30,456
$
$
15,489
4,692
—
—
5,872
(61 )
—
(708 )
25,284
The (provision) benefit for income taxes on the (loss) income from continuing operations before income taxes, equity income (losses) in
affiliates and minority interest consists of the following (in thousands):
Current:
U.S. Federal
State and local
Foreign
Total
Deferred:
U.S. Federal
State and local
Foreign
Valuation allowance
Total
Total income tax (provision) benefit
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
Years Ended
December 31,
2004
2003
(532 )
(429 )
(791 )
(1,752 )
325
97
(422 )
—
(1,752 )
$
$
(1,235 )
(2,339 )
(1,659 )
(5,233 )
$ —
(335 )
(796 )
(1,131 )
$
358
(745 )
(604 )
(991 )
(259,373 )
(45,737 )
321,244
16,134
10,901
59,635
12,891
(3,650 )
(81,029 )
(12,153 )
$ (13,284 )
118,672
(16,811 )
960
(95,500 )
7,321
$ 6,330
$
$
F-36
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the periods from October 2, 2005 to December 31, 2005 and from January 1, 2005 to October 1, 2005 and for the years ended
December 31, 2004 and 2003, the (loss) income from continuing operations before income taxes includes non-U.S. source income (loss) of
approximately $1.2 million, $1.9 million, $0.3 million and $(22) million, respectively. Old Loral received no cumulative benefit as a result of
being established in Bermuda because of substantial losses incurred by the Bermuda entities. Our provision for foreign income taxes relates
primarily to Brazil tax imposed on the lease income from Estrela do Sul-1.
For the period October 2, 2005 to December 31, 2005, we continued to maintain the 100% valuation allowance that had been established at
December 31, 2002 against our net deferred tax assets, with the exception of our $2.0 million deferred tax asset relating to AMT credit
carryforwards.
In connection with our emergence from bankruptcy, Old Loral realized cancellation of debt income (“COD”) on its federal income tax
return of approximately $439 million. COD realized while in bankruptcy is excluded from federal taxable income. We are required to reduce
certain of our tax attributes, and to the extent sufficient attributes are not available on a separate company basis, reduce the tax basis in our
assets, by an amount equal to the COD excluded by Old Loral from its taxable income. This adjustment resulted in a reduction to our deferred
tax assets and the related valuation allowance. Also, as part of our fresh-start accounting and plan of reorganization adjustments, we recognized
a net income tax benefit of $15.4 million, which includes a net deferred tax benefit of $16.5 million. See Note 4.
For 2004, the deferred income tax provision of $12.1 million related to an additional valuation allowance which was required when we
reversed the following deferred tax liabilities from accumulated other comprehensive loss: (i) With the dissolution of Globalstar on June 29,
2004, we wrote-off the remaining book value of our investment in Globalstar’s $500 million credit facility and reduced to zero the unrealized
gains and related deferred tax liabilities previously reflected in accumulated other comprehensive loss. The reversal of this deferred tax liability
resulted in a net deferred tax asset of $11.4 million against which we recorded a full valuation allowance. (ii) We also reduced the balance for
certain deferred gains on derivative transactions and the related deferred tax liability included in accumulated other comprehensive loss. The
reversal of this deferred tax liability also resulted in a net deferred tax asset of $0.7 million against which we recorded a full valuation
allowance (see Notes 6 and 9).
The (provision) benefit for income taxes presented above excludes the following items which were recorded in discontinued operations:
(i) a current benefit of $2.6 million and a current provision of $4.3 million for the period ended October 1, 2005 and for the year ended
December 31, 2004, respectively, related to the previously deferred gain on sale of discontinued operations and (ii) a deferred tax provision of
$11.0 million for the year ended December 31, 2003 reclassified from continuing operations (see Note 5).
F-37
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The (provision) benefit for income taxes on the (loss) income from continuing operations before income taxes, equity income (losses) in
affiliates and minority interest differs from the amount computed by applying the statutory U.S. Federal income tax rate because of the effect of
the following items (in thousands):
Tax benefit (provision) at U.S. Statutory Rate of 35%
Permanent adjustments which change statutory amounts:
State and local income taxes, net of federal income tax
Non-U.S. income and losses taxed at lower rates
Reorganization expenses due to bankruptcy
Plan of Reorganization and Fresh-Start valuation adjustments
Nondeductible expenses
Change in valuation allowance
Other, net
Total income tax (provision) benefit
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
$
1,888
$
Predecessor Registrant
For the
Period
January 1,
2005 to
October 1,
2005
(357,928 )
Years Ended
December 31,
2004
$ 72,748
2003
$ 128,924
(216 )
(847 )
(94 )
—
(1,410 )
(422 )
(651 )
(1,752 )
$
(31,249 )
(6,308 )
(9,944 )
94,206
(1,122 )
321,244
2,002
10,901
8,161
(4,575 )
(7,080 )
—
(1,548 )
(81,029 )
39
$ (13,284 )
(11,411 )
(9,121 )
(5,885 )
—
(673 )
(95,500 )
(4 )
$ 6,330
$
The reorganization of the Company on the Effective Date constituted an ownership change under section 382 of the Internal Revenue Code.
Accordingly, use of our tax attributes, such as net operating losses (“NOLs”) and tax credits generated prior to the ownership change, will be
subject to an annual limitation of approximately $32 million, subject to modification based on certain factors. At December 31, 2005, we have
unused NOL carryforwards of approximately $1.1 billion and general business tax credit carryforwards of approximately $10 million, which
expire from 2019 through 2024, as well as AMT credit carryforwards of approximately $2.0 million that may be carried forward indefinitely.
We have not yet determined the final amount of tax attributes that will be available for use in the future. This analysis is dependent upon the
values of our individual assets, which the Company expects to finalize during the first half of 2006 (see Note 4). As a result, we may modify
the gross deferred tax asset and related valuation allowance for these attributes in the future.
We assess the recoverability of our NOLs and other deferred tax assets and based upon this analysis, record a valuation allowance to the
extent recoverability does not satisfy the “more likely than not” recognition criteria in SFAS No. 109. Based upon this analysis, we concluded
during the fourth quarter of 2002 that, due to insufficient positive evidence substantiating recoverability, a 100% valuation allowance should be
established for the entire balance of the net deferred tax assets of the U.S. consolidated tax group.
As of October 1, 2005, we had valuation allowances totaling $336.9 million which we will maintain until sufficient positive evidence exists
to support full or partial reversal. If in the future we were to determine that we will be able to realize all or a part of the benefit from our
deferred tax assets, a reduction to the balance of this valuation allowance at October 1, 2005 will be accounted for first as a reduction in
goodwill, then intangible assets, and if these accounts are exhausted, further reductions to the valuation allowance will be recorded as an
increase to paid-in -capital during the period such determination is made.
F-38
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the period October 2, 2005 to December 31, 2005, our valuation allowance increased by $0.4 million to a balance of $337.3 million.
For the period January 1, 2005 to October 1, 2005, our valuation allowance decreased by $322.9 million to a balance of $336.9 million,
primarily as a result of changes to our deferred tax balances upon adoption of fresh-start accounting as described above.
During 2004, our valuation allowance decreased by $11.1 million to a balance of $659.8 million. The net change consisted primarily of a
decrease of $87.1 million applied directly against our deferred tax assets for cancellation of debt income recognized for tax purposes when
Globalstar dissolved in June 2004; a decrease of $16.3 million applied to equity in net income of affiliates; an increase of $7.8 million applied
directly to shareholders’ deficit for other comprehensive loss items; an increase of $1.2 million applied to discontinued operations; an increase
of $2.3 million applied to the deferred gain on sale of assets; and an increase of $81.0 million charged to continuing operations for 2004.
During 2003, our valuation allowance increased by $94.4 million to a balance of $670.9 million. This net change consisted primarily of an
increase of $7.8 million applied directly to shareholders’ deficit for other comprehensive loss items; an increase of $12.0 million applied to
equity in net losses of affiliates; an increase of $0.1 million applied to discontinued operations; a decrease of $21.0 million applied directly
against our deferred tax assets; and an increase of $95.5 million charged to continuing operations for 2003.
The significant components of the net deferred income tax asset (liability) are (in thousands):
Deferred tax assets:
Postretirement benefits other than pensions
Inventoried costs
Net operating loss and tax credit carryforwards
Compensation and benefits
Premium on senior notes
Investments in and advances to affiliates
Other, net
Pension costs
Total deferred tax assets before valuation allowance
Less valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Property, plant and equipment
Intangible assets
Investments in and advances to affiliates
Income recognition on long-term contracts
Total deferred tax liability
Net deferred tax liability
Successor
Registrant
Predecessor
Registrant
December 31,
2005
2004
$
$
$
$
$
30,912
36,114
421,271
7,662
—
—
2,519
60,374
558,852
(337,346 )
221,506
148,905
43,528
21,807
20,145
234,385
(12,879 )
$
$
$
$
$
21,373
30,718
487,934
8,669
69,663
38,108
7,546
44,933
708,944
(659,783 )
49,161
66,436
831
—
12,501
79,768
(30,607 )
At December 31, 2005 the Company had $7,889,000 of net current deferred tax assets included in other current assets and $20,768,000 of
net non-current deferred tax liabilities included in long-term liabilities. At
F-39
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2004, the Company had $30,607,000 of net non-current deferred tax liabilities included in long-term liabilities.
15.
Shareholders’ Equity (Deficit) and Minority Interest
Successor Registrant
Common Stock
As of November 21, 2005, all of the securities of Old Loral, including, among other securities, the common stock of Old Loral, were
extinguished and deemed cancelled. In accordance with the Plan of Reorganization, New Loral issued 20 million of its 40 million authorized
shares of common stock, par value $0.01 per share (the “Common Stock”), which shares were distributed in accordance with the Plan of
Reorganization. All shares of Common Stock were issued pursuant to the exemption from the registration requirements of the Securities Act
afforded by Section 1145 of the United States Bankruptcy Code.
Loral Skynet Preferred Stock
On November 21, 2005, Loral Skynet Corporation issued 1,000,000 of its 2,000,000 authorized shares of series A 12% non-convertible
preferred stock, $0.01 par value per share (the “Loral Skynet Preferred Stock”), which were distributed in accordance with the Plan of
Reorganization. The issued shares have an aggregate liquidation preference of $200,000,000 plus accrued and unpaid dividends and were
distributed to holders of allowed claims in Orion Class 4, as such term is used in the Plan of Reorganization. Dividends on the Loral Skynet
Preferred Stock (if not paid or accrued as permitted under certain circumstances) will be payable in kind (in additional shares of Loral Skynet
Preferred Stock) if the amount of any dividend payment would exceed certain thresholds. All of the shares of Loral Skynet Preferred Stock
were issued pursuant to the exemption from the registration requirements of the Securities Act afforded by Section 1145 of the United States
Bankruptcy Code.
Loral Skynet may, at its option, redeem any or all issued and outstanding shares of the Loral Skynet Preferred Stock by paying, in cash, a
redemption price for each share of Loral Skynet Preferred Stock equal to the sum of (i) the liquidation preference and (ii) an amount equal to
any unpaid accumulated dividends not reflected in the liquidation preference.
The Loral Skynet Preferred Stock is reflected as minority interest on our consolidated balance sheet and accrued dividends of $2.7 million
as of December 31, 2005, are reflected as minority interest on our consolidated statement of operations.
Stock Plans
On November 21, 2005, the New Loral 2005 stock incentive plan (the “Stock Incentive Plan”) became effective pursuant to the Plan of
Reorganization. The Stock Incentive Plan allows for the grant of several forms of stock-based compensation awards including stock options,
stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other stock-based awards (collectively, the “Awards”). The
total number of shares of Common Stock reserved and available under the Stock Incentive Plan is 1,390,452 shares. In addition, shares of
Common Stock that expire, are forfeited or canceled, or withheld in payment of the exercise price or taxes relating to an Award, will again be
available for Awards under the Stock Incentive Plan. Options were granted with an exercise price equal to the fair market value of our stock, as
defined, vest over a four year period and have a seven year life. The Awards provide for accelerated vesting if there is a change in control, as
defined.
The fair value of the Award is estimated on the date of grant using the Black-Scholes-Merton model as described in Note 3.
F-40
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of stock options awarded under the Stock Incentive Plan as of December 31, 2005 is presented below:
Outstanding at October 2, 2005
Granted (weighted average fair value $6.82 per share)
Exercised
Forfeited
Outstanding at December 31, 2005
Exercisable at December 31, 2005
Weighted
Average
Exercise
Price
$
$
—
28.44
—
—
28.44
Weighted
Average
Remaining
Contractual
Term
—
7 years
—
—
7 years
Shares
—
746,952
—
—
746,952
—
Options totaling 1,390,452 shares were issued on December 21, 2005. However, because communications to certain employees with
options totaling 643,500 were made on January 9, 2006, recognition of the grant of these options has been delayed to such date.
The compensation cost charged against income, net of estimated forfeitures, was $0.1 million for the period from October 2, 2005 to
December 31, 2005. There was no tax benefit recognized in our statement of operations for this compensation cost. As of December 31, 2005,
there was $4.8 million of total unrecognized compensation cost related to non-vested stock options (not including an additional $4.8 million of
unrecognized compensation cost for the stock options for which recognition was delayed until January 9, 2006) which is expected to amortize
over the next four years.
As of December 31, 2005, there were no shares of common stock available for future grant under the Stock Incentive Plan after
consideration of the stock option grant for which recognition was delayed until 2006. In March 2006, we adopted an amendment to the Stock
Incentive Plan to increase by 825,000 the number of shares available for grant thereunder and to increase to 1,000,000 the number of shares
that may be granted to any one employee during any calendar year. This amendment covers the grant in March 2006, subject to stockholder
approval of the plan amendment, of options to purchase 825,000 shares to our Chief Executive Officer in connection with his entering into an
employment agreement with us. Moreover, we intend to further amend our stock option plan in the future to provide for additional increases in
the number of shares available for grant thereunder, including, among others, an increase to cover an option grant which we have agreed,
provided he has earned his target bonus for 2006 and 2007, to grant to our Chief Executive Officer in 2008 with a Black-Scholes value equal to
one-half of the value of his March 2006 Option Grant and an increase to cover the component of annual fees to our directors that consists of
restricted stock awards.
Predecessor Registrant
Common Stock
On June 4, 2003, the Old Loral Board of Directors approved a reverse stock split of its common stock at a ratio of one-for-ten, resulting in a
new par value of $0.10 per common share (previously $0.01 par value per common share). The reverse stock split became effective after the
close of business on June 13, 2003 and reduced the number of shares of Old Loral common stock then outstanding from 440 million to
44 million.
At its annual shareholders’ meeting on May 29, 2003, Old Loral obtained shareholder approval to increase the authorized number of shares
of its common stock from 75,000,000 to 125,000,000 (as adjusted for the above-mentioned reverse stock split).
F-41
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All shares of Old Loral common stock were cancelled upon our emergence pursuant to the terms of the Plan of Reorganization.
Old Loral Stock Plans
On April 18, 2000, the Old Loral Board of Directors approved a new stock option plan (the “2000 Plan”). The 2000 Plan was intended to
constitute a “broadly-based plan” as defined in Section 312.04(h) of the NYSE Listed Company Manual, which provides that at least 50% of
grants thereunder exclude senior management. The 2000 Plan provided for the grant of non-qualified stock options only. As of December 31,
2004, up to 3.7 million shares of common stock were issuable under the 2000 Plan, of which approximately 1.2 million options at a weighted
average exercise price of $18.69 per share were outstanding as of December 31, 2004.
In April 1996, Old Loral established the 1996 Stock Option Plan. An aggregate of 1.8 million shares of common stock were reserved for
issuance, of which approximately 0.7 million options at a weighted average exercise price of $92.76 per share were outstanding as of
December 31, 2004.
In connection with the acquisition of Loral Orion in 1998, Old Loral assumed the unvested employee stock options of Loral Orion.
The Plan of Reorganization does not provide for participation or recovery by Old Loral common shareholders and, accordingly, the above
stock options have no value to the employees. A summary of the status of Old Loral’s stock option plans, as of November 21, 2005, and
December 31, 2004 and 2003 and changes during the periods then ended is presented below. Options outstanding as of November 21, 2005
were forfeited in accordance with the Plan of Reorganization:
Outstanding at January 1, 2003
Granted below fair market value (weighted average fair value $3.06 per share)
Exercised
Forfeited
Outstanding at December 31, 2003
Forfeited
Outstanding at December 31, 2004
Forfeited
Outstanding as of November 21, 2005
Options exercisable at December 31, 2003
Options exercisable at December 31, 2004
Weighted
Average
Exercise
Price
$62.90
0.10
0.10
83.60
46.45
39.12
47.86
47.86
Shares
4,284,884
30,000
(30,000 )
(1,897,671 )
2,387,213
(384,343 )
2,002,870
(2,002,870 )
—
—
1,945,227
52.21
1,974,654
48.25
As of December 31, 2004, there were 3,380,146 shares of common stock available for future grant under the Old Loral’s stock plans.
In connection with an exchange offer for certain outstanding stock options completed on March 7, 2003, Old Loral accepted and cancelled
existing stock options to purchase an aggregate of 1,488,440 shares of common stock that were tendered in the exchange offer and agreed to
grant in exchange new stock options to purchase an aggregate of 602,149 shares of common stock. The new options were to be granted, subject
to the terms and conditions of the exchange offer, on September 8, 2003. As a result of our Chapter 11 filing,
F-42
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
however, we were not able to grant the new stock options and any claims that option holders may have arising from such cancellations have
been extinguished pursuant to the Plan of Reorganization. Any claims or rights that option holders whose options were cancelled may have
had, were addressed in the context of the Chapter 11 Cases. These cancellations have been reflected as forfeitures in 2003.
16. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted average number of shares of common stock outstanding. Diluted loss
per share excludes the assumed conversion of the Series C Preferred Stock and the Series D Preferred Stock for the Predecessor Registrant, as
their effect would have been antidilutive. For the periods from October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005
and for the years ended December 31, 2004 and 2003, the effect of approximately 0.7 million, 2.0 million, 2.0 million and 2.4 million stock
options, which would be calculated using the treasury stock method, were excluded from the calculation of diluted loss per share, as the effect
would have been antidilutive.
F-43
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the computation of basic and diluted loss per share:
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
Years Ended December 31,
For the Period
January 1,
2005 to
October 1,
2005
2004
(in thousands, except per share data)
2003
Numerator for basic and diluted loss per share:
(Loss) income from continuing operations
(Loss) income from discontinued operations, net of taxes
Gain on sale of discontinued operations, net of taxes
(Loss) income before cumulative effect of change in
accounting principle and extraordinary gain on
acquisition of minority interest
Cumulative effect of change in accounting principle
Extraordinary gain on acquisition of minority interest
Net (loss) income
Preferred dividends
Net (loss) income applicable to common stockholders
Denominator:
Weighted average common shares outstanding
Basic and diluted (loss) earnings per share:
Continuing operations
Discontinued operations
Before cumulative effect of change in accounting principle
and extraordinary gain on acquisition of minority
interest
Cumulative effect of change in accounting principle
Extraordinary gain on acquisition of minority interest
(Loss) earnings per share
$
$
$
$
Pensions and Other Employee Benefits
17.
Pensions
$
(15,261 )
—
—
1,030,882
—
13,967
$ (174,347 )
(2,348 )
—
$ (413,158 )
18,803
—
(15,261 )
—
—
(15,261 )
—
(15,261 )
20,000
(0.76 )
—
(0.76 )
—
—
(0.76 )
$
$
$
1,044,849
—
—
1,044,849
—
1,044,849
(176,695 )
—
—
(176,695 )
—
$ (176,695 )
(394,355 )
(1,970 )
13,615
(382,710 )
(6,719 )
$ (389,429 )
44,108
44,108
43,819
23.37
0.32
$
(3.96 )
(0.05 )
$
(9.58 )
0.43
23.69
—
—
23.69
$
(4.01 )
—
—
(4.01 )
$
(9.15 )
(0.05 )
0.31
(8.89 )
We maintain a pension plan and a supplemental retirement plan. These plans are defined benefit pension plans and members in certain
locations may contribute to the pension plan in order to receive enhanced
F-44
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefits. Eligibility for participation in these plans varies and benefits are based on members’ compensation and/or years of service. Our
funding policy is to fund the pension plan in accordance with the Internal Revenue Code and regulations thereon and to fund the supplemental
retirement plan on a discretionary basis. Plan assets are generally invested in listed stocks and bonds and U.S. government and agency
obligations.
Other Benefits
In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents.
Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for our pension plan. These
benefits are funded primarily on a pay-as-you-go basis, with the retiree generally paying a portion of the cost through contributions, deductibles
and coinsurance provisions.
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for 2005 and 2004, and
a statement of the funded status as of December 31, 2005 and 2004, respectively. We use a December 31 measurement date for the pension
plans and other post retirement benefit plans. The plans’ benefit obligations and recorded liabilities were revalued as of October 1, 2005, in
connection with our adoption of fresh-start accounting.
Reconciliation of benefit obligation
Obligation at beginning of period
Service cost
Interest cost
Participant contributions
Actuarial (gain) loss
Benefit payments
Obligation at December 31,
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of period
Actual return on plan assets
Employer contributions
Participant contributions
Benefit payments
Fair value of plan assets at December 31,
Funded status
Unfunded status at end of period
Unrecognized prior service cost
Unrecognized loss (gain)
Net amount recognized
Pension Benefits
Other Benefits
Successor
Registrant
December 31,
2005
(in thousands)
Predecessor
Registrant
December 31,
2004
(in thousands)
Successor
Registrant
December 31,
2005
(in thousands)
Predecessor
Registrant
December 31,
2004
(in thousands)
$
$
$
$
$
$
$
$
$
$
$
$
395,098
10,683
23,361
933
(3,246 )
(19,923 )
406,906
230,685
15,305
20,022
933
(19,217 )
247,728
(159,178 )
—
1,922
(157,256 )
F-45
353,881
9,694
22,740
1,008
28,467
(20,692 )
395,098
218,897
17,268
13,255
1,008
(19,743 )
230,685
(164,413 )
(225)
125,248
(39,390 )
$
$
$
$
$
$
82,029
935
4,564
1,751
(2,765 )
(5,338 )
81,176
1,154
21
3,440
1,751
(5,338 )
1,028
(80,148 )
—
(544 )
(80,692 )
$
$
$
$
$
$
69,337
1,212
5,178
1,592
9,748
(5,038 )
82,029
1,380
26
3,194
1,592
(5,038 )
1,154
(80,875 )
(21,335)
50,041
(52,169 )
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides the details of the net pension liability recognized in the balance sheet as of December 31, 2005 and 2004,
respectively (in thousands):
Accrued benefit liability
Accumulated other comprehensive loss
Net amount recognized
Successor
Registrant
Predecessor
Registrant
December 31,
2005
(157,256 )
—
(157,256 )
$
$
$
$
2004
(127,648 )
88,258
(39,390 )
Included in liabilities subject to compromise (Note 11) at December 31, 2004 is $179 million of the accrued benefit liability for pensions
and the net amount recognized for other benefits.
The accumulated pension benefit obligation was $367.7 million and $358.5 million at December 31, 2005 and 2004, respectively.
During 2005, we contributed $20 million to the qualified pension plan. During 2006, based on current estimates, we expect to contribute
approximately $2 million to the qualified pension plan. The significant declines experienced in the financial markets in previous years have
unfavorably impacted pension plan asset performance. This, coupled with historically low interest rates (a key factor when estimating pension
plan liabilities), caused us to recognize an additional $19.0 million during 2004, for a total of $88.3 million of non-cash charges to other
comprehensive income (loss) as of December 31, 2004. As a result of the adoption of fresh-start accounting as of October 1, 2005, we
increased our recorded liability by $78 million, net of the charge to equity previously recorded, offset by a reorganization adjustment of
$19 million due to a reduction of certain benefits. Market conditions and interest rates significantly affect future assets and liabilities of our
pension plans.
The following table provides the components of net periodic cost for the plans for the periods October 2, 2005 to December 31, 2005 and
from January 1, 2005 to October 1, 2005 and for the year ended December 31, 2004 and 2003, respectively (in thousands):
Pension Benefits
Other Benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Recognition of curtailment loss
(gain)
Net periodic cost
$
$
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
2,896
5,760
(5,545 )
—
—
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
$
7,787
17,601
(15,343 )
(27)
4,976
December 31,
2004
$ 9,694
22,740
(19,415 )
(36 )
5,294
2003
$ 10,647
22,021
(18,318 )
(36 )
5,372
—
3,111
$
—
14,994
—
18
$ 18,277
$ 19,704
$
F-46
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
$
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
680
3,407
(78 )
(1,443 )
1,843
December 31,
2004
$ 1,212
5,178
(74 )
(1,931 )
2,911
2003
$ 3,139
5,647
(139 )
(1,429 )
2,120
—
4,409
—
$ 7,296
(1,257 )
$ 8,081
255
1,157
(23 )
—
—
—
1,389
$
$
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The principal actuarial assumptions were:
Assumptions used to determine net periodic cost:
Discount rate
Expected return on plan assets
Rate of compensation increase
Assumptions used to determine the benefit obligation:
5.75 %
9.00 %
4.25 %
6.00 %
9.00 %
4.25 %
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
December 31,
2004
6.25 %
9.00 %
4.25 %
2003
6.75 %
9.00 %
4.25 %
Discount rate
Rate of compensation increase
Successor
Registrant
December 31,
2005
5.75 %
4.25 %
Predecessor Registrant
For the Period
Ended
October 1,
2005
December 31,
2004
5.75 %
4.25 %
6.00 %
4.25 %
The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the projected
benefit obligation for the plans, the asset mix of the plans and the fact that the plan assets are actively managed to mitigate risk. Allowable
investment types include equity investments and fixed income investments. Pension plan assets are managed by Russell Investment Corp.
(“Russell”), which allocates the assets into specified Russell designed funds as per our directed asset allocation. Each specified Russell fund is
then managed by investment managers chosen by Russell. The targeted allocation of our pension plan assets is 60% in equity investments and
40% in fixed income investments. Based on this target allocation, the fifteen year historical return of our investment managers has been 10.5%.
The expected long-term rate of return on plan assets determined on this basis was 9.0% for the periods October 2, 2005 to December 31, 2005,
January 1, 2005 to October 1, 2005, and the years ended December 31, 2004 and 2003.
Our pension and other employee benefits plan asset allocations by asset category as of December 31, 2005 and 2004 are as follows:
Equity investments
Fixed income investments
Successor
Registrant
Predecessor
Registrant
December 31,
2005
2004
56 %
44 %
100%
56 %
44 %
100 %
Actuarial assumptions used a health care cost trend rate of 9.0% decreasing gradually to 5.0% by 2009. Assumed health care cost trend
rates have a significant effect on the amounts reported for the health care
F-47
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
plans. A 1% change in assumed health care cost trend rates for 2005 would have the following effects (in thousands):
Effect on total of service and interest cost components of net periodic postretirement health care
benefit cost
Effect on the health care component of the accumulated postretirement benefit obligation
1% Increase
1% Decrease
$
$
423
6,921
$
$
(356 )
(5,867 )
The following benefit payments, which reflect future services, as appropriate, are expected to be paid (in thousands):
2006
2007
2008
2009
2010
2011 to 2015
Pension
Benefits
$ 21,346
22,072
22,869
23,416
23,872
127,300
Other Benefits
Gross
Benefit
Payments
$
4,959
5,128
5,362
5,591
5,775
31,776
Subsidy
Receipts
$
309
357
392
429
465
2,877
Assets designated to fund the obligations of our supplementary retirement plan are held in a trust. Such assets amounting to, $6.6 million
and $7.4 million as of December 31, 2005 and 2004, respectively, are not available for general corporate use; however, these assets would be
available to general creditors in the event of bankruptcy and, therefore, do not qualify as plan assets. Accordingly, we have classified these
assets as other assets in the accompanying consolidated balance sheets.
Additionally, only unpaid post-petition minimum funding requirements would not be subject to compromise if we had rejected our pension
and other post retirement liabilities in the bankruptcy proceedings. Therefore, all pension and post retirement liabilities in excess of our unpaid
post-petition minimum funding requirements have been classified as liabilities subject to compromise on the accompanying consolidated
balance sheet as of December 31, 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”). MMA requires a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. These subsidy payments will
first be payable to plan sponsors in 2006. In May 2004, the FASB released FSP 106-2 to provide guidance on accounting and disclosure
requirements related to MMA. We adopted FSP 106-2 effective as of the beginning of the fourth quarter of 2004, the earliest the required
actuarial information was available. As a result of the adoption of FSP 106-2 our net periodic cost for the periods October 2, 2005 to
December 31, 2005 and January 1, 2005 to October 1, 2005, and the fourth quarter of 2004 was reduced by $0.2 million, $0.9 million and
$0.2 million, respectively. The accumulated benefit obligation was reduced by $8.1 million and $6.7 million as of December 31, 2005 and
2004, respectively.
Employee Savings Plan
We have an employee savings plan, which provides that we match the contributions of participating employees up to a designated level.
Under this plan, the matching contributions in our common stock or cash were $1.0 million, $3.3 million, $4.7 million and $5.3 million for the
periods from October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, and the years ended December 31, 2004 and
F-48
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2003, respectively. All matching contributions since July 4, 2003, have been in cash. Employees vested in the savings plan are able to redirect
our matching contributions to any available fund. In addition, employees are able to direct their individual contributions to any available fund.
18.
Financial Instruments and Foreign Currency
Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is
practicable to estimate fair value:
The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The fair value
of supplemental retirement plan assets is based on market quotations. The fair value of our long-term debt obligations is based on the last
market trade of 2005 as reported on Bloomberg for the Loral Skynet Corporation 14% Senior Notes.
The estimated fair values of our financial instruments are as follows (in thousands):
Cash and cash equivalents
Supplemental retirement plan assets
Long-term debt
Old Loral 6% Series C Preferred Stock
Old Loral 6% Series D Preferred Stock
Successor Registrant
Predecessor Registrant
December 31,
2005
2004
Carrying
Amount
$ 275,796
6,637
128,191
—
—
$
Fair Value
275,796
6,637
153,405
—
—
Carrying
Amount
$ 147,773
7,444
1,269,977
187,274
36,707
$
Fair Value
147,773
7,444
563,000
1,000
—
Approximately $214 million of the carrying amount of debt as of December 31, 2004 is attributable to the accounting for the deferred gain
related to a Loral Orion debt exchange offer.
Foreign Currency
We, in the normal course of business, are subject to the risks associated with fluctuations in foreign currency exchange rates. Prior to filing
Chapter 11, we entered into forward exchange contracts to establish with certainty the U.S. dollar amount of future anticipated cash receipts
and payments and firm commitments for cash payments denominated in a foreign currency. The primary business objective of this hedging
program was to minimize the gains and losses resulting from exchange rate changes.
Ineffectiveness from all hedging activity was immaterial for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to
October 1, 2005, and for the years ended December 31, 2004 and 2003.
When we filed for Chapter 11, SS/ L’s hedges with counterparties (primarily yen denominated forward contracts) were cancelled, leaving
SS/ L vulnerable to foreign currency fluctuations in the future. The inability to enter into forward contracts exposes SS/ L’s future revenues,
costs and cash associated with anticipated yen denominated receipts and payments to currency fluctuations. As of December 31, 2005, SS/ L
had the following amounts denominated in Japanese Yen (which have been translated into U.S. dollars based on the December 31, 2005
exchange rate) that were unhedged (in millions):
Future revenues
Future expenditures
Contracts-in-process (unbilled receivables)
F-49
¥
Japanese Yen
U.S. $
$
324
2,178
69
2.7
18.5
0.6
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2005, SS/ L also had future expenditures in EUROs of 119,389 ($141,410 U.S.) that were unhedged.
19. Commitments and Contingencies
Financial Matters
We had outstanding letters of credit of approximately $2.4 million as of December 31, 2005.
Due to the long lead times required to produce purchased parts, we have entered into various purchase commitments with suppliers. These
commitments aggregated approximately $346.3 million as of December 31, 2005, and primarily relate to satellite backlog.
We are obligated to pay $6.7 million over the next four years to the U.S Department of State pursuant to a consent agreement entered into
by Old Loral and SS/ L.
SS/ L has deferred revenue and accrued liabilities for performance warranty obligations relating to satellites sold to customers, which could
be affected by future performance. SS/ L accounts for satellite performance warranties in accordance with the product warranty provisions of
FIN 45, which requires disclosure, but not initial recognition and measurement, of performance guarantees. SS/ L estimates the deferred
revenue for its warranty obligations based on historical satellite performance. SS/ L periodically reviews and adjusts the deferred revenue and
accrued liabilities for warranty reserves based on the actual performance of each satellite and remaining warranty period. A reconciliation of
such deferred amounts for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, and for the years ended
December 31, 2004 and 2003, is as follows (in millions):
Balance of deferred amounts at January 1, 2003
Accruals for deferred amounts issued during the period
Accruals relating to pre-existing contracts (including changes in estimates)
$ 14.1
—
2.2
Balance of deferred amounts at December 31, 2003
Accruals for deferred amounts issued during the period
Accruals relating to pre-existing contracts (including changes in estimates)
Balance of deferred amounts at December 31, 2004
Accruals for deferred amounts issued during the period
Accruals relating to pre-existing contracts (including changes in estimates)
Balance of deferred amounts at October 1, 2005
Accruals for deferred amounts issued during the period
Accruals relating to pre-existing contracts (including changes in estimates)
16.3
2.9
6.8
26.0
1.3
10.5
37.8
—
2.7
Balance of deferred amounts at December 31, 2005
$ 40.5
Many of SS/ L’s satellite contracts require SS/ L to provide vendor financing to its customers or, more customarily, for customers to pay a
portion of the purchase price for the satellite over time subject to performance of the satellite (“orbitals”) or a combination of these terms.
Although not always the case, in many cases these arrangements are provided to customers that are start-up companies or companies in the
early stages of building their businesses. As of December 31, 2005, SS/ L had recorded vendor financing and orbital receivables totaling
$99 million (of which $57 million was from start-up or early stage companies). Of this $57 million, SS/ L had received payments of
$49 million as of March 2006. There can be no assurance that these companies or their businesses will be successful and, accordingly, that
these customers will be able to fulfill their payment obligations under their contracts with SS/ L. Moreover, SS/ L’s receipt of orbital
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payments is subject to the continued performance of its satellites generally over the contractually stipulated life of the satellites. As of
December 31, 2005, SS/ L had recorded orbital receivables of $41.7 million, payable over 16 years. Since these orbital receivables could be
affected by future satellite performance, there can be no assurance that SS/ L will be able to collect all or a portion of these receivables.
Loral Skynet has in the past entered into prepaid leases, sales contracts and other arrangements relating to transponders on its satellites.
Under the terms of these agreements, as of December 31, 2005, Loral Skynet continues to provide for a warranty for periods of two years to
eight years for sales contracts and other arrangements (seven transponders), and prepaid leases (two transponders). Depending on the contract,
Loral Skynet may be required to replace transponders which do not meet operating specifications. Substantially all customers are entitled to a
refund equal to the reimbursement value if there is no replacement, which is normally covered by insurance. In the case of the sales contracts,
the reimbursement value is based on the original purchase price plus an interest factor from the time the payment was received to acceptance of
the transponder by the customer, reduced on a straight-line basis over the warranty period. In the case of prepaid leases, the reimbursement
value is equal to the unamortized portion of the lease prepayment made by the customer. For other arrangements, in the event of transponder
failure where replacement capacity is not available on the satellite, one customer is not entitled to reimbursement, and the other customer’s
reimbursement value is based on contractually prescribed amounts that decline over time.
Satellite Matters
Satellites are built with redundant components or additional components to provide excess performance margins to permit their continued
operation in case of component failure, an event that is not uncommon in complex satellites. Twenty of the satellites built by SS/ L and
launched since 1997, three of which are owned and operated by our subsidiaries or affiliates, have experienced losses of power from their solar
arrays. There can be no assurance that one or more of the affected satellites will not experience additional power loss. In the event of additional
power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power
loss, the level of redundancy built into the affected satellite’s design, when in the life of the affected satellite the loss occurred, how many
transponders are then in service and how they are being used. It is also possible that one or more transponders on a satellite may need to be
removed from service to accommodate the power loss and to preserve full performance capabilities on the remaining transponders. A complete
or partial loss of a satellite’s capacity could result in a loss of orbital incentive payments to SS/ L and, in the case of satellites owned by Loral
Skynet and its affiliates, a loss of revenues and profits. With respect to satellites under construction and the construction of new satellites, based
on its investigation of the matter, SS/ L has identified and has implemented remediation measures that SS/ L believes will prevent newly
launched satellites from experiencing similar anomalies. SS/ L does not expect that implementation of these measures will cause any significant
delay in the launch of satellites under construction or the construction of new satellites. Based upon information currently available, including
design redundancies to accommodate small power losses, and that no pattern has been identified as to the timing or specific location within the
solar arrays of the failures, we believe that this matter will not have a material adverse effect on our condensed consolidated financial position
or our results of operations, although no assurance can be provided.
In November 2004, Intelsat Americas 7 (formerly Telstar 7) experienced an anomaly which caused it to completely cease operations for
several days before it was partially recovered. Four other satellites manufactured by SS/ L for other customers have designs similar to Intelsat
Americas 7 and, therefore, could be susceptible to similar anomalies in the future. A partial or complete loss of these satellites could result in
the incurrence of warranty payments by SS/ L of up to $18 million.
Certain of our satellites are currently operating using back-up components because of the failure of primary components. If the back-up
components fail, however, and we are unable to restore redundancy, these
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
satellites could lose capacity or be total losses, which would result in a loss of revenues and profits. For example, in July 2005, in the course of
conducting our normal operations, we determined that the primary command receiver on two of our satellites had failed. These satellites, which
are equipped with redundant command receivers designed to provide full functional capability through the full design life of the satellite,
continue to function normally and service to customers has not been affected. Moreover, SS/ L has successfully completed implementation of a
software workaround that fully restores the redundant command receiver function on each of these satellites.
Two satellites owned by us have the same solar array configuration as one other 1300-class satellite manufactured by SS/ L that has
experienced an event with a large loss of solar power. SS/ L believes that this failure is an isolated event and does not reflect a systemic
problem in either the satellite design or manufacturing process. Accordingly, we do not believe that this anomaly will affect our two satellites
with the same solar array configuration. The insurance coverage for these satellites, however, provides for coverage of losses due to solar array
failures only in the event of a capacity loss of 75% or more for one satellite and 80% or more for the other satellite.
We normally insure the on-orbit performance of the satellites in our Satellite Services segment. Typically such insurance is for one year
subject to renewal. It may be difficult, however, to obtain full insurance coverage for satellites that have, or are part of a family of satellites that
has, experienced problems in the past. We cannot assure that, upon the expiration of an insurance policy, we will be able to renew the policy on
terms acceptable to us. Insurers may require either exclusions of certain components or may place limitations on coverage in connection with
insurance renewals for such satellites in the future. The loss of a satellite would have a material adverse effect on our financial performance and
may not be adequately mitigated by insurance.
In connection with an agreement reached in 1999 and an overall settlement reached in February 2005 with ChinaSat relating to the delayed
delivery of ChinaSat 8, we have provided ChinaSat with usage rights to two Ku-band transponders on Telstar 10 for the life of the satellite and
to one Ku-band transponder on Telstar 18 for the life of the Telstar 10 satellite plus two years.
SS/ L has completed repairs on a satellite that was damaged in transit, a significant portion of which was recovered through insurance
coverage. The cost of repairs less the negotiated insurance recoveries have been reflected in these financial statements.
SS/ L has contracted to build a spot beam, Ka-band satellite for a customer planning to offer broadband data services directly to the
consumer. As of December 31, 2005, SS/ L had billed and unbilled accounts receivable and vendor financing arrangements of $56 million
(including accrued interest of $18 million) with this customer. In January 2006, the customer paid SS/ L $48.9 million, representing all
outstanding accounts receivable and vendor financing, and the security arrangements that the customer had granted to SS/ L to secure payment
of the outstanding vendor financing were terminated.
Regulatory Matters
To prevent frequency interference, the regulatory process requires potentially lengthy and costly negotiations with third parties who operate
or intend to operate satellites at or near the locations of our satellites. For example, as part of our coordination efforts on Telstar 12, we agreed
to provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the satellite and have retained risk of loss with respect to those
transponders. In the event of an unrestored failure, under Loral Skynet’s related warranty obligation, Eutelsat would be entitled to
compensation on contractually prescribed amounts that decline over time. We also granted Eutelsat the right to acquire, at cost, four
transponders on the replacement satellite for Telstar 12. We continue to be in discussions with other operators on coordination issues. We may
be required to make additional financial concessions in the future in connection with our coordination efforts. The failure to reach
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
an appropriate arrangement with a third party having priority rights at or near one of our orbital slots may result in substantial restrictions on
the use and operation of our satellite at that location.
SS/ L is required to obtain licenses and enter into technical assistance agreements, presently under the jurisdiction of the State Department,
in connection with the export of satellites and related equipment, and with the disclosure of technical data to foreign persons. Due to the
relationship between launch technology and missile technology, the U.S. government has limited, and is likely in the future to limit, launches
from China and other foreign countries. Delays in obtaining the necessary licenses and technical assistance agreements have in the past resulted
in, and may in the future result in, the delay of SS/ L’s performance on its contracts, which could result in the cancellation of contracts by its
customers, the incurrence of penalties or the loss of incentive payments under these contracts.
Lease Arrangements
We lease certain facilities, equipment and transponder capacity under agreements expiring at various dates. Certain leases covering
facilities contain renewal and/or purchase options which may be exercised by us. Rent expense, net of sublease income is as follows (in
thousands):
October 2, 2005 to December 31, 2005
January 1, 2005 to October 1, 2005
Year ended December 31, 2004
Year ended December 31, 2003
Gross
Rent
Sublease
Income
$ 6,536
$ 20,057
$ 36,565
$ 42,580
$ (38 )
$ (261 )
$ (328 )
$ (974 )
Net Rent
$ 6,498
$ 19,796
$ 36,237
$ 41,606
Future minimum payments, by year and in the aggregate under operating leases with initial or remaining terms of one year or more
consisted of the following as of December 31, 2005 (in thousands):
2006
2007
2008
2009
2010
Thereafter
$ 22,225
19,102
15,993
14,068
12,566
39,812
$ 123,766
Future minimum payments have been reduced by minimum sublease rentals of $0.3 million due in the future under non-cancelable
subleases.
Legal Proceedings
Class Action Securities Litigations
In August 2003, plaintiffs Robert Beleson and Harvey Matcovsky filed a purported class action complaint against Bernard L. Schwartz in
the United States District Court for the Southern District of New York. The complaint seeks, among other things, damages in an unspecified
amount and reimbursement of plaintiffs’ reasonable costs and expenses. The complaint alleges (a) that Mr. Schwartz violated Section 10(b) of
the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, by making material misstatements or
failing to state material facts about our financial condition relating to the sale of assets to Intelsat and our Chapter 11 filing and (b) that
Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged
“controlling person” of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Old Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Old Loral common stock during the
period from June 30, 2003 through July 15, 2003, excluding the defendant and certain persons related to or affiliated with him. In November
2003, three other complaints against Mr. Schwartz with substantially similar allegations were consolidated into the Beleson case. In February
2004, a motion to dismiss the complaint in its entirety was denied by the court. Defendant filed an answer in March 2004. The case has been
stayed until mid-July 2006. Since this case was brought by or on behalf of holders of the common stock of Old Loral and was not brought
against Old Loral, we believe, although no assurance can be given, that, to the extent that any award is ultimately granted to the plaintiffs in
this action, the liability of New Loral, if any, with respect thereto is limited solely to claims for indemnification against Old Loral by the
defendant as described below under “Indemnification Claims.”
In November 2003, plaintiffs Tony Christ, individually and as custodian for Brian and Katelyn Christ, Casey Crawford, Thomas Orndorff
and Marvin Rich, filed a purported class action complaint against Bernard L. Schwartz and Richard J. Townsend in the United States District
Court for the Southern District of New York. The complaint seeks, among other things, damages in an unspecified amount and reimbursement
of plaintiffs’ reasonable costs and expenses. The complaint alleges (a) that defendants violated Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Old Loral’s financial condition
relating to the restatement in 2003 of the financial statements for the second and third quarters of 2002 to correct accounting for certain general
and administrative expenses and the alleged improper accounting for a satellite transaction with APT Satellite Company Ltd. and (b) that each
of the defendants is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged
“controlling person” of Old Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Old Loral
common stock during the period from July 31, 2002 through June 29, 2003, excluding the defendants and certain persons related to or affiliated
with them. In October 2004, a motion to dismiss the complaint in its entirety was denied by the court. Defendants filed an answer to the
complaint in December 2004. The case has been stayed until mid-July 2006. Since this case was brought by or on behalf of holders of the
common stock of Old Loral and was not brought against Old Loral, we believe, although no assurance can be given, that to the extent that any
award is ultimately granted to the plaintiffs in this action, the liability of New Loral, if any, with respect thereto is limited solely to claims for
indemnification against Old Loral by the defendants as described below under “Indemnification Claims.”
Class Action ERISA Litigation
In April 2004, two separate purported class action lawsuits filed in the United States District Court for the Southern District of New York
by former employees of Old Loral and participants in the Old Loral Savings Plan (the “Savings Plan”) were consolidated into one action titled
In re: Loral Space ERISA Litigation. In July 2004, plaintiffs in the consolidated action filed an amended consolidated complaint against the
members of the Loral Space & Communications Ltd. Savings Plan Administrative Committee and certain existing and former members of the
Board of Directors of SS/ L, including Bernard L. Schwartz. The amended complaint seeks, among other things, damages in the amount of any
losses suffered by the Savings Plan to be allocated among the participants’ individual accounts in proportion to the accounts’ losses, an order
compelling defendants to make good to the Savings Plan all losses to the Savings Plan resulting from defendants’ alleged breaches of their
fiduciary duties and reimbursement of costs and attorneys’ fees. The amended complaint alleges (a) that defendants violated Section 404 of the
Employee Retirement Income Security Act (“ERISA”), by breaching their fiduciary duties to prudently and loyally manage the assets of the
Savings Plan by including Old Loral common stock as an investment alternative and by providing matching contributions under the Savings
Plan in Old Loral stock, (b) that the director defendants violated Section 404 of ERISA by breaching their fiduciary duties to monitor the
committee defendants and to provide them with accurate information, (c) that defendants violated Sections 404 and 405 of ERISA by failing to
provide
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
complete and accurate information to Savings Plan participants and beneficiaries, and (d) that defendants violated Sections 404 and 405 of
ERISA by breaching their fiduciary duties to avoid conflicts of interest. The class of plaintiffs on whose behalf the lawsuit has been asserted
consists of all participants in or beneficiaries of the Savings Plan at any time between November 4, 1999 and the present and whose accounts
included investments in Old Loral stock. In September 2005, the plaintiffs agreed in principle to settle this case for $7.5 million payable solely
from proceeds of insurance coverage and without recourse to the individual defendants. The District Court has suspended further proceedings
in this case pending the outcome of the insurance litigation referred to below and final approval of the settlement. Plaintiffs have also filed a
proof of claim against Old Loral with respect to this case and have agreed that in no event will their claim against Old Loral with respect to this
case exceed $22 million. If the settlement of this case does not, for whatever reason, go forward and plaintiffs’ claim ultimately becomes an
allowed claim under the Plan of Reorganization, plaintiffs would be entitled to a distribution under the Plan of Reorganization of New Loral
common stock based upon the amount of the allowed claim. Any such distribution of stock would be in addition to the 20 million shares of
New Loral common stock being distributed under the Plan of Reorganization to other creditors.
In addition, two insurers under our directors and officers liability insurance policies have denied coverage with respect to the case titled In
re: Loral Space ERISA Litigation, each claiming that coverage should be provided under the other’s policy. In December 2004, one of the
defendants in that case filed a lawsuit in the United States District Court for the Southern District of New York seeking a declaratory judgment
as to his right to receive coverage under the policies. In March 2005, the insurers filed answers to the complaint and one of the insurers filed a
cross claim against the other insurer which such insurer answered in April 2005. In August and October 2005, each of the two potentially
responsible insurers moved separately for judgment on the pleadings, seeking a court ruling absolving it of liability to provide coverage of the
ERISA action. Those motions are pending, and discovery has commenced and is ongoing. We believe, although no assurance can be given, that
the liability of New Loral, if any, with respect to the In re: Loral Space ERISA Litigation case or with respect to the related insurance coverage
litigation is limited solely to claims for indemnification against Old Loral by the defendants as described below under “Indemnification
Claims” and, to the extent that any award is ultimately granted to the plaintiffs in this action, to distributions under the Plan of Reorganization
as described above.
Globalstar Related Class Action Securities Litigations
On September 26, 2001, the nineteen separate purported class action lawsuits filed in the United States District Court for the Southern
District of New York by various holders of securities of Globalstar Telecommunications Limited (“GTL”) and Globalstar against GTL, Old
Loral, Bernard L. Schwartz and other defendants were consolidated into one action titled In re: Globalstar Securities Litigation. In November
2001, plaintiffs in the consolidated action filed a consolidated amended class action complaint against Globalstar, GTL, Globalstar Capital
Corporation, Old Loral and Bernard L. Schwartz seeking, among other things, damages in an unspecified amount and reimbursement of
plaintiffs’ costs and expenses. The complaints alleged (a) that all defendants (except Old Loral) violated Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Globalstar’s business and
prospects, (b) that defendants Old Loral and Mr. Schwartz are secondarily liable for these alleged misstatements and omissions under
Section 20(a) of the Exchange Act as alleged “controlling persons” of Globalstar, (c) that defendants GTL and Mr. Schwartz are liable under
Section 11 of the Securities Act of 1933 (the “Securities Act”) for untrue statements of material facts in or omissions of material facts from a
registration statement relating to the sale of shares of GTL common stock in January 2000, (d) that defendant GTL is liable under Section 12(2)
(a) of the Securities Act for untrue statements of material facts in or omissions of material facts from a prospectus and prospectus supplement
relating to the sale of shares of GTL common stock in January 2000, and (e) that defendants Old Loral and Mr. Schwartz
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
are secondarily liable under Section 15 of the Securities Act for GTL’s primary violations of Sections 11 and 12(2)(a) of the Securities Act as
alleged “controlling persons” of GTL. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of securities
of Globalstar, Globalstar Capital and GTL during the period from December 6, 1999 through October 27, 2000, excluding the defendants and
certain persons related to or affiliated with them. This case was preliminarily settled by Mr. Schwartz in July 2005 for $20 million with final
approval of the settlement in December 2005, and he has commenced a lawsuit against Globalstar’s directors and officers liability insurers
seeking to recover the full settlement amount plus legal fees and expenses incurred in enforcing his rights under Globalstar’s directors and
officers liability insurance policy. In addition, Mr. Schwartz has filed a proof of claim against Old Loral asserting a general unsecured
prepetition claim for, among other things, indemnification relating to this case. Mr. Schwartz and Old Loral have agreed that in no event will
his claim against Old Loral with respect to the settlement of this case exceed $25 million. If Mr. Schwartz’s claim ultimately becomes an
allowed claim under the Plan of Reorganization and assuming he is not reimbursed by Globalstar’s insurers, Mr. Schwartz would be entitled to
a distribution under the Plan of Reorganization of New Loral common stock based upon the amount of the allowed claim. Any such
distribution of stock would be in addition to the 20 million shares of New Loral common stock being distributed under the Plan of
Reorganization to other creditors. We believe, although no assurance can be given, that New Loral will not incur any material loss as a result of
this settlement.
On March 2, 2002, the seven separate purported class action lawsuits filed in the United States District Court for the Southern District of
New York by various holders of Old Loral common stock against Old Loral, Bernard L. Schwartz and Richard J. Townsend were consolidated
into one action titled In re: Loral Space & Communications Ltd. Securities Litigation. On May 6, 2002, plaintiffs in the consolidated action
filed a consolidated amended class action complaint seeking, among other things, damages in an unspecified amount and reimbursement of
plaintiffs’ costs and expenses. The complaint alleged (a) that all defendants violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, by making material misstatements or failing to state material facts about Old Loral’s financial condition and its
investment in Globalstar and (b) that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20(a) of
the Exchange Act as an alleged “controlling person” of Old Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists
of all buyers of Old Loral common stock during the period from November 4, 1999 through February 1, 2001, excluding the defendants and
certain persons related to or affiliated with them. After oral argument on a motion to dismiss filed by Old Loral and Messrs. Schwartz and
Townsend, in June 2003, the plaintiffs filed an amended complaint alleging essentially the same claims as in the original amended complaint.
In February 2004, a motion to dismiss the amended complaint was granted by the court insofar as Messrs. Schwartz and Townsend are
concerned. Pursuant to the Plan of Reorganization, plaintiffs received no distribution with respect to their claims in this lawsuit.
In addition, the primary insurer under the directors and officers liability insurance policy of Old Loral has denied coverage under the policy
for the In re: Loral Space & Communications Ltd. Securities Litigation case and, on March 24, 2003, filed a lawsuit in the Supreme Court of
New York County seeking a declaratory judgment upholding its coverage position. In May 2003, Old Loral and the other defendants served an
answer and filed counterclaims seeking a declaration that the insurer is obligated to provide coverage and damages for breach of contract and
the implied covenant of good faith. In May 2003, Old Loral and the other defendants also filed a third party complaint against the excess
insurers seeking a declaration that they are obligated to provide coverage. Although we believe that the insurers have wrongfully denied
coverage, the parties have voluntarily agreed not to proceed further with the action at this time, subject to their right to actively pursue the
litigation at a later date. We believe, although no assurance can be given, that the liability of New Loral, if any, with respect to the In re: Loral
Space & Communications Ltd. Securities Litigation case or with respect to the related insurance coverage litigation is limited solely to claims
for indemnification against Old Loral by the defendants as described below under “Indemnification Claims.”
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Indemnification Claims
Old Loral was obligated to indemnify its directors and officers for any losses or costs they may incur as a result of the lawsuits described
above in Class Action Securities Litigations, Class Action ERISA Litigation and Globalstar Related Class Action Securities Litigations. The
Plan of Reorganization provides that the direct liability of New Loral post-emergence in respect of such indemnity obligation is limited to the
In re: Loral Space ERISA Litigation and In re: Loral Space & Communications Ltd. Securities Litigation cases in an aggregate amount of
$2.5 million. In addition, most directors and officers have filed proofs of claim in unliquidated amounts with respect to the prepetition
indemnity obligations of the Debtors. The Debtors and these directors and officers, including Mr. Schwartz with respect to all claims he may
have other than the Globalstar settlement referred to above, have agreed that in no event will their indemnity claims against Old Loral and
Loral Orion in the aggregate exceed $25 million and $5 million, respectively. If any of these claims ultimately becomes an allowed claim under
the Plan of Reorganization, the claimant would be entitled to a distribution under the Plan of Reorganization of New Loral common stock
based upon the amount of the allowed claim. Any such distribution of stock would be in addition to the 20 million shares of New Loral
common stock being distributed under the Plan of Reorganization to other creditors. We believe, although no assurance can be given, that New
Loral will not incur any substantial losses as a result of these claims.
Reorganization Matters
In connection with our Plan of Reorganization, certain claims have been filed against Old Loral and its Debtor Subsidiaries, the validity or
amount of which we dispute. We are in the process of resolving these disputed claims, which may involve litigation in the Bankruptcy Court.
To the extent any disputed claims become allowed claims, the claimants would be entitled to distributions under the Plan of Reorganization
based upon the amount of the allowed claim, payable either in cash for claims against SS/ L or Loral SpaceCom or in New Loral common
stock for all other claims. We have accrued only the amount we believe is valid for disputed claims payable in cash, although there can be no
assurance that this amount will be sufficient to cover all such claims that ultimately become allowed claims. We have reserved 1.3 million of
the 20 million shares of New Loral Common Stock distributable under the Plan of Reorganization for disputed claims that may ultimately be
payable in Common Stock. To the extent that disputed claims do not become allowed claims, shares held in reserve on account of such claims
will be distributed pursuant to the Plan of Reorganization pro rata to claimants with allowed claims.
Confirmation of our Plan of Reorganization was opposed by the Official Committee of Equity Security Holders (the “Equity Committee”)
appointed in the Chapter 11 Cases and by the self-styled Loral Stockholders Protective Committee (the “LSPC”). Shortly before the hearing to
consider confirmation of the Plan of Reorganization, the Equity Committee also filed a motion seeking authority to prosecute an action on
behalf of the estates of Old Loral and its debtor subsidiaries seeking to unwind as fraudulent, a guarantee provided by Old Loral in 2001, of
certain indebtedness of Loral Orion (the “Motion to Prosecute”). By separate Orders dated August 1, 2005, the Bankruptcy Court confirmed the
Plan of Reorganization (the “Confirmation Order”) and denied the Motion to Prosecute (the “Denial Order”). On or about August 10, 2005, the
LSPC appealed (the “Appeal”) to the United States District Court for the Southern District of New York (the “District Court”) the
Confirmation Order and the Denial Order. On February 3, 2006, we filed with the District Court a motion to dismiss the Appeal.
On or about January 27, 2006, the LSPC filed with the Bankruptcy Court a motion pursuant to section 1144 of the Bankruptcy Code (the
“Revocation Motion”), pursuant to which the LSPC seeks revocation of the Confirmation Order. On February 6, 2006, we filed an objection to
the Revocation Motion, in which the we objected to the relief sought in the Revocation Motion and requested that the Bankruptcy Court impose
sanctions against the LSPC. A hearing on the Revocation Motion currently is scheduled for April 10, 2006.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At a hearing held on March 29, 2005, the Bankruptcy Court denied the “Motion of the LSPC for a Court Order for Relief From Automatic
Stay and Order for the Annual Election of the Loral Board of Directors” (the “Election Motion”). Pursuant to the Election Motion, the LSPC
sought an order compelling Old Loral to hold an annual meeting of shareholders. Although the Bankruptcy Court did not enter its Order
denying the Election Motion until March 31, 2005, on March 30, 2005, the LSPC filed with the Bankruptcy Court a Notice of Appeal of the
Bankruptcy Court’s denial of the Election Motion (the “Shareholder Meeting Appeal”). This appeal is currently on the court’s active calendar,
and the LSPC has been instructed to file its brief. The court has stated, however, that we need not respond to that brief until further notice from
the court, pending resolution of the motion to dismiss the appeal relating to the Confirmation Order and the Denial Order.
In November 2005, a shareholder of Old Loral on behalf of the LSPC filed with the FCC a petition for reconsideration of the FCC’s
approval of the transfer of our FCC licenses from Old Loral to reorganized Loral in connection with the implementation of our Plan of
Reorganization and a request for investigation by the FCC into the financial matters and actions of the Company (the “FCC Appeal”). In
December 2005, we filed with the FCC our opposition to the FCC Appeal.
Other and Routine Litigation
In October 2002, National Telecom of India Ltd. (“Natelco”) filed suit against Old Loral and a subsidiary in the United States District
Court for the Southern District of New York. The suit relates to a joint venture agreement entered into in 1998 between Natelco and ONS
Mauritius, Ltd., a Loral Orion subsidiary, the effectiveness of which was subject to express conditions precedent. In 1999, ONS Mauritius had
notified Natelco that Natelco had failed to satisfy those conditions precedent. In Natelco’s amended complaint filed in March 2003, Natelco has
alleged wrongful termination of the joint venture agreement, has asserted claims for breach of contract and fraud in the inducement and is
seeking damages and expenses in the amount of $97 million. Natelco has filed a proof of claim in the Chapter 11 Cases and, in response, we
have filed an objection stating our belief that the claims are without merit. The Bankruptcy Court has assumed jurisdiction over this claim.
After a hearing on March 15, 2006, the Bankruptcy Court granted both our motion for summary judgment and our motion to dismiss with
respect to Natelco’s claim for breach of contract. The Bankruptcy Court denied our motion for summary judgment and requested further
briefing by March 31, 2006 with respect to our motion to dismiss Natelco’s fraudulent inducement claim and indicated that it would decide the
motion to dismiss with respect to that claim after receipt of such briefs. We believe that, if Natelco’s pre-petition unsecured claim ultimately
becomes an allowed claim, the liability of New Loral would be limited solely to a distribution of New Loral common stock under the Plan of
Reorganization based upon the amount of the allowed claim.
SS/ L has entered into several long-term launch services agreements with various launch providers to secure future launches for its
customers, including Loral and its affiliates. SS/ L had launch services agreements with International Launch Services (“ILS”) which covered a
number of launches, three of which remained open. In November 2002, SS/ L elected to terminate one of those future launches, which had a
termination liability equal to SS/ L’s deposit of $5 million. Subsequently, SS/ L received a letter from ILS alleging SS/ L’s breach of the
agreements and purporting to terminate the launch service agreements and all remaining launches. Despite ILS’s wrongful termination of the
agreements and all remaining launches, to protect its interest, SS/ L also terminated a second launch, which had a termination liability equal to
its deposit of $5 million, but reserved all of its rights against ILS. As a result, SS/ L recognized a non-cash charge to earnings of $10 million in
the fourth quarter of 2002 with respect to the two terminated launches. In June 2003, to protect its interest, SS/ L also terminated a third launch,
which had a termination liability equal to $23.5 million, and SS/ L recognized a non-cash charge to earnings of $23.5 million in the second
quarter of 2003 with respect to this launch. SS/ L also reserved all of its rights at that time against ILS. In April 2004, SS/ L commenced an
adversary proceeding against ILS in the Bankruptcy Court to seek recovery of
F-58
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$37.5 million of its deposits. In June 2004, ILS filed counterclaims in the Bankruptcy Court, and, in January 2005, the Bankruptcy Court
dismissed two of ILS’s four counterclaims. In the two remaining counterclaims, ILS is seeking to recover damages, in an unspecified amount,
as a result of our alleged failure to assign to ILS two satellite launches and $38 million in lost revenue due to our alleged failure to comply with
a contractual obligation to assign to ILS the launch of another satellite. After a hearing in October 2005 on cross motions for summary
judgment, the Bankruptcy Court ruled that SS/ L is entitled to recover from ILS at least $9 million, representing the excess of the deposits that
SS/ L paid to ILS over the termination liabilities. The Bankruptcy Court further ruled that this $9 million payment is subject to ILS’s
counterclaims which we believe are without merit and against which we intend to defend vigorously. In addition, the Bankruptcy Court ruled
that ILS wrongfully terminated the launch service agreements with SS/ L but that whether SS/ L is entitled to the $28.5 million in remaining
deposits involves factual questions that must be the subject of a trial after further discovery. We do not believe that this matter will have a
material adverse effect on our consolidated financial position or results of operations, although no assurance can be provided.
In March 2001, Loral entered into an agreement (the “Rainbow DBS Sale Agreement”) with Rainbow DBS Holdings, Inc. (“Rainbow
Holdings”) pursuant to which Loral agreed to sell to Rainbow Holdings its interest in Rainbow DBS Company, LLC (formerly R/ L DBS
Company, LLC, “Rainbow DBS”) for a purchase price of $33 million plus interest at an annual rate of 8% from April 1, 2001. Loral’s receipt
of this purchase price is, however, contingent on the occurrence of certain events, including without limitation, the sale of substantially all of
the assets of Rainbow DBS. At the time of the Rainbow DBS Sale Agreement, Loral’s investment in Rainbow DBS had been recorded at zero
and Loral did not record a receivable or gain from this sale. During the quarter ended March 31, 2005, Rainbow DBS entered into an agreement
to sell its Rainbow 1 satellite and related assets to EchoStar Communications Corporation, which sale was consummated in November 2005.
Rainbow Holdings, however, has informed Loral that it does not believe that Loral is entitled to receive an immediate payment of the purchase
price under the Rainbow DBS Sale Agreement as a result of the EchoStar sale transaction. Loral disputes Rainbow Holdings’ interpretation of
the agreement and, in September 2005, commenced a lawsuit in the Supreme Court of the State of New York to enforce its rights thereunder.
Moreover, a third party has asserted a prepetition claim against Loral in the amount of $3 million with respect to the purchase price.
We are subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these legal proceedings and claims cannot be predicted with certainty, we do not believe that any of these other
existing legal matters will have a material adverse effect on our consolidated financial position or our results of operations.
20. Segments
We are organized into two operating segments: Satellite Services and Satellite Manufacturing (see Note 1 regarding our operating segments
and Note 5 regarding the sale of our North American satellites and related assets).
The common definition of EBITDA is “Earnings Before Interest, Taxes, Depreciation and Amortization”. In evaluating financial
performance, we use revenues and operating income (loss) from continuing operations before depreciation and amortization, including
amortization of unearned stock compensation, and reorganization expenses due to bankruptcy (“Adjusted EBITDA”) as the measure of a
segment’s profit or loss. Adjusted EBITDA is equivalent to the common definition of EBITDA before amortization of stock compensation;
reorganization expenses due to bankruptcy; gain on discharge of pre-petition obligations and fresh-start adjustments, gain (loss) on
investments; other income (expense); equity in net income (losses) of affiliates, minority interest, net of tax; income (loss) from discontinued
operations, net of taxes; cumulative effect of change in accounting principle, net of tax, and extraordinary gain on acquisition of minority
interest, net of tax. Interest expense has been excluded from Adjusted EBITDA to maintain comparability with the
F-59
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
performance of competitors using similar measures with different capital structures. During the period we were in Chapter 11, we only
recognized interest expense on the actual interest payments we made. During this period, we did not expect to make any further interest
payments on our debt obligations after March 17, 2004, the date we repaid our secured bank debt. Reorganization expenses due to bankruptcy
were only incurred during the period we were in Chapter 11. These expenses have been excluded from Adjusted EBITDA to maintain
comparability with our results during periods we were not in Chapter 11 and with the results of competitors using similar measures. Adjusted
EBITDA should be used in conjunction with U.S. GAAP financial measures and is not presented as an alternative to cash flow from operations
as a measure of our liquidity or as an alternative to net income as an indicator of our operating performance.
We believe the use of Adjusted EBITDA along with U.S. GAAP financial measures enhances the understanding of our operating results
and is useful to investors in comparing performance with competitors, estimating enterprise value and making investment decisions. Adjusted
EBITDA allows investors to compare operating results of competitors exclusive of depreciation and amortization, net losses of affiliates and
minority interest. Adjusted EBITDA is a useful tool given the significant variation that can result from the timing of capital expenditures, the
amount of intangible assets recorded, the differences in assets’ lives, the timing and amount of investments, and effects of investments not
managed by us. Adjusted EBITDA as used here may not be comparable to similarly titled measures reported by competitors. We also use
Adjusted EBITDA to evaluate operating performance of our segments, to allocate resources and capital to such segments, to measure
performance for incentive compensation programs, and to evaluate future growth opportunities.
F-60
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intersegment revenues primarily consists of satellites under construction by Satellite Manufacturing for Satellite Services and the leasing of
transponder capacity by Satellite Manufacturing from Satellite Services. Summarized financial information concerning the reportable segments
is as follows (in millions):
2005 Segment Information
Successor Registrant
October 2, 2005 through December 31, 2005
Revenues and Adjusted EBITDA:
Revenues (2)
Intersegment revenues
Operating segment revenues
Eliminations (3)
Operating revenues as reported
Segment Adjusted EBITDA before eliminations (4)(5)(9)
Eliminations (3)
Adjusted EBITDA
Depreciation and amortization (6)(7)
Operating loss from continuing operations
Interest and investment income
Interest expense
Other expense
Income tax provision
Equity loss in affiliates
Minority interest
Loss from continuing operations
Other Data:
Depreciation and amortization (6)(7)
Capital expenditures (7)
Total assets (7)
Satellite
Services
Satellite
Manufacturing
Corporate (1)
Total
$
$
36.1
0.9
37.0
$
$
161.0
0.8
161.8
$
11.5
$
11.8
$
(11.0 )
$ 197.1
1.7
198.8
(1.6 )
$ 197.2
12.3
$
(1.2 )
11.1
(16.0 )
(4.9 )
4.1
(4.4 )
(0.2 )
(1.8 )
(5.4 )
(2.7 )
(15.3 )
$
$
$
$
12.4
2.0
741.4
$
$
$
3.2
3.0
871.5
$
$
$
0.4
—
66.1
16.0
$
$
5.0
$ 1,679.0
F-61
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Predecessor Registrant
January 1, 2005 through October 1, 2005
Revenues and Adjusted EBITDA:
Revenues (2)
Intersegment revenues
Operating segment revenues
Eliminations (3)
Operating revenues as reported
Segment Adjusted EBITDA before eliminations (4)(5)(9)
Eliminations (3)
Adjusted EBITDA
Depreciation and amortization (6)(7)
Reorganization expenses due to bankruptcy
Operating loss from continuing operations
Gain on discharge of pre-petition obligations and fresh-start
adjustments (10)
Interest and investment income
Interest expense (10)
Other expense
Income tax benefit (10)
Equity loss in affiliates
Minority interest
Income from continuing operations
Other Data:
Depreciation and amortization (6)(7)
Capital expenditures (7)
Total assets (7)
Satellite
Services
Satellite
Manufacturing
Corporate (1)
Total
$
$
111.3
3.2
114.5
$
$
318.6
10.9
329.5
$
39.8
$
15.2
$
(17.3 )
$ 429.9
14.1
444.0
(14.8 )
$ 429.2
37.7
$
(12.3 )
25.4
(61.3 )
(31.2 )
(67.1 )
1,101.5
6.4
(17.2 )
(0.9 )
10.9
(2.8 )
0.1
$ 1,030.9
$
$
$
48.8
2.2
521.5
$
$
$
11.9
2.4
510.7
$
$
$
0.6
—
68.8
61.3
$
4.6
$
$ 1,101.0
F-62
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004 Segment Information
Satellite
Services
Satellite
Manufacturing
Corporate (1)
Total
Revenues and Adjusted EBITDA:
Revenues (2)
Revenues from sales-type lease arrangement (see Note 8)
Intersegment revenues
Operating segment revenues
Eliminations (3)
Operating revenues as reported
Segment Adjusted EBITDA before eliminations (4)(5)(9)
Eliminations (3)
Adjusted EBITDA
Depreciation and amortization (6)(7)
Reorganization expenses due to bankruptcy
Operating loss from continuing operations
Interest and investment income
Interest expense
Other expense
Income tax provision
Equity income in affiliates
Minority interest
Loss from continuing operations
Other Data:
Depreciation and amortization (6)(7)
Capital expenditures (7)
Total assets (7)
$
$
136.7
87.2
4.5
228.4
$
$
299.6
137.0
436.6
$
23.3
$
(13.5 )
$
(34.9 )
$ 436.3
87.2
141.5
665.0
(142.9 )
$ 522.1
(25.1 )
$
(24.0 )
(49.1 )
(134.8 )
(30.4 )
(214.3 )
9.9
(2.9 )
(0.5 )
(13.2 )
46.6
0.1
$ (174.3 )
$
$
$
111.3
22.8
780.8
$
$
$
22.9
1.8
382.2
$
$
$
0.6
0.2
55.7
$ 134.8
$
24.8
$ 1,218.7
F-63
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2003 Segment Information (8)
Satellite
Services
Satellite
Manufacturing
Corporate (1)
Total
Revenues and Adjusted EBITDA:
Revenues (2)
Intersegment revenues
Operating segment revenues
Eliminations (3)
Operating revenues as reported
Segment Adjusted EBITDA before eliminations (4)(5)(9)
Eliminations (3)
Adjusted EBITDA
Depreciation and amortization (6)(7)
Reorganization expenses due to bankruptcy
Operating loss from continuing operations
Interest and investment income
Interest expense
Other income
Gain on investment
Income tax benefit
Equity losses in affiliates
Loss from continuing operations
Other Data:
Depreciation and amortization (6)(7)
Capital expenditures (7)
Total assets (7)
$
$
150.0
4.3
154.3
$
$
245.0
229.0
474.0
$
7.5
$
(158.6 )
$
(36.0 )
$ 395.0
233.3
628.3
(236.3 )
$ 392.0
$ (187.1 )
(41.9 )
(229.0 )
(134.6 )
(25.3 )
(388.9 )
15.2
(14.1 )
1.5
17.9
6.4
(51.2 )
$ (413.2 )
106.9
$
$
109.4
$ 1,983.9
$
$
$
27.2
6.0
362.0
$
$
$
0.5
—
117.9
$ 134.6
$ 115.4
$ 2,463.8
(1) Represents corporate expenses incurred in support of our operations.
(2) Includes revenues from affiliates of $4.1 million for the period October 2, 2005 to December 31, 2005, $10.0 million for the period January 1, 2005 to October 1, 2005 and
$7.8 million and $27.7 million in 2004 and 2003, respectively.
(3) Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under construction by SS/ L for wholly owned subsidiaries and
in the year ended December 31, 2003, the reversal of cumulative satellite manufacturing sales of $83 million and cost of satellite manufacturing of $73 million on a satellite
program that was changed to a lease arrangement in the third quarter of 2003 (see Note 8).
(4) Satellite manufacturing excludes charges of $24 million for the year ended December 31, 2004, as a result of the settlement of all orbital receivables on satellites sold to
Intelsat. This settlement had the effect of reducing future orbital receipts by $25 million, including $15 million relating to a satellite that was under construction in 2004.
Consistent with our internal reporting for satellite manufacturing, this decrease in contract value for the satellite that was under construction in 2004 was not being reflected as
a decrease in satellite manufacturing revenues. These charges had no effect on our consolidated results in 2004.
(5) Satellite Services recognized for the year ended December 31, 2004, $7.7 million of EBITDA for a sales-type lease arrangement for satellite capacity (Note 8) and an
impairment charge of $12.0 million relating to our Telstar 14/ Estrela do Sul-1 satellite and related assets to reduce the carrying values to the expected proceeds from insurance
(Note 8).
F-64
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(6) Includes additional depreciation expense of $9 million for 2004 and $14 million for 2003, due to accelerating the estimated end of depreciable life of our Telstar 11 satellite to
June 2004 from March 2005. Also, includes amortization of unearned stock compensation charges.
(7) Amounts are presented after the elimination of intercompany profit and include $89.4 million, $250.7 million and zero goodwill for Satellite Services, Satellite Manufacturing
and Corporate, respectively, as of December 31, 2005.
(8) The 2003 segment information has been adjusted to remove the operations of the North American satellites and related assets sold, which have been reclassified to discontinued
operations (see Note 5).
(9) Satellite manufacturing includes:
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Predecessor Registrant
Adjusted EBITDA before specific identified charges
Accrued warranty obligations
Write-off of long-term receivables due to contract modifications
Provisions for inventory obsolescence
Loss on cancellation of a deposits
Accrual for Alcatel settlement
Loss on acceleration of receipt of long-term receivables
Valuation allowance on vendor financing receivables
Settlement of satellite contract dispute
Satellite manufacturing segment Adjusted EBITDA before eliminations
$
$
16.0
(2.7 )
—
(1.5 )
—
—
—
—
—
11.8
$
$
29.1
(11.8 )
—
(2.1 )
—
—
—
—
—
15.2
(10)
In connection with our emergence from Chapter 11 and our adoption of fresh-start accounting on October 1, 2005 we recognized a gain on discharge of pre-petition
obligations and fresh-start adjustments of $1.101 billion, related interest expense of $13.2 million and a tax benefit of $15.4 million (see Note 4).
Revenue by Customer Location
The following table presents our revenues by country based on customer location for the periods from October 2, 2005 to December 31,
2005 and January 1, 2005 to October 1, 2005, and for the years ended December 31, 2004 and 2003 (in thousands).
Years Ended
December 31,
2004
$ 10.8
(9.7 )
(11.3 )
(3.3 )
—
—
—
—
—
$ (13.5 )
2003
$
(21.3 )
(2.2 )
(20.2 )
(49.5 )
(23.5 )
(13.0 )
(10.9 )
(10.0 )
(8.0 )
$ (158.6 )
United States
Japan
Thailand
Spain
Mexico
People’s Republic of China (including Hong Kong) (1)
Other
$
$
170,103
4,193
2,711
3,418
1,327
2,411
13,002
197,165
$
$
350,622
13,486
6,010
7,483
7,122
4,498
39,962
429,183
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Predecessor Registrant
Years Ended
December 31,
2004
$ 303,258
47,641
20,378
5,292
1,693
97,628
46,237
$ 522,127
2003
$ 239,531
69,573
54,436
30,903
(3,749 )
(66,047 )
67,396
$ 392,043
(1) The 2004 amount includes $87 million for a sales-type lease arrangement for satellite capacity. The 2003 amount includes the reversal of $83 million of sales on a satellite
program with a customer where the contract was changed to a lease arrangement (see Note 8).
F-65
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2005, four of our customers accounted for approximately 13%, 13%, 11% and 10% of our consolidated revenues. During 2004, two
of our customers accounted for approximately 26% and 17% of our consolidated revenues. During 2003, three of our customers accounted for
approximately 20%, 14% and 12% of our consolidated revenues.
With the exception of our satellites in-orbit, our long-lived assets are primarily located in the United States.
21. Related Party Transactions
K&F Industries, Inc.
In 2005, we provided administrative and certain other services to K&F Industries, Inc. (“K&F”), a subsidiary of K&F Industries Holdings,
Inc., and a company of which Bernard L. Schwartz was Chairman of the Board. K&F paid us a fee based on the cost of such services plus out
of pocket expenses. For the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, we billed K&F $12,000
and $146,000, respectively.
In addition, K&F charged us $44,000 and $108,000 for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to
October 1, 2005, respectively, for certain expenses and services.
MHR Fund Management LLC
Pursuant to the Plan of Reorganization, on November 21, 2005, Loral and Loral Skynet entered into a registration rights agreement with
seven affiliated funds of MHR Fund Management LLC (“MHR”). Pursuant to the Plan of Reorganization, each holder of an Allowed Claim, as
that term is used in the Plan of Reorganization, that receives a distribution pursuant to the plan of ten percent (10%) or greater of any of
(i) Loral common stock, (ii) Loral Skynet preferred stock or (iii) Loral Skynet notes (collectively, the “Registrable Securities”) is entitled to
receive certain registration rights under the registration rights agreement (each such holder, and any future holder of such securities who
becomes a party to the registration rights agreement, a “Registration Rights Holder”). Pursuant to the registration rights agreement, in addition
to certain piggy-back registration rights granted to the Registration Rights Holders, certain Registration Rights Holders may also demand,
under certain circumstances, that the Registrable Securities be registered under the Securities Act of 1933, as amended, in each case subject to
the terms and conditions of the registration rights agreement.
Pursuant to the Plan of Reorganization, holders of certain claims at Loral Orion, Inc. were entitled to subscribe for up to $120 million of
Loral Skynet notes. MHR and P. Schoenfeld Asset Management LLC agreed to backstop 95% and 5%, respectively, of the rights offering, in
consideration of a $6 million fee, paid in additional Loral Skynet notes, as well as reimbursement of certain related costs and expenses. In
connection with this backstop agreement, MHR received $5.7 million principal amount of Loral Skynet notes for its backstop commitment.
We have reimbursed fees and out-of -pocket expenses incurred by legal counsel to MHR in connection with our reorganization.
Dr. Rachesky and Mr. Goldstein are co-founders and managing principals of MHR. Mr. Devabhaktuni is also a managing principal of
MHR. Dr. Rachesky, Mr. Goldstein and Mr. Devabhaktuni are directors of Loral.
Other Relationships
During 2005, we paid BLS Group LLC (a company owned by Mr. Schwartz) and The Air Group (a company commissioned by
Mr. Schwartz to handle his corporate jet affairs) approximately $14,000 and
F-66
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$2,000, respectively, for our use of Mr. Schwartz’s corporate jet. Additional 2005 related expenses of approximately $134,000 will be paid by
us to The Air Group in 2006.
Robert B. Hodes, a director and a member of the Compensation Committee until his resignation from the Board of Directors on
February 28, 2006, is counsel to the law firm of Willkie Farr & Gallagher LLP, which acts as counsel to us.
For the year ended December 31, 2005, we paid fees and disbursements in the amount of approximately $91,000 for corporate
communications consultations and related services to Kekst & Company Incorporated, of which company Gershon Kekst, is President and
principal stockholder. Prior to November 21, 2005, Mr. Kekst was a director of Old Loral.
Lockheed Martin
In 2003, Lockheed Martin ceased being a related party to us. Costs of purchased goods and services from Lockheed Martin in the year
ended December 31, 2003, were $8.6 million.
22.
Selected Quarterly Financial Information (unaudited, in thousands, except per share amounts)
Year ended December 31, 2005
Revenues
Operating loss from continuing operations
Loss from continuing operations
Gain on discharge of pre-petition obligations
and fresh-start adjustments
Gain on sale of discontinued operations, net
of taxes
Net (loss) income
Basic and diluted (loss) earnings per share
(1) :
Continuing operations
Discontinued operations
(Loss) earnings per share
Predecessor Registrant
Quarter Ended
March 31,
June 30,
September 30,
October 1,
$ 132,378
(23,959 )
(26,221 )
$ 136,762
(16,741 )
(18,776 )
$
$
160,043
(26,395 )
(27,800 )
$
—
—
—
—
—
—
1,101,453
—
11,371
(26,221 )
(7,405 )
2,596
(25,204 )
—
1,103,679
(0.59 )
—
(0.59 )
(0.43 )
0.26
(0.17 )
(0.63 )
0.06
(0.57 )
25.02
—
25.02
F-67
Successor
Registrant
October 2 to
December 31,
197,165
(4,945 )
(15,261)
—
—
(15,261 )
(0.76 )
—
(0.76 )
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Predecessor Registrant
Year ended December 31, 2004
Revenues
Operating loss from continuing operations
Loss from continuing operations
Income (loss) from discontinued
operations
Net loss
Basic and diluted loss per share (1) :
Continuing operations
Discontinued operations
Loss per share
March 31,
June 30,
September 30,
December 31,
Quarter Ended
$ 103,684
(68,078 )
(68,016 )
$ 113,703
(58,489 )
(22,827 )
$
$
198,615
(35,127 )
(31,701 )
(11,620 )
(79,636 )
158
(22,669 )
(1.54 )
(0.26 )
(1.80 )
(0.51 )
—
(0.51 )
299
(31,402 )
(0.72 )
0.01
(0.71 )
106,125
(52,651 )
(51,803 )
8,815
(42,988 )
(1.17 )
0.20
(0.97 )
(1) The quarterly earnings per share information is computed separately for each period. Therefore, the sum of such quarterly per share amounts may differ from the total for the
year.
F-68
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
CONDENSED BALANCE SHEETS
(In thousands)
SCHEDULE I
Current assets:
Cash and cash equivalents
Accounts receivable
Other current assets
Total current assets
Property, plant and equipment, net
Investments in and advances to subsidiaries
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued employment costs
Other current liabilities
Total current liabilities
Pension and other postretirement liabilities
Long-term liabilities
Liabilities subject to compromise
Investments in and advances to subsidiaries
Total liabilities
Shareholders’ equity (deficit):
Common stock
Paid-in capital
Treasury stock, at cost
Unearned compensation
Retained deficit
Accumulated other comprehensive (loss)
Total shareholders’ equity (deficit)
Total liabilities and shareholders’ (deficit) equity
Successor
Parent
December 31,
2005
Predecessor
Parent
December 31,
2004
$
$
$
$
8,309
227
1,627
10,163
1,758
685,321
6,637
703,879
5,555
5,551
17,550
28,656
15,529
32,530
—
—
76,715
200
642,210
—
—
(15,261 )
15
627,164
703,879
$
$
$
$
1,525
—
2,331
3,856
—
—
4,197
8,053
499
—
1,220
1,719
—
30,607
456,078
563,750
1,052,154
4,413
3,392,825
(3,360 )
(87)
(4,348,231 )
(89,661 )
(1,044,101 )
8,053
See accompanying notes to condensed financial information of the parent company.
F-69
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
Selling, general and administrative expenses
Loss from continuing operations before reorganization
expenses due to bankruptcy
Reorganization expenses due to bankruptcy
Loss from continuing operations
Gain on discharge of pre-petition obligations and fresh-start
adjustments
Interest and investment income
Interest expense
Other expense
Income (loss) from continuing operations before income
taxes, equity income (losses) in subsidiaries and affiliates
Income tax (provision) benefit
Income (loss) from continuing operations before equity
(losses) income in subsidiaries and affiliates
Equity (loss) income in subsidiaries, net of taxes
Equity loss in affiliates
(Loss) income from continuing operations before cumulative
effect of change in accounting principle
Cumulative effect of change in accounting principle
Net (loss) income
Successor Parent
For the Period
October 2,
2005 to
December 31,
2005
For the Period
January 1,
2005 to
October 1,
2005
Predecessor Parent
Years Ended December 31,
2004
2003
$
516
$
—
$
4,279
$
8,937
(516 )
—
(516 )
—
2,724
—
—
2,208
(3,225 )
(1,017 )
(14,244 )
—
(15,261 )
—
(15,261 )
$
—
(5,539 )
(5,539 )
352,202
20
(389 )
(3 )
346,291
32,099
(4,279 )
(3,885 )
(8,164 )
—
10
—
—
(8,154 )
(1,077 )
(8,937 )
(1,900 )
(10,837 )
—
12,198
(21,675)
—
(20,314 )
(3,656 )
378,390
666,459
—
(9,231 )
(167,464 )
—
(23,970 )
(334,995 )
(21,775)
1,044,849
—
1,044,849
(176,695 )
—
$ (176,695 )
(380,740 )
(1,970 )
$ (382,710 )
$
See accompanying notes to condensed financial information of the parent company.
F-70
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED STATEMENTS OF CASH FLOW
(in thousands)
Operating activities:
Net (loss) income
Non-cash items:
Gain on discharge of pre-petition obligations and fresh-
start adjustments
Cumulative effect of change in accounting principle
Equity income in affiliates
Equity losses in subsidiaries
Deferred taxes
Depreciation and amortization
Due (to) from subsidiaries
Accounts receivable
Other current assets and other assets
Accounts payable
Accrued expenses and other current liabilities
Pension and other postretirement liabilities
Income taxes payable
Long-term liabilities
Merger of subsidiary into parent in connection with Plan
of Reorganization
Other
Net cash (used in) provided by operating activities
Investing activities:
Capital expenditures for continuing operations
Investments in and advances to subsidiaries
Investments in and advances to affiliates
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from note receivable from subsidiary
Proceeds from other stock issuances
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents — beginning of period
Cash and cash equivalents — end of period
Successor
Parent
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Parent
For the Period
January 1,
2005 to
October 1,
2005
Years Ended December 31,
2004
2003
$
(15,261 )
$
1,044,849
$ (176,695 )
$ (382,710 )
—
—
—
14,244
1,427
464
(19,902 )
(62 )
(53 )
(37 )
(9,667 )
(222 )
1,661
696
—
—
(26,712 )
(24 )
—
—
(24 )
—
—
—
(26,736 )
35,045
8,309
$
(352,202 )
—
—
(666,459 )
(30,607 )
—
58
—
1,732
(1,536 )
1,418
—
(1,492 )
—
34,012
—
29,773
—
3,747
3,747
—
—
—
33,520
1,525
35,045
$
—
—
—
167,464
—
—
4,527
—
1,147
—
(476 )
—
—
1,077
—
—
(2,956 )
—
—
—
—
(2,956 )
4,481
1,525
$
$
—
1,970
21,775
334,995
3,656
—
2,080
—
(964 )
—
1,253
—
—
—
67
(17,878 )
(288 )
—
(288 )
17,284
3,849
21,133
2,967
1,514
4,481
See accompanying notes to condensed financial information of the parent company
F-71
LORAL SPACE & COMMUNICATIONS INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
1. Basis of Presentation
Loral Space & Communications Inc. (“New Loral”) together with its subsidiaries is a leading satellite communications company with
substantial activities in satellite-based communications services and satellite manufacturing. New Loral was formed to succeed the business
conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal
bankruptcy laws on November 21, 2005 (the “Effective Date”).
We adopted fresh start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7, Financial Reporting of
Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”). Accordingly, our financial information disclosed under the heading
“Successor Parent” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not comparable
to, our financial information disclosed under the heading “Predecessor Parent” for the period ended and as of October 1, 2005 (the date we
adopted fresh-start accounting) or for prior periods.
The terms, “Loral,” the “Company,” “we,” “our” and “us,” when used in this report with respect to the period prior to our emergence, are
references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New Loral. These
references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context otherwise requires.
Loral is a holding company which is the ultimate parent of all Loral subsidiaries and is the registrant of Loral’s common stock. The
accompanying condensed financial statements reflect the financial position, results of operations and cash flows of Loral on a separate parent
company basis. All subsidiaries of Loral are reflected as investments accounted for under the equity method of accounting. Accordingly,
intercompany payables and receivables have not been eliminated.
Loral’s significant transactions with its subsidiaries other than the investment account and related equity in net (loss) income of subsidiaries
are the allocation of general corporate expenses to its subsidiaries and in the case of New Loral include a management fee paid by certain of its
subsidiaries.
No cash dividends were paid to Loral by its subsidiaries or its affiliates during the periods October 2, 2005 to December 31, 2005 and
January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003.
These condensed financial statements should be read in conjunction with Loral’s consolidated financial statements and the accompanying
notes thereto.
2. Guarantees and Contingencies
Old Loral had guaranteed Space Systems/ Loral’s performance obligations under certain of its customer contracts. We are in the process of
replacing certain of these guarantees with guarantees of New Loral.
Of the matters described under the heading Financial Matters in Note 19, Commitments and Contingencies, to the consolidated financial
statements, Loral has certain obligations to the U.S. Department of State pursuant to a consent agreement.
Of the matters described under the heading Legal Proceedings in Note 19 to the consolidated financial statements, Loral is a party to all of
these contingencies with the exception of the following two matters reported under the sub-heading Other and Routine Litigation in that
section:
1) the litigation with ILS
2) the litigation with Rainbow DBS Holdings, Inc.
F-72
LORAL SPACE & COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
SCHEDULE II
Additions
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts (1)
Deductions
From
Reserves (2)
Balance at
End of
Year
$
7,094
32,574
$ 39,668
$ 24,123
$
7,221
10,329
$ 17,550
$ 49,546
$ 11,703
20,177
$ 31,880
$ 41,736
$
6,445
$ 34,000
$
4,509
$ 33,920
$
$
$
$
$
$
$
(2,144 )
—
(2,144 )
3,324
(2,880 )
2,127
953
1,525
$
$
$
$
$
$
$
$
$
$
1,405
19,856
21,261
—
(13 )
—
(13 )
—
2
—
—
—
$
$
$
$
$
$
$
$
$
$
(4,017 )
(42,582 )
(46,599 )
(31,933)
(3,101 )
(20,177)
(23,278 )
(11,060)
942
(2,207 )
—
(1,703 )
$
$
$
$
$
$
$
$
$
$
11,703
20,177
31,880
41,736
6,445
—
6,445
34,000
4,509
33,920
5,462
33,742
Description
Predecessor Registrant:
Year ended 2003
Allowance for billed receivables
Allowance for long-term receivables
Total Receivables allowance
Inventory allowance
Year ended 2004
Allowance for billed receivables
Allowance for long-term receivables
Total Receivables allowance
Inventory allowance
January 1, 2005-October 1, 2005
Allowance for billed receivables
Inventory allowance
Successor Registrant:
October 2, 2005-December 31, 2005
Allowance for billed receivables
Inventory allowance
(1) Allowance for long-term receivables recorded as a reduction to revenues.
(2) Write-offs of uncollectible accounts.
F-73
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of the 28th day of March, 2006 (the "Effective Date"), by and between Loral Space & Communications Inc., a
Delaware corporation (the "Company"), Michael B. Targoff (the "Executive") and those subsidiaries of the Company signatory hereto solely
for purposes of Section 13(n) hereof.
WHEREAS, the Company desires to engage the services of the Executive and the Executive desires to be employed by the Company on the
terms and conditions hereinafter set forth; and
WHEREAS, the Company desires to be assured that all proprietary and confidential information of the Company will be preserved for the
exclusive benefit of the Company;
NOW, THEREFORE, in consideration of such employment and the mutual covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows:
Section 1. Employment and Position. The Company hereby employs the Executive as its Chief Executive Officer and Vice Chairman of the
Board of Directors (the "Board"), and the Executive hereby accepts such employment under and subject to the terms and conditions hereinafter
set forth.
Section 2. Term. The term of employment under this Agreement shall begin as of March 1, 2006, and, unless sooner terminated as provided in
Section 6, shall conclude on December 31, 2010 (the "Term").
Section 3. Duties. The Executive shall perform services in a managerial capacity in a manner consistent with the Executive's position as Chief
Executive Officer and Vice Chairman of the Board, subject to the general supervision of the Board. The Executive shall have all of the duties,
responsibilities and authority commensurate with his position. The Executive hereby agrees to devote substantially all his business time to
performance of such duties and to the promotion and forwarding of the business and affairs of the Company for the Term; provided, however,
that Executive shall be permitted to engage, or continue participation, in (a) charitable, civic, educational, professional, community or industry
affairs, (b) managing the Executive's and his family's personal investments, (c) corporate directorships and other business activities described in
Schedule I attached hereto with regard to public companies, and as heretofore disclosed to the Board with regard to private companies,
including any replacements for any such private companies heretofore disclosed to the Board that does not materially change the time
commitment or violate Section 10 hereof and (d) such other activities as may hereafter be specifically approved in writing, which in each case
and in the aggregate do not materially interfere with the performance of his obligations hereunder; provided, further, however, that Executive
may not engage in any such activities that would result in the Executive being in Competition (as defined in Section 10(d) below).
Section 4. Compensation.
(a) Salary. In consideration of the services rendered by the Executive under this Agreement, the Company shall pay the Executive a base salary
(the "Base Salary") at the rate of $950,000 per calendar year. The Base Salary shall be paid in such installments and at such times as the
Company pays its salaried executives and shall be subject to all necessary withholding taxes, FICA contributions and similar deductions. The
Board shall review annually the Base Salary payable to Executive hereunder and may, in its sole discretion, increase but not decrease, the
Executive's salary rate. Any such increased salary shall be and become the "Base Salary" for purposes of this Agreement.
(b) Annual Bonus. The Company shall maintain an annual Management Incentive Bonus program ("MIB Program") for certain executives, and
Executive shall be a participant in the MIB Program and shall be entitled to an annual bonus to the extent payable under such program
("Annual Bonus"). The Executive's target annual bonus opportunity under the MIB Program shall be not less than 125% of the Executive's
Base Salary (the "Target Annual Bonus"). With respect to the Annual Bonus for the 2006 fiscal year or any subsequent fiscal year, the Board
shall, in its discretion, establish the terms and conditions of the MIB Program and may amend the MIB Program (other than by reducing the
Target Annual Bonus percentage set forth above) accordingly. The Annual Bonus shall be paid on or before March 15 of the year following the
year to which the Annual Bonus relates.
(c) Equity Grants. In connection with Executive's service as Vice Chairman of the Board commencing on November 21, 2005, the Company,
pursuant to an Option Agreement dated December 21, 2005 (the "Initial Option Agreement"), on December 21, 2005, granted to Executive (the
"Initial Option Grant") an option to purchase 106,952 shares of its common stock at an exercise prices of $28.441 per share under the
Company's 2005 Stock Incentive Plan (the "Stock Option Plan"). The Board has amended and restated the Stock Option Plan to increase the
number of shares of the Company's common stock, par value per share $0.01 (the "Common Stock"), available for grant thereunder to a
number adequate to cover the Option (as defined below) and will, prior to the submission of the amended and restated Stock Option Plan to
stockholders for approval, further amend and restate the Plan to provide for an additional number or shares adequate to cover the 2008 Equity
Award (as defined below), based on the Company's best estimate at the time of amendment and restatement of the number of shares necessary
for the 2008 Equity Award, and shall reserve adequate shares, subject to such best estimate, under the Stock Option Plan for such awards and
the Company agrees to submit the Stock Option Plan as amended to the Company's stockholders at the next annual meeting of stockholders and
seek stockholder approval (the "Approvals"). In addition to the Initial Option Grant, in connection with the execution of this Agreement,
2
the Company grants to the Executive an option to purchase 825,000 shares of common stock of the Company, with a per-share exercise price
equal to the fair market value of one share of the Company's common stock at the date of grant (the "Option"), such grant to be subject to
obtaining the Approvals. To the extent the Approvals are not obtained, the Option shall be void. The Option shall have such other terms and
conditions as set forth in the Option Agreement attached hereto as EXHIBIT A (the "Second Option Agreement" and, together with the Initial
Option Agreement, the "Option Agreements"). The Option is intended to count as an option award for both 2006 and 2007, in lieu of any
regular annual option award that the Executive would otherwise be entitled to in 2006 and 2007, and has been structured as such with one-half
of the Option vesting over three years commencing on the date of Grant and one-half of the Option vesting over three years commencing on the
first anniversary of the date of grant. In addition, if the Executive has earned a Target Annual Bonus for both 2006 and 2007, the Company
shall grant to the Executive in 2008 an additional option to purchase shares of common stock of the Company, or other equity award under the
Stock Option Plan, in either case having a comparable economic value equal to one-half (1/2) of the value of the Option (based on a Black-
Scholes valuation of such Option) (the "2008 Equity Award") and, to the extent the 2008 Equity Award is a stock option, with terms similar to
the Second Option Agreement; provided, however, that the 2008 Equity Award shall, whether an Option or other equity award, vest in four
annual installments with twenty-five percent (25%) of the award vesting on the date of grant, an additional twenty-five percent (25%) of the
award vesting on the first anniversary of the date of grant, an additional twenty-five percent (25%) of the award vesting on the second
anniversary of the date of grant and the remaining twenty-five percent (25%) of the award vesting on the third anniversary of the date of grant
(consistent with the provisions of the Second Option Agreement (and Section 7(h)
hereof) relating to termination of employment and accelerated vesting and exercise periods); and further provided, however, that the 2008
Equity Award shall not be made subject to stockholder approval. The grant of the 2008 Equity Award shall also be subject to obtaining the
Approvals. The Executive shall be eligible for participation in the Stock Option Plan during the Term to the same extent as other senior
executives of the Company, taking into account that the Option is intended to count as the regular option award for both 2006 and 2007 and the
2008 Equity Award is intended to count as an the regular equity award for 2008. The Company may make such other discretionary equity
awards to the Executive as it deems appropriate. Notwithstanding anything herein to the contrary, (i) the Option shall not become exercisable
prior to the date the Company obtains the Approvals and the 2008 Equity Award shall not become exercisable prior to the Approvals.
Section 5. Benefits. In addition to the compensation detailed in Section 4 of this Agreement, the Executive shall be entitled to the following
additional benefits:
(a) Paid Vacation. The Executive shall be entitled to 20 days paid vacation per calendar year in accordance with the Company's vacation policy
in effect from time to time, such vacation shall extend for such periods and shall be taken at such intervals as
3
shall be appropriate and consistent with the proper performance of the Executive's duties hereunder.
(b) Welfare Plans. During the Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans, programs, practices and policies provided generally by the Company to similarly situated
executives of the Company (including, without limitation, any medical, prescription, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and programs that may be provided by the Company from time to time). Such plans,
programs, practices and policies are subject to change from time to time by the Company.
(c) Other Benefit Plans. During the Term, the Executive shall be entitled to participate in all equity, savings, retirement and pension plans
(including the Company's Supplemental Executive Retirement Plan ("SERP")), programs, practices and policies applicable generally to
similarly situated executives of the Company as determined by the Board from time to time. Such plans, programs, practices and policies are
subject to change from time to time by the Company.
(d) Perquisites and Other Benefits. During the Term, the Executive shall be entitled to such additional perquisites and fringe benefits
appertaining to his position in accordance with any practice established by the Board. During the Term, Executive shall be entitled to receive
all benefits under any individual welfare benefit arrangements (including life insurance coverage) or other benefit arrangements currently in
effect for other senior executives of the Company in a manner consistent with past practice, and such arrangements are listed on Schedule I
attached hereto.
(e) Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable expenses actually incurred by the Executive
directly in connection with the business affairs of the Company and the performance of his duties hereunder, upon presentation of proper
receipts or other proof of expenditure and subject to such reasonable guidelines or limitations provided by the Company from time to time. The
Executive shall comply with such reasonable limitations and reporting requirements with respect to such expenses as the Board may establish
from time to time.
(f) Indemnification. In addition to the terms of any officers' liability insurance carried by the Company, the Executive (and his heirs, executors
and administrators) shall be indemnified by the Company and its successors and assigns pursuant to a separate Indemnification Agreement
attached hereto as EXHIBIT B, which has heretofore been executed. The Executive shall be an insured person under or otherwise covered by
directors and officers liability insurance in an amount consistent with past practice. The obligations of the Company pursuant to this Section
shall survive the expiration of the Term or Executive's voluntary or involuntary termination or resignation for Good Reason.
4
Section 6. Termination of Employment. The Executive's employment may end earlier than the end of the Term as follows:
(a) Death. The employment of the Executive shall automatically terminate upon the death of the Executive.
(b) Disability. In the event of any physical or mental disability of the Executive rendering the Executive substantially unable to perform his
duties hereunder for a period of at least one hundred eighty (180) days out of any three hundred sixty-five (365)-day period and the further
determination that the disability is permanent with regard to the Executive's ability to return to work in his full capacity, the Executive's
employment shall be terminated on account of the Executive's disability upon written notice from the Company. In the event of any dispute as
to the Executive's disability, the determination binding on both parties shall be made by a physician or physicians mutually agreed upon in
good faith by the Board and the Executive or his representative.
(c) By the Company For Cause. The employment of the Executive may be terminated by the Company for Cause (as defined below) at any
time effective upon written notice to the Executive; provided, however, that if such termination is based upon any event set forth in clauses
(iii), (iv), (v), (vi) or (vii) below, Executive shall be given not less than ten (10) days prior written notice by the Board of the intention to
terminate him for Cause, such notice to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which
the proposed termination for Cause is based, and Executive shall have ten (10) days after the date that such written notice has been given to
Executive in which to address the full Board and present arguments on his own behalf, with or without legal representation at the Executive's
election, regarding any such alleged act or failure to act. If a majority of the members of the full Board make a determination that Cause exists,
the termination shall be effective on the date immediately following the expiration of the ten (10) day notice period. Otherwise, Cause shall not
be determined to exist. For purposes hereof, the term "Cause" shall mean that one or more of the following has occurred:
(i) the Executive shall have been after the Effective Date convicted of, or shall have pleaded guilty or nolo contendere to, any felony;
(ii) the Executive shall have materially breached any provision of
Section 10 hereof;
(iii) the Executive shall have committed any fraud, embezzlement, misappropriation of funds, or breach of fiduciary duty against the Company,
in each case of a material nature;
(iv) the Executive shall have engaged in any willful misconduct with regard to the Company resulting in or reasonably likely to result in a
material loss to the Company or substantial damage to its reputation; or
5
(v) the Executive shall have willfully breached in any material respect any material provision of the Company's Code of Conduct, which breach
would generally result in the termination of a senior executive of the Company and, to the extent any such breach is curable, the Executive shall
have failed to cure such breach within ten (10) days after written notice of the alleged breach is provided to the Executive.
(d) By the Company without Cause. The Company may terminate the Executive's employment at any time without Cause effective upon
written notice to the Executive.
(e) By the Executive Voluntarily. The Executive may terminate his employment at any time effective upon at least thirty (30) days prior written
notice to the Company.
(f) By the Executive for Good Reason. The Executive may terminate his employment for Good Reason by providing the Company thirty (30)
days' written notice setting forth in reasonable specificity the event that constitutes Good Reason, within sixty (60) days of the occurrence of
such event. During such thirty (30) day notice period, the Company shall have a cure right (if curable), and, if not cured within such period,
Executive's termination will be effective upon the expiration of such cure period. For this purpose, unless agreed to by the Executive, the term
"Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or
responsibilities or any duties which are illegal or unethical;
(ii) any reduction or diminution in the Executive's then titles or positions (including removal or failure to be re-elected to the Board or as Vice
Chairman), or a material reduction or diminution in the Executive's then authorities, duties or responsibilities or reporting requirements with the
Company; provided, however, that the sale of all or substantially all of the assets or stock of Loral Skynet Corporation or Space Systems/Loral,
Inc. (each, a "Subsidiary") shall not, by itself, constitute Good Reason;
(iii) any reduction in Base Salary, the Target Annual Bonus or any of the benefits described in Section 5 of this Agreement to the extent not
permitted under Section 5;
(iv) the relocation by the Company of the Executive's primary place of employment with the Company to a location outside of New York
County, New York;
(v) other material breach of this Agreement by the Company;
6
(vi) the failure of the Company to obtain the assumption in writing delivered to the Executive of its obligation to perform this Agreement by
any successor to all or substantially all of the assets of the Company;
(vii) the occurrence of a Change in Control, as defined in the Stock Option Plan, if the stockholders of the Company have not granted the
Approvals under Section 4(c) prior to the earlier of June 30, 2007 or a Change in Control; provided, however, that for purposes of this Section
6(f)(vii) the Executive shall not have Good Reason following the date that is six months following the earlier of June 30, 2007 or a Change in
Control; and further provided, however, that for purposes of this Section 6(f)(vii) the Executive shall not have Good Reason following the date
that the Approvals are obtained.
(viii)the failure of the stockholders of the Company to grant the Approvals by June 30, 2007; provided, however, that for purposes of this
Section 6(f)(viii) the Executive shall not have Good Reason following December 31, 2007; or
(ix) the failure of the Company to grant the 2008 Equity Award, unless such failure is due to the failure to obtain the Approvals.
Section 7. Termination Payments and Benefits.
(a) Voluntary Termination, Termination For Cause. Upon any termination of employment during the Term either (i) by the Executive without
Good Reason under
Section 6(e), or (ii) by the Company for Cause as provided in Section 6(c), all payments, Base Salary and other benefits hereunder shall cease
at the effective date of termination. Notwithstanding the foregoing, the Executive shall be entitled to receive from the Company (i) Base Salary
earned or accrued through the date the Executive's employment is terminated, (ii) reimbursement for any and all monies advanced in
connection with the Executive's employment for reasonable business expenses incurred by the Executive through the date the Executive's
employment is terminated, (iii) all other payments and benefits to which the Executive may be entitled under the terms of any applicable
compensation arrangement or benefit plan or program of the Company, including any earned and accrued, but unused vacation pay and benefits
under and in accordance with the terms and provisions of the SERP, but excluding any entitlement to severance under any Company severance
policy generally applicable to the Company's salaried employees, and (iv) excluding any accrued and unpaid Annual Bonus for the
immediately preceding year (collectively, the "Accrued Benefits"). Payment of the Accrued Benefits pursuant to this Section 7(a) shall be made
as soon as reasonably practicable following the Executive's termination of employment subject to such limitations and adjustments necessary to
comply with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code").
(b) Death. In the event of a termination due to the Executive's death during the Term, the Company shall have no further obligations to the
Executive or his
7
beneficiaries other than to pay to the Executive's designated beneficiary or, if no beneficiary has been designated by the Executive, to his estate
(i) all Accrued Benefits, plus (ii) any Base Salary through the end of the calendar month in which the Executive's death occurred, plus (iii) any
accrued and unpaid Annual Bonus for the immediately preceding year, and (iv) at the times the Company pays its executives bonuses in
accordance with its general payroll policies, an amount equal to that portion of the Annual Bonus, which but for the Executive's death would
have been earned by the Executive during the year of his death, pro-rated based on a formula, the denominator of which shall be 365 and the
numerator of which shall be the number of days during the year of his death during which the Executive was employed by the Company on an
active status (the Accrued Benefits and the payment of the amounts set forth in clauses (iii) and
(iv) of this Section 7(b) are collectively referred to as the "Enhanced Accrued Benefits"). In addition, any unvested stock options under the
Stock Option Plan and any deferred compensation under the Initial Option Agreement that would have become vested on the next date of
vesting applicable thereto shall become vested and shall remain exercisable or be paid as provided under the terms of the applicable plan or
agreement as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator of which shall be the number of
days during the year of his death during which the Executive was employed by the Company on an active status. The Executive's medical,
prescription and dental coverage shall continue for the benefit of the Executive's family through the end of the Term.
(c) Termination without Cause or for Good Reason. In the event that the Executive's employment is terminated during the Term by the
Company without Cause or by the Executive for Good Reason, the Executive shall be entitled to receive as his exclusive right and remedy in
respect of such termination, (i) all Enhanced Accrued Benefits, and (ii) a lump sum severance payment equal to two (2) times the sum of (A)
the Executive's Base Salary in effect on the date of termination and (B) the Annual Bonus for the immediately preceding year (or Target
Annual Bonus if termination occurs during the first year of the Term or before the Annual Bonus for the prior fiscal year is declared); provided,
however, that if the Good Reason is the event under Section 6(f)(vii), the sum of subsections (A) and (B) above shall be paid in the amount that
would be due for the remainder of the original Term rather than two (2) time such sum ("Severance Payments"). In addition, all unvested stock
options, other equity grants and all deferred compensation under the Initial Option Agreement shall become fully vested and shall remain
exercisable or be paid as provided under the terms of the applicable plan or agreement. Following the termination of the Executive's
employment by the Company without Cause or by the Executive for Good Reason, the Company shall provide medical, dental and life
insurance coverage, upon the same terms and conditions applicable generally to similarly situated executives who remain employed with the
Company, for a period of eighteen (18) months; provided, however, that for each of the eighteen (18) months following such termination the
Executive shall be responsible for payment of the regular employee portion of the monthly insurance premiums for such insurance, applicable
to similarly situated executives who remain employed with the Company, and the Company shall be responsible for payment of the regular
Company portion of the
8
monthly insurance premiums for such insurance, applicable to similarly situated executives who remain employed with the Company (the
"Welfare Severance Benefits"); and further provided, however, that such obligation shall expire if the Executive commences new employment
prior to the expiration of such eighteen
(18)-month period and becomes covered by substantially similar benefits. The Severance Payments, all other payments and the provision of
any continued benefits pursuant to this Section 7(c) shall be made as soon as reasonably practicable following the Executive's termination of
employment subject to such limitations and adjustments necessary to comply with Code Section 409A. For the avoidance of doubt, in the event
that all or substantially all of the assets or stock of a Subsidiary are acquired by a person or entity (the "Acquirer") and the Executive is offered
employment, as the principal executive officer of such Subsidiary consistent with the terms of this Agreement, by the Acquirer or any affiliate
of the Acquirer that directly or indirectly owns such Acquirer, or any successor to the Acquirer or any such affiliate and the Executive accepts
such offer and such Acquirer, affiliate or successor, as applicable, assumes this Agreement, the Executive shall not be treated as having a
termination of employment without Cause or for Good Reason; provided, however, that the Executive shall have no obligation to accept any
such offer of employment. Notwithstanding anything herein to the contrary, to the extent that the Executive willfully commits a material breach
of any provision of Section 10 hereof (a "Material Breach"), the Company shall be relieved of its obligation to provide the Welfare Severance
Benefits after such Material Breach and the Executive shall be obligated to pay to the Company, as partial damages related to the Severance
Payments, for such Material Breach an amount equal to X multiplied by Y, where X is a fraction, the denominator of which is 365 and the
numerator of which is the number of days remaining in the 365 days immediately following the Executive's termination of employment by the
Company without Cause or by the Executive for Good Reason after any such Material Breach, and Y is the amount of Severance Payments (the
"Severance Mitigation"). For example, if the Executive commits a Material Breach on the 182nd day following his termination of employment
by the Company without Cause or by the Executive for Good Reason and the Executive received $2,000,000 in Severance Payments, the
Executive would be obligated to pay $1,000,000 to the Company. Payment of the Severance Mitigation shall not limit the remedies of the
Company and its affiliates under
Section 10 or any other remedies that may be available to them, if a court of competent jurisdiction or arbitrator, as applicable, determines that
the Executive has breached any of the provisions of this Section 10.
(d) Termination due to Disability. In the event that the Executive's employment is terminated during the Term due to the Disability of the
Executive, the Company shall have no further obligation to the Executive other than to pay the Executive (in addition to any disability
insurance payments to which the Executive is entitled pursuant to Section 5 above) all Enhanced Accrued Benefits. In addition, any unvested
stock options under the Stock Option Plan and any deferred compensation under the Initial Option Agreement that would have become vested
on the next date of vesting applicable thereto shall become vested and shall remain exercisable or be paid as provided under the terms of the
applicable plan or agreement, as to a portion thereof
9
based on a formula, the denominator of which shall be 365 and the numerator of which shall be the number of days during the year of his
Disability during which the Executive was employed by the Company on an active status. Payment of the Enhanced Accrued Benefits and all
other payments pursuant to this Section 7(d) shall be made as soon as reasonably practicable following the Executive's termination of
employment subject to such limitations and adjustments necessary to comply with Code Section 409A.
(e) No Other Benefits. Except as specifically provided in this Section 7 or Section 8, the Executive shall not be entitled to any other
compensation, severance or other benefits from the Company or any of its subsidiaries or affiliates upon the termination of this Agreement or
the Executive's employment for any reason whatsoever. Payment by the Company of all Accrued Benefits, Enhanced Accrued Benefits and
Severance Payments (if applicable) and contributions to the cost of the Executive's confirmed participation in the Company's group medical,
dental and life insurance plans that may be due to the Executive under the applicable termination provision of this Section 7 shall constitute the
entire obligation of the Company to the Executive. Notwithstanding anything contained in this Agreement to the contrary, the Executive (or his
beneficiary or estate) shall be entitled, under all circumstances, to (i) payment of all amounts under and in accordance with the terms and
provisions of the SERP and other retirement plans, including, without limitation, whether or not the Executive is employed by the Company,
(ii) rights of indemnification that the Executive has been granted or at law, or (iii) continued coverage under the Company's director and officer
liability insurance policy at the same level as other officers and directors while potential liability exists.
(f) Condition. The Company will not be required to make the payment and provide the benefits stated in Section 7(c) and Section 8, unless the
Executive executes and delivers to the Company, a waiver and release agreement in the form attached hereto as EXHIBIT C with all periods of
revocation expired.
(g) Resignation from Company Offices. In the event of the Executive's termination of employment for any reason, the Executive shall resign
and shall be deemed to have resigned immediately from the Board (if the Executive is then a member of the Board) and any and all other
directorships, offices and positions with, on behalf of, or relating to the Company or any of its subsidiaries, effective as of the date of the
Executive's termination of employment with the Company.
(h) Expiration of Term. Upon the expiration of the Term, the Executive shall be entitled, at the time the Company pays its executives bonuses
for the last fiscal year of the Term in accordance with its general payroll policies, to the Annual Bonus earned in accordance with the terms of
the MIB Program for the last fiscal year of the Term, despite the fact that the Executive may not be employed with the Company when such
bonuses are paid. To the extent that the Executive's employment with the Company terminates for any reason at or following the expiration of
the Term, the Executive shall also be entitled to any Accrued Benefits. In addition, if, at or after the expiration of the Term Executive's
employment with the Company ceases for any reason without the parties having entered into a new employment contract or an extension of this
Agreement
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(notwithstanding who declined such future arrangement), the Executive shall be entitled to the continued vesting of the outstanding and
unvested portion of the 2008 Equity Award (the "Outstanding and Unvested Award") for an additional one-year period following the expiration
of such employment, and the Outstanding Unvested Award shall expire on the later of the end of such one-year period or as provided under the
terms of the applicable award agreement (but not beyond the original last exercise date of the grant); provided that if the 2008 Equity Award or
any such other equity award consists of restricted stock, such additional vesting shall occur on the date such restricted stock would be treated as
taxable income to the Executive.
Section 8. 280G Gross-Up.
(a) In the event that the Executive shall become entitled to payments and/or benefits provided by this Agreement or any other amounts in the
"nature of compensation" (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, or
any arrangement or agreement with any person whose actions result in a change of ownership or effective control covered by Code Section
280G(b)(2) (a "280G Change in Control") or any person affiliated with the Company or such person) as a result of a 280G Change in Control
(collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Code Section
4999 (and any similar tax that may hereafter be imposed by any taxing authority), subject to
Section 8(d) below the Company shall pay to the Executive at the time specified below (i) an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any U.S. federal, state,
and for local income or payroll tax upon the Gross-up Payment provided for by this paragraph, but before deduction for any U.S. federal, state,
and local income or payroll tax on the Company Payments, shall be equal to the Company Payments and (ii) an amount equal to the product of
any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Gross-Up Payment in the Executive's
adjusted gross income multiplied by the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar
year in which the Gross-Up Payment is to be made.
(b) Notwithstanding the foregoing, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that if the Company
Payments (other than that portion valued under Treasury Regulation Section 1.280G, Q&A
24(c)) (the "Cash Payments") are reduced by the amount necessary such that the receipt of the Company Payments would not give rise to any
Excise Tax (the "Reduced Payment") and the Reduced Payment would not be less than ninety-five percent (95%) of the Cash Payment, then no
Gross-Up Payment shall be made to the Executive and the Cash Payments, in the aggregate, shall be reduced to the Reduced Payments. If the
Reduced Payments is to be effective, payments shall be reduced in the following order (i) any cash severance based on a multiple of Base
Salary or Annual Bonus, (ii) any other cash amounts payable to the Executive, (iii) any benefits valued as parachute payments; (iv) acceleration
of vesting of any stock options for which the exercise price exceeds the then fair market value; and (v)
11
acceleration of vesting of any equity not covered by subsection (iv) above, unless the Executive elects another method of reduction by written
notice to the Company prior to the change of ownership or effective control.
(c) In the event that the Internal Revenue Service or court ultimately makes a determination that the excess parachute payments plus the base
amount is an amount other than as determined initially, an appropriate adjustment shall be made with regard to the Gross-Up Payment or
Reduced Payment, as applicable to reflect the final determination and the resulting impact on whether the preceding Section 8(d) applies.
(d) For purposes of determining whether any of the Company Payments and Gross-Up Payments (collectively the "Total Payments") will be
subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the
meaning of Code Section 280G(b)(2), and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)
(3)) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified
public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such
accountants or the Company (the "Accountants") such Total Payments (in whole or in part) either do not constitute "parachute payments,"
including giving effect to the recalculation of stock options in accordance with Treasury Regulation
Section 1.280G-1, Q&A 33, represent reasonable compensation for services actually rendered within the meaning of Code Section 280G(b)(4)
in excess of the "base amount" or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by the Accountants in accordance with the principles of Code Section 280G. To the extent permitted
under Revenue Procedure 2003-68, the value determination shall be recalculated to the extent it would be beneficial to the Executive. In the
event that the Accountants are serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the
Executive may appoint with the approval of the Company, which approval shall not be unreasonable or unreasonably delayed, another
nationally recognized accounting firm to make the determinations hereunder (which accounting firm shall then be referred to as the
"Accountants" hereunder). All determinations hereunder shall be made by the Accountants which shall provide detailed supporting calculations
both to the Company and the Executive at such time as it is requested by the Company or the Executive. If the Accountants determine that
payments under this Agreement must be reduced pursuant to this paragraph, they shall furnish the Executive with a written opinion to such
effect. The determination of the Accountants shall be final and binding upon the Company and the Executive.
(e) For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay U.S. federal income taxes at the
highest marginal rate of U.S. federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local
income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence for the calendar year in which the
Company Payment is to be made, net of the maximum reduction in U.S. federal income
12
taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently
determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, the
Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior
Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and U.S. federal,
state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a
reduction in Excise Tax or a U.S. federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate
provided in Code Section 1274(b)(2)(B). Notwithstanding the foregoing, in the event any portion of the Gross-Up Payment to be refunded to
the Company has been paid to any U.S. federal, state and local tax authority, repayment thereof (and related amounts) shall not be required
until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest
received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually
agree upon the course of action to be pursued (and the method of allocating the expense thereof) if the Executive's claim for refund or credit is
denied.
(f) In the event that the Excise Tax is later determined by the Accountant or the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any
interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined.
(g) The Gross-up Payment or portion thereof provided for above shall be paid not later than the thirtieth (30th) day following a 280G Change in
Control which subjects the Executive to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof
cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good
faith by the Accountant, of the minimum amount of such payments and shall pay the remainder of such payments, subject to further payments
pursuant to Section 8(c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day
after the occurrence of the event subjecting the Executive to the Excise Tax. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, subject to Section 8(m) below, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Code Section 1274(b)(2)
(B)).
(h) In the event of any controversy with the Internal Revenue Service (or other taxing authority) with regard to the Excise Tax, the Executive
shall permit the Company to control issues related to the Excise Tax (at its expense), but the Executive shall control any other issues unrelated
to the Excise Tax. In the event that the issues are
13
interrelated, the Executive and the Company shall in good faith cooperate. In the event of any conference with any taxing authority as to the
Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany the Executive, and the
Executive and his representative shall cooperate with the Company and its representative.
(i) The Company shall be responsible for all charges of the Accountant.
(j) The Company and the Executive shall promptly deliver to each other copies of any written communications, and summaries of any verbal
communications, with any taxing authority regarding the Excise Tax covered by this provision.
(k) Nothing in this Section 8 is intended to violate the Sarbanes-Oxley Act and to the extent that any advance or repayment obligation
hereunder would do so, such obligation shall be modified so as to make the advance a nonrefundable payment to the Executive and the
repayment obligation null and void.
Section 9. Mitigation and Offset. The Executive is not required to seek other employment or otherwise mitigate the amount of any payments to
be made by the Company pursuant to this Agreement. The payments provided in this Agreement shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer after the termination date or otherwise. However, the amounts
payable under this Agreement (including, but not limited to, any Severance Payments) shall be subject to setoff for any amounts that the
Executive owes to the Company, but not any other claim of the Company.
Section 10. Restrictive Covenants.
(a) Proprietary Information. In the course of service to the Company, the Executive will have access to confidential specifications, know-how,
strategic or technical data, marketing research data, product research and development data, manufacturing techniques, confidential customer
lists, sources of supply and trade secrets, all of which are confidential and may be proprietary and are owned or used by the Company, or any of
its subsidiaries or affiliates. Such information shall hereinafter be called "Proprietary Information" and shall include any and all items
enumerated in the preceding sentence and coming within the scope of the business of the Company or any of its subsidiaries or affiliates as to
which the Executive may have access, whether conceived or developed by others or by the Executive alone or with others during the
Executive's period of service with the Company, whether or not conceived or developed during regular working hours. Proprietary Information
shall not include any records, data or information which are in the public domain during Executive's service with the Company or after the
Executive's service with the Company has terminated, provided the same are not in the public domain as a consequence of disclosure by the
Executive in violation of this Agreement.
14
(b) Non-Use and Non-Disclosure. The Executive shall not during the Term or at any time thereafter (i) disclose any Proprietary Information to
any person other than (A) the Company, (B) the Company's or its affiliates' directors, officers or employees who, in the reasonable judgment of
the Executive, need to know such Proprietary Information, (C) such other persons to whom the Executive has been specifically instructed to
make disclosure by the Board; and in all such cases only to the extent required in the course of the Executive's service to the Company, (D) as
required by law or court or administrative order, or (E) in the good faith performance of the Executive's duties hereunder or (ii) use any
Proprietary Information, directly or indirectly, for his own benefit or for the benefit of any other person or entity.
(c) Return of Documents. All notes, letters, documents, records, tapes and other media of every kind and description containing Proprietary
Information and any copies, in whole or in part, thereof (collectively, the "Documents"), whether or not prepared by the Executive, shall be the
sole and exclusive property of the Company. The Executive shall safeguard all Documents in the Executive's possession and shall surrender to
the Company at the time his employment terminates, or at such other time or times as the Board or its designee may specify, all Documents
then in the Executive's possession or control; provided, that the Executive shall be permitted to retain his rolodex and similar address books,
including those in electronic form.
(d) Non-Competition. At all times during the Executive's employment with the Company or any affiliate during the Term, and for a period of
twelve (12) months following the termination during the Term of employment with the Company or any affiliate for any reason (or twenty-four
(24) months in the case of termination following a Change in Control) (the "Restricted Period"), the Executive will not engage in Competition
(as defined below) with the Company. For purposes of this Agreement, "Competition" shall mean engaging in, or otherwise directly or
indirectly being employed by, or acting as a consultant or adviser (paid or unpaid) to, or being a director, officer, employee, principal, agent,
stockholder, member, owner or partner of (i) Boeing, Lockheed, Alcatel Space or Astrium, (ii) PanAmSat, SES Astra, Intelsat, New Skies
Satellites,
(iii) any business similar to the businesses described in clause (i) or (ii) above that competes with the services provided by the Company, (iv)
any business that competes with a business that the Company engages in as of the date of the Executive's termination of employment with the
Company, as described or otherwise contemplated in the Company's business plan for the year of such termination of employment, or (v) any
business that competes with a business that the Company is, to the knowledge of the Executive, preparing to engage in as of the date of the
Executive's termination of employment with the Company, and any transferee of or successor to any of the foregoing businesses; provided,
however, that the foregoing shall not prevent or be violated by the Executive's service in a non-competitive portion of a company or business
enterprise in Competition with the Company or, as a result thereof, owning compensatory equity in such a company or business enterprise in
Competition with the Company; and further provided, however, that the prohibition of clauses (i) and (ii) above shall apply only so long as
such entities compete with the services provided by the
15
Company. Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or indirectly, own, solely as an investment,
securities of a business enterprise in Competition with the Company or its subsidiaries which are publicly traded on a national or regional stock
exchange or on the over-the-counter market if the Executive (i) is not a controlling person of or a member of a group which controls such
business enterprise and (ii) does not, directly or indirectly, own five percent (5%) or more of any class of securities of such business enterprise
or less than five percent (5%) in any mutual fund, private equity fund, hedge fund or similar collective investment, so long as the Executive's
investment is passive.
(e) Non-Solicitation of Employees. At all times during the Restricted Period, except in the course of the Executive's service to the Company
and consistent with Executives duties to the Company, the Executive will not directly or indirectly solicit or in any manner encourage
employees of the Company or any affiliate who were employed by the Company within the six
(6)-month period prior to the termination of the Executive's employment with the Company or any affiliate to leave its employ and will not
offer or cause to be offered employment to any such person; provided, however, that the restrictions in this paragraph shall not apply to (i)
general solicitations that are not specifically directed to employees of the Company or any affiliate, (ii) any administrative support staff or (iii)
serving as a reference at the request of an employee.
(f) Non-Solicitation of Customers or Suppliers. At all times during the Restricted Period, the Executive will not knowingly solicit or in any
manner encourage, directly or indirectly, customers of or suppliers to the Company or any affiliate who were customers of or suppliers to the
Company or any affiliate within the twelve-month period prior to the termination of the Executive's employment with the Company or any
affiliate to terminate or diminish their relationship with the Company or any affiliate.
(g) Reasonableness. The Executive has carefully considered the nature, extent and duration of the restrictions and obligations contained in this
Agreement, including, without limitation, provisions of this Section 10 and acknowledges and agrees that such restrictions are fair and
reasonable in all respects to protect the legitimate interests of the Company and its affiliates and that these restrictions are designed for the
reasonable protection of the business of the Company and that of its affiliates.
(h) Remedies. The Executive recognizes that any breach of this Section 8 shall cause irreparable injury to the Company or its affiliates,
inadequately compensable in monetary damages. Accordingly, in addition to any other legal or equitable remedies that may be available to the
Company, Executive agrees that the Company or its affiliates shall be able to seek and obtain injunctive relief in the form of a temporary
restraining order, preliminary injunction, or permanent injunction against the Executive to enforce this Agreement. To the extent that any
damages are calculable resulting from the breach of this Agreement, the Company and its affiliates shall also be entitled to recover such
damages. Any recovery of damages by the Company and its affiliates shall be in addition to and not in lieu of the injunctive relief to which the
Company and its affiliates are entitled and any Severance Mitigation.
16
Section 11. Severable Provisions. The provisions of this Agreement are severable and the invalidity of any one or more provisions shall not
affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision of this
Agreement or the application thereof is unenforceable in whole or in part because of the duration or scope thereof, the parties hereto agree that
said court in making such determination shall have the power to reduce the duration and scope of such provision to the extent necessary to
make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law.
Section 12. Notices. All notices hereunder, to be effective, shall be in writing and shall be delivered by hand or mailed by certified mail,
postage and fees prepaid, as follows:
If to the Company: Loral Space & Communications Inc.
600 Third Avenue
New York, New York 10016
Attention: General Counsel
If to the Executive to the address on file with the Company.
or to such other address as a party may notify the other pursuant to a notice given in accordance with this Section 12. All notices to any person
shall be deemed given when actually received by the person.
Section 13. Miscellaneous.
(a) Amendment. This Agreement may not be amended or revised except by a writing signed by the parties.
(b) Assignment and Transfer. The provisions of this Agreement shall be binding on and shall inure to the benefit of any successor in interest to
the Company. Neither this Agreement nor any of the rights, duties or obligations of the Executive shall be assignable by the Executive, nor
shall any of the payments required or permitted to be made to the Executive by this Agreement be encumbered, transferred or in any way
anticipated, except as required by applicable laws. This Agreement shall not be terminated solely by reason of the merger or consolidation of
the Company with any corporate or other entity or by the transfer of all or substantially all of the assets of the Company to any other person,
corporation, firm or entity; provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and
such assignee or transferee assumes the rights and duties of the Company as contained in this Agreement, either contractually or as a matter of
law. However, all rights of the Executive under this Agreement shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid,
in the event of the Executive's death, to the Executive's estate, heirs or representatives.
17
(c) Withholding. The Company shall be entitled to withhold from any amounts to be paid or benefits provided to the Executive hereunder any
federal, state, local, or foreign withholding or other taxes or charges which it is from time to time required to withhold. The Company shall be
entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise.
(d) Waiver of Breach. A waiver by the Company or the Executive of any breach of any provision of this Agreement by the other party shall not
operate or be construed as a waiver of any other or subsequent breach by the other party.
(e) Survival of Certain Provisions. Provisions of this Agreement shall survive any termination of employment and the expiration of the Term if
so provided herein or if necessary or desirable fully to accomplish the purposes of such provision, including, without limitation, the obligations
of the Company under Sections 7 and 8 hereof if the Executive is terminated during the Term and the obligations of the Executive under
Section 10 hereof.
(f) Attorney's Fees.
(i) The Company shall pay the reasonable legal fees incurred by the Executive in connection with this Agreement and to the extent such
payment is taxed to the Executive, the Company shall gross up such amount so that the Executive has no after-tax cost therefrom.
(ii) In the event that any action is brought to enforce any of the provisions of this Agreement, or to obtain money damages for the breach
thereof, all expenses (including reasonable attorneys' fees and expenses) shall be paid by the party incurring such fees or expenses; provided,
however, that the Company shall reimburse Executive for such fees and expenses to the extent that the Executive prevails on any issues raised
in such action.
(g) Entire Agreement. This Agreement, the Stock Option Plan, the Option Agreements, the Indemnification Agreement referred to in Section 5
(f) hereof, the Certificates of Incorporation of the Company and of each of its affiliates and the SERP, constitute the entire understanding of the
parties with respect to the subject matter hereof and supercede all prior negotiations, understandings, discussions, and agreements, whether
written or oral, between them.
(h) Captions. Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
(i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and shall have the
same effect as if the signatures hereto and thereto were on the same instrument.
18
(j) Governing Law. This Agreement and the enforcement thereof shall be governed and controlled in all respects by the internal laws of the
State of New York, without application of the conflict of laws provisions thereof.
(k) Arbitration. Any dispute or controversy arising from or relating to this Agreement and/or the Executive's employment or relationship with
the Company shall be resolved by binding arbitration, to be held in New York or in any other location mutually agreed to by the Company and
the Executive in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
(l) Acknowledgement of Representation. The Executive and the Company acknowledge that they have been represented by counsel of their
own choosing and have received a full and complete explanation of their rights and obligations under this Agreement and, therefore, in the
event of a dispute over the meaning of this Agreement or any provision thereof, neither party shall be entitled to any presumption of correctness
in favor of the interpretation advanced by such party or against the interpretation advanced by the other party.
(m) Guarantee.
(i) Each of Loral Skynet Corporation and Space Systems/Loral, Inc. (each a "Guarantor") hereby acknowledge the benefit they will receive as a
result of the Executive serving as Chief Executive Officer of the Company and accordingly, irrevocably and unconditionally guarantees the due
and punctual payment and performance of all obligations of the Company under this Agreement; provided, however, that a Guarantor's
guarantee obligation hereunder shall terminate and cease to have any force or effect immediately upon (x) such Guarantor ceasing to be a direct
or indirect subsidiary or parent of the Company or (y) the sale of all or substantially all of such Guarantor's assets pursuant to an Approved
Transaction (as defined below) in which a Guarantor does not receive all or substantially all of the consideration of such sale.
(ii) Notwithstanding anything in this Agreement to the contrary and for as long as the Guarantor's obligations hereunder are in effect, the
Executive hereby acknowledges and agrees that at any time a Guarantor may effectuate, and this Agreement shall not in any way prohibit or
restrict the Guarantor from effectuating, and the Executive shall not have any right or claim with respect to, rely upon, or challenge (A) any
transfer by the Guarantor of any or all of its funds, assets or other property to either: (1) the Company or any of its direct or indirect
subsidiaries or their successors (each a "Group Entity"), including by way of dividend, distribution, payment, lease, sale, assignment, transfer,
merger, consolidation or otherwise, or (2) any other person, pursuant to a transaction that the Guarantor's Board of Directors determines in
good faith to effect in furtherance of a legitimate business purpose of the Guarantor or any Group Entity (an "Approved Transaction") or (B)
the liquidation or dissolution of a Guarantor.
19
(n) Code Section 409A. If any provision of this Agreement (or of any award of compensation, including equity compensation or benefits)
would cause the Executive to incur any additional tax or interest under Code Section 409A or any regulations or Treasury guidance
promulgated thereunder, the Company shall, after consulting with the Executive, reform such provision to comply with Code
Section 409A; provided that the Company agrees to maintain, to the maximum extent practicable, the original intent and economic benefit to
Executive of the applicable provision without violating the provisions of Code Section 409A. The Company shall indemnify and hold the
Executive harmless, on an after tax basis, for any additional tax (including interest and penalties with respect there to) that may be imposed on
the Executive by Code Section 409A as a result of the Option being granted subject to the Approvals.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ Avi Katz
-----------------------------------------------------
Name: Avi Katz
Title: Vice President and General Counsel
/s/ Michael B. Targoff
--------------------------------------------------------
Michael B. Targoff
LORAL SKYNET CORPORATION (solely for purposes of Section 11(m) hereof)
By: /s/ Avi Katz
---------------------------------------------------------
Name: Avi Katz
Title: Vice President
SPACE SYSTEMS/LORAL, INC. (solely for purposes of Section 11(m) hereof)
By: /s/ Avi Katz
---------------------------------------------------------
Name: Avi Katz
Title: Vice President
20
Schedule I
Outside Business Relationships
1. Chairman of the Board of Directors and Chairman of the Audit Committee of Communication Power Industries.
2. Member of the Board of Directors and Chairman of the Audit Committee of Leap Wireless International, Inc.
3. Member of the Board of Directors of ViaSat Inc.
and any replacements for any of the foregoing that does not materially change the time commitment or violate Section 10 of the Employment
Agreement.
Perquisites and Individual Benefits
EXECUTIVE
LIFE EXECUTIVE
INSURANCE MEDICAL
ANNUAL PREMIUM
NOT TO EXCEED
$25,000 $4,000
21
Exhibit 10.11
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of the 21st day of November, 2005, by and between Loral Space & Communications Inc., a Delaware corporation (the
"Company"), Eric J. Zahler, a resident of New York, NY (the "Executive") and those subsidiaries of the Company signatory hereto solely for
purposes of Section 11(m) hereof.
WHEREAS, the Company desires to engage the services of the Executive and the Executive desires to be employed by the Company on the
terms and conditions hereinafter set forth; and
WHEREAS, the Company desires to be assured that all proprietary and confidential information of the Company will be preserved for the
exclusive benefit of the Company;
NOW, THEREFORE, in consideration of such employment and the mutual covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows:
Section 1. Employment and Position. The Company hereby employs the Executive as its President & Chief Operating Officer, and the
Executive hereby accepts such employment under and subject to the terms and conditions hereinafter set forth.
Section 2. Term. The term of employment under this Agreement shall begin on the Effective Date, as such term is defined in the Debtors'
Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated June 3, 2005, as modified (the "Plan of
Reorganization"), and, unless sooner terminated as provided in Section 6, shall conclude on the second (2nd) anniversary of the Effective Date
(the "Term"). At the Executive's request within the last six months preceding the expiration of the Term, the Company shall, to the extent
practicable within two weeks after any such request but without any obligation, provide the Executive with notice regarding whether the
Company intends to renew or extend the Term under this Agreement, terminate the employment relationship between the parties on or shortly
after the expiration of the Term or continue the Executive's employment on an "at will" basis with no guaranteed term. Unless the Executive's
employment with the Company is terminated upon the expiration of the Term or the Term under this Agreement is renewed or extended, the
Executive shall be employed by the Company after the Term on an "at will" basis.
Section 3. Duties. The Executive shall perform services in a managerial capacity in a manner consistent with the Executive's position as
President & Chief Operating Officer, subject to the general supervision of the Chief Executive Officer of the Company or his designee. The
Executive hereby agrees to devote his full business time to the faithful performance of such duties and to the promotion and forwarding of the
business and affairs of the Company for the Term, provided, however, that Executive shall be permitted to engage in (i) other activities of a
civic, religious, political or charitable nature, (ii) managing investments of the Executive and the Executive's family in securities, mutual funds
or other collective investment funds, limited partner interests
or similar passive investments, (iii) corporate directorships and other business activities described in Schedule I attached hereto, or (iv) such
other activities as may hereafter be specifically approved in writing, which in each case and in the aggregate do not materially interfere with the
performance of his obligations hereunder, provided, further, however, that Executive may not engage in any such activities that would result in
the Executive being in Competition (as defined in Section 8(d) below).
Section 4. Compensation.
(a) Salary. In consideration of the services rendered by the Executive under this Agreement, the Company shall pay the Executive a base salary
(the "Base Salary") at the rate of $1,248,000 per calendar year. The Base Salary shall be paid in such installments and at such times as the
Company pays its salaried executives and shall be subject to all necessary withholding taxes, FICA contributions and similar deductions. The
Board of Directors (the "Board") of the Company may review from time to time the Base Salary payable to Executive hereunder and may, in its
sole discretion, increase but not decrease, the Executive's salary rate. Any such increased salary shall be and become the "Base Salary" for
purposes of this Agreement.
(b) Annual Bonus. The Company shall maintain an annual Management Incentive Bonus program ("MIB Program") for certain executives, and
Executive shall be a participant in the MIB Program and shall be entitled to an annual bonus to the extent payable under such program
("Annual Bonus"). The Executive's target annual bonus opportunity under the MIB Program shall be forty percent (40%) of the Executive's
Base Salary (the "Target Annual Bonus"). The Annual Bonus for the 2005 fiscal year under the MIB Program shall be earned and determined
in accordance with the terms and conditions heretofore established by the Compensation Committee of the Board of Directors of Loral Space &
Communications Ltd. With respect to the Annual Bonus for the 2006 fiscal year or any subsequent fiscal year, the Board shall, in its discretion,
establish the terms and conditions of the MIB Program and may amend the MIB Program (other than by reducing the Target Annual Bonus
percentage set forth above) accordingly. The Annual Bonus shall be paid on or before March 15 of the year following the year to which the
Annual Bonus relates.
(c) Stock Options. The Company agrees to grant to the Executive an option to purchase 120,000 shares of common stock of the Company (the
"Option") pursuant to the terms of the Company's 2005 Stock Incentive Plan (the "Stock Option Plan"). Except as set forth in the Option
Agreement (defined below), the Option shall have a per share exercise price equal to $19.00. Such Option shall be granted on or about the
thirtieth (30th) day following the Effective Date. The Option shall have such other terms and conditions as set forth in the Option Agreement
attached hereto as Exhibit A (the "Option Agreement").
Section 5. Benefits. In addition to the compensation detailed in Section 4 of this Agreement, the Executive shall be entitled to the following
additional benefits:
(a) Paid Vacation. The Executive shall be entitled to twenty (20) days paid vacation per calendar year in accordance with the Company's
vacation policy in effect
2
from time to time, such vacation shall extend for such periods and shall be taken at such intervals as shall be appropriate and consistent with
the proper performance of the Executive's duties hereunder.
(b) Welfare Plans. During the Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans, programs, practices and policies provided generally by the Company to similarly situated
executives of the Company (including, without limitation, any medical, prescription, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and programs that may be provided by the Company from time to time). Such plans,
programs, practices and policies are subject to change from time to time by the Company.
(c) Other Benefit Plans. During the Term, the Executive shall be entitled to participate in all savings, retirement and pension plans (including
the Company's Supplemental Executive Retirement Plan ("SERP")), programs, practices and policies applicable generally to similarly situated
executives of the Company as determined by the Board from time to time. Such plans, programs, practices and policies are subject to change
from time to time by the Company.
(d) Perquisites and Other Benefits. During the Term, the Executive shall be entitled to such additional perquisites and fringe benefits
appertaining to his position in accordance with any practice established by the Board. During the Term, Executive shall be entitled to receive
all benefits under any individual welfare benefit arrangements (including life insurance coverage) or other benefit arrangements currently in
effect for such Executive in a manner consistent with past practice, and such arrangements are listed on Schedule I attached hereto.
(e) Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable and necessary expenses actually incurred by
the Executive directly in connection with the business affairs of the Company and the performance of his duties hereunder, upon presentation
of proper receipts or other proof of expenditure and subject to such reasonable guidelines or limitations provided by the Company from time to
time. The Executive shall comply with such reasonable limitations and reporting requirements with respect to such expenses as the Board may
establish from time to time.
(f) Indemnification. In addition to indemnification obligations of the Company pursuant to Section 8.7 of the Plan of Reorganization and the
terms of any officers' liability insurance carried by the Company, the Executive (and his heirs, executors and administrators) shall be
indemnified by the Company and its successors and assigns pursuant to a separate Indemnification Agreement in the form attached hereto as
Exhibit B. The Executive shall be an insured person under or otherwise covered by directors and officers liability insurance in an amount
consistent with past practice. The obligations of the Company pursuant to this Section shall survive the expiration of the Term or Executive's
voluntary or involuntary termination or resignation for Good Reason.
3
Section 6. Termination. This Agreement shall terminate at the end of the Term. The Executive's employment may end earlier as follows:
(a) Death. The employment of the Executive shall automatically terminate upon the death of the Executive.
(b) Disability. In the event of any physical or mental disability of the Executive rendering the Executive substantially unable to perform his
duties hereunder for a period of at least 120 days out of any twelve-month period and the further determination that the disability is permanent
with regard to the Executive's ability to return to work in his full capacity, the Executive's employment shall be terminated on account of the
Executive's disability. Any determination of permanent disability shall be made by the Board in consultation with a qualified physician or
physicians selected by the Board and reasonably acceptable to the Executive. The failure of the Executive to submit to a reasonable
examination by such physician or physicians shall act as an estoppel to any objection by the Executive to the determination of disability by the
Board.
(c) By the Company For Cause. The employment of the Executive may be terminated by the Company for Cause (as defined below) at any
time effective upon written notice to the Executive; provided, however, that if such termination is based upon any event set forth in clauses
(iii), (iv), (v), (vi) or (vii) below, Executive shall be given not less than ten (10) days prior written notice by the Board of the intention to
terminate him for Cause, such notice to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which
the proposed termination for Cause is based, and Executive shall have ten (10) days after the date that such written notice has been given to
Executive in which to address the Board regarding any such alleged act or failure to act. If the Board makes a determination that Cause exists,
the termination shall be effective on the date immediately following the expiration of the ten (10) day notice period. For purposes hereof, the
term "Cause" shall mean that the Board has determined reasonably, in good faith and based on credible evidence that one or more of the
following has occurred:
(i) the Executive shall have been after the Effective Date convicted of, or shall have pleaded guilty or nolo contendere to, any felony or any
other crime that would have constituted a felony under the laws of the State of New York;
(ii) the Executive shall have been indicted for any felony or any other crime that would have constituted a felony under the laws of the State of
New York in connection with or arising from the Executive's employment with the Company;
(iii) the Executive shall have breached any material provision of
Section 8 hereof;
(iv) the Executive shall have committed any fraud, embezzlement, misappropriation of funds, or breach of fiduciary duty against the Company,
in each case of a material nature;
4
(v) the Executive shall have engaged in any willful misconduct resulting in or reasonably likely to result in a material loss to the Company or
substantial damage to its reputation;
(vi) the Executive shall have willfully breached in any material respect any material provision of the Company's Code of Conduct and, to the
extent any such breach is curable, the Executive shall have failed to cure such breach within ten (10) days after written notice of the alleged
breach is provided to the Executive; or
(vii) the Executive shall have willfully breached in any material respect any material provision of Section 3 hereof.
(d) By the Company without Cause. The Company may terminate the Executive's employment at any time without Cause effective upon
written notice to the Executive.
(e) By the Executive Voluntarily. The Executive may terminate his employment at any time effective upon at least thirty (30) days prior written
notice to the Company.
(f) By the Executive for Good Reason. The Executive may terminate his employment for Good Reason by providing the Company thirty (30)
days' written notice setting forth in reasonable specificity the event that constitutes Good Reason, within sixty (60) days of the occurrence of
such event. During such thirty (30) day notice period, the Company shall have a cure right (if curable), and, if not cured within such period,
Executive's termination will be effective upon the expiration of such cure period. For this purpose, the term "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or
responsibilities or any duties which are illegal or unethical or any material diminution of any of the Executive's significant duties;
(ii) any reduction in Base Salary, the Target Annual Bonus or any of the benefits described in Section 5 of this Agreement to the extent not
permitted under Section 5;
(iii) the relocation by the Company of the Executive's primary place of employment with the Company to a location not within a thirty (30)
mile radius of such place of employment as of the Effective Date; provided, however, that such relocation shall not be considered Good Reason
if such location is closer to the Executive's home than the Executive's primary place of employment as of the Effective Date;
(iv) other material breach of this Agreement by the Company; or
5
(v) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company.
Notwithstanding anything in this Agreement to the contrary, any determination by the non-employee directors of the Board regarding the
action the Company shall take with respect to (a) any personal claims of any of the Company's or its affiliates' officers (including Executive) or
directors against the Company or any of its affiliates for indemnification arising from or in connection with alleged acts or omissions that
occurred on or prior to the date of the commencement of the chapter 11 cases of Loral Space & Communications Ltd. and certain of its
affiliates on July 15, 2003; and (b) the Shared Services Agreement or the Management Agreement, each of even date herewith, by and among
the Company, Loral Skynet Corporation and Space Systems/Loral, Inc., shall not constitute Good Reason.
Section 7. Termination Payments and Benefits.
(a) Voluntary Termination, Termination For Cause. Upon any termination of employment during the Term either (i) by the Executive without
Good Reason under
Section 6(e), or (ii) by the Company for Cause as provided in Section 6(c), all payments, salary and other benefits hereunder shall cease at the
effective date of termination. Notwithstanding the foregoing, the Executive shall be entitled to receive from the Company (i) all salary earned
or accrued through the date the Executive's employment is terminated, (ii) reimbursement for any and all monies advanced in connection with
the Executive's employment for reasonable and necessary business expenses incurred by the Executive through the date the Executive's
employment is terminated, (iii) all other payments and benefits to which the Executive may be entitled under the terms of any applicable
compensation arrangement or benefit plan or program of the Company, including any earned and accrued, but unused vacation pay and benefits
under and in accordance with the terms and provisions of the SERP, but excluding any entitlement to severance under any Company severance
policy generally applicable to the Company's salaried employees, and (iv) excluding any accrued and unpaid Annual Bonus for the
immediately preceding year (collectively, "Accrued Benefits").
(b) Death. In the event of a termination due to the Executive's death during the Term, the Company shall have no further obligations to the
Executive or his beneficiaries other than to pay to the Executive's designated beneficiary or, if no beneficiary has been designated by the
Executive, to his estate (i) all Accrued Benefits, plus (ii) any Base Salary through the end of the calendar month in which the Executive's death
occurred, plus (iii) any accrued and unpaid Annual Bonus for the immediately preceding year, and (iv) at the times the Company pays its
executives bonuses in accordance with its general payroll policies, an amount equal to that portion of the Annual Bonus which but for the
Executive's death would have been earned by the Executive during the year of his death, pro rated based on a formula, the denominator of
which shall be 365 and the numerator of which shall be the number of days during the year of his death during which the Executive was
employed by the Company on an active status (the Accrued Benefits and the payment of the amounts set forth in clauses (iii) and
(iv) of this Section 7(b) are collectively referred to as "Enhanced Accrued Benefits"). In
6
addition, any unvested stock options under the Stock Option Plan and any deferred compensation under the Option Agreement that would have
become vested on the next date of vesting applicable thereto shall become vested and shall remain exercisable or be paid as provided under the
terms of the applicable plan or agreement as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator
of which shall be the number of days during the year of his death during which the Executive was employed by the Company on an active
status. The Executive's medical, prescription and dental coverage shall continue for the benefit of the Executive's family members through the
end of the Term.
(c) Termination without Cause or for Good Reason. In the event that the Executive's employment is terminated during the Term by the
Company without Cause or by the Executive for Good Reason, the Executive shall be entitled to receive as his exclusive right and remedy in
respect of such termination, (i) all Enhanced Accrued Benefits, (ii) severance pay equal to the greater of (A) the amount set forth on Schedule II
hereto, or (B) the remaining amount of Base Salary the Executive would have received had the Executive been employed through the end of the
Term ("Severance Payments"), with such Severance Payments to be paid in a lump sum as soon as practicable on or after termination (but not
later than three business days after the release described in Section 7(f) becomes effective and not revocable). In addition, all unvested stock
options under the Stock Option Plan and all deferred compensation under the Option Agreement shall become fully vested and shall remain
exercisable or be paid as provided under the terms of the applicable plan or agreement, and the Executive shall continue to be covered, upon the
same terms and conditions applicable generally to similarly situated executives who remain employed with the Company, by the same or
equivalent medical, dental and life insurance coverage as in effect for the Executive immediately prior to the termination of his employment,
until the earlier of (A) the expiration of a period of months determined by dividing the lump sum amount of severance pay he receives pursuant
to clause (ii) of the preceding sentence by the Executive's monthly salary rate in effect on his date of termination, or (B) the date the Executive
has commenced new employment and has thereby become eligible for comparable benefits, subject to the Executive's rights under COBRA.
For avoidance of doubt, if the Executive is offered employment consistent with the terms of this Agreement with the person that acquires all or
substantially all of the assets or stock of New FSS or New SSL (as such terms are defined in the Plan of Reorganization), any affiliate that
directly or indirectly owns such acquirer, or any successor to the acquirer or any such affiliate and such person assumes this Agreement, the
Executive shall not be treated as having a termination of employment without Cause or for Good Reason, regardless of whether the Executive
refuses the offer of employment, by reason of the sale of such assets or stock.
(d) Termination due to Disability. In the event that the Executive's employment is terminated during the Term due to the Disability of the
Executive, the Company shall have no further obligation to the Executive other than to pay the Executive (in addition to any disability
insurance payments to which the Executive is entitled pursuant to Section 5 above) all Enhanced Accrued Benefits. In addition, any unvested
stock options under the Stock Option Plan and any deferred compensation under the Option Agreement that would have become vested on the
next date of vesting
7
applicable thereto shall become vested and shall remain exercisable or be paid as provided under the terms of the applicable plan or agreement,
as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator of which shall be the number of days
during the year of his Disability during which the Executive was employed by the Company on an active status.
(e) No Other Benefits. Except as specifically provided in this Section 7, the Executive shall not be entitled to any other compensation,
severance or other benefits from the Company or any of its subsidiaries or affiliates upon the termination of this Agreement or the Executive's
employment for any reason whatsoever. Payment by the Company of all Accrued Benefits, Enhanced Accrued Benefits and Severance
Payments (if applicable) and contributions to the cost of the Executive's confirmed participation in the Company's group medical, dental and
life insurance plans that may be due to the Executive under the applicable termination provision of this Section 7 shall constitute the entire
obligation of the Company to the Executive. Notwithstanding anything contained in this Agreement to the contrary, the Executive (or his
beneficiary or estate) shall be entitled, under all circumstances, to payment of all amounts under and in accordance with the terms and
provisions of the SERP, including, without limitation, whether or not the Executive is employed by the Company.
(f) Condition. The Company will not be required to make the payment and provide the benefits stated in this Section 7 unless the Executive
executes and delivers to the Company a waiver and release agreement in the form attached hereto as Exhibit C and such waiver and release is
not unilaterally revocable by the Executive.
(g) Resignation from Company Offices. In the event of the Executive's termination of employment for any reason, the Executive shall resign
and shall be deemed to have resigned immediately from the Board (if the Executive is then a member of the Board) and any and all other
directorships, offices and positions with, on behalf of, or relating to the Company or any of its subsidiaries, effective as of the date of the
Executive's termination of employment with the Company.
Section 8. Restrictive Covenants.
(a) Proprietary Information. In the course of service to the Company, the Executive will have access to confidential specifications, know-how,
strategic or technical data, marketing research data, product research and development data, manufacturing techniques, confidential customer
lists, sources of supply and trade secrets, all of which are confidential and may be proprietary and are owned or used by the Company, or any of
its subsidiaries or affiliates. Such information shall hereinafter be called "Proprietary Information" and shall include any and all items
enumerated in the preceding sentence and coming within the scope of the business of the Company or any of its subsidiaries or affiliates as to
which the Executive may have access, whether conceived or developed by others or by the Executive alone or with others during the
Executive's period of service with the Company, whether or not conceived or developed during regular working hours. Proprietary Information
shall not include any records, data or information which are in the public domain during Executive's service with the Company or after the
Executive's service with the Company has terminated, provided the
8
same are not in the public domain as a consequence of disclosure by the Executive in violation of this Agreement.
(b) Non-Use and Non-Disclosure. The Executive shall not during the Term or at any time thereafter (i) disclose any Proprietary Information to
any person other than (A) the Company, (B) the Company's or its affiliates' directors, officers or employees who, in the reasonable judgment of
the Executive, need to know such Proprietary Information, (C) such other persons to whom the Executive has been specifically instructed to
make disclosure by the Board; and in all such cases only to the extent required in the course of the Executive's service to the Company or (D)
as required by law, or (ii) use any Proprietary Information, directly or indirectly, for his own benefit or for the benefit of any other person or
entity.
(c) Return of Documents. All notes, letters, documents, records, tapes and other media of every kind and description containing Proprietary
Information and any copies, in whole or in part, thereof (collectively, the "Documents"), whether or not prepared by the Executive, shall be the
sole and exclusive property of the Company. The Executive shall safeguard all Documents and shall surrender to the Company at the time his
employment terminates, or at such other time or times as the Board or its designee may specify, all Documents then in the Executive's
possession or control.
(d) Non-Competition. At all times during the Executive's employment with the Company or any affiliate during the Term, and for a period of
twelve (12) months following the termination during the Term of employment with the Company or any affiliate for any reason (the "Restricted
Period"), the Executive will not engage in Competition (as defined below) with the Company. For purposes of this Agreement, "Competition"
shall mean engaging in, or otherwise directly or indirectly being employed by, or acting as a consultant or adviser (paid or unpaid) to, or being
a director, officer, employee, principal, agent, stockholder, member, owner or partner of (i) Boeing, Lockheed, Alcatel Space or Astrium, (ii)
PanAmSat, SES Astra, Intelsat, New Skies Satellites, (iii) any business similar to the businesses described in clause (i) or (ii) above that
competes with the services provided by the Company, (iv) any business that competes with a business that the Company engages in as of the
date of the Executive's termination of employment with the Company, as described or otherwise contemplated in the Company's business plan
for the year of such termination of employment, or (v) any business that competes with a business that the Company is, to the knowledge of the
Executive, preparing to engage in as of the date of the Executive's termination of employment with the Company, and any transferee of or
successor to any of the foregoing businesses. Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or
indirectly, own, solely as an investment, securities of a business enterprise in Competition with the Company or its subsidiaries which are
publicly traded on a national or regional stock exchange or on the over-the-counter market if the Executive (i) is not a controlling person of or a
member of a group which controls such business enterprise and (ii) does not, directly or indirectly, own five percent (5%) or more of any class
of securities of such business enterprise.
(e) Non-Solicitation of Employees. At all times during the Restricted Period, the Executive will not directly or indirectly solicit or in any
manner encourage employees
9
of the Company or any affiliate who were employed by the Company within the six-month period prior to the termination of the Executive's
employment with the Company or any affiliate to leave its employ and will not offer or cause to be offered employment to any such person;
provided, however, that the restrictions in this paragraph shall not apply to (i) general solicitations that are not specifically directed to
employees of the Company or any affiliate and (ii) any administrative support staff.
(f) Non-Solicitation of Customers or Suppliers. At all times during the Restricted Period, the Executive will not knowingly solicit or in any
manner encourage, directly or indirectly, customers of or suppliers to the Company or any affiliate who were customers of or suppliers to the
Company or any affiliate within the twelve-month period prior to the termination of the Executive's employment with the Company or any
affiliate to terminate or diminish their relationship with the Company or any affiliate.
(g) Reasonableness. The Executive has carefully considered the nature, extent and duration of the restrictions and obligations contained in this
Agreement, including, without limitation, provisions of this Section 8 and acknowledges and agrees that such restrictions are fair and
reasonable in all respects to protect the legitimate interests of the Company and its affiliates and that these restrictions are designed for the
reasonable protection of the business of the Company and that of its affiliates.
(h) Remedies. The Executive recognizes that any breach of this Section 8 shall cause irreparable injury to the Company or its affiliates,
inadequately compensable in monetary damages. Accordingly, in addition to any other legal or equitable remedies that may be available to the
Company, Executive agrees that the Company or its affiliates shall be able to seek and obtain injunctive relief in the form of a temporary
restraining order, preliminary injunction, or permanent injunction against the Executive to enforce this Agreement. To the extent that any
damages are calculable resulting from the breach of this Agreement, the Company and its affiliates shall also be entitled to recover damages.
Any recovery of damages by the Company and its affiliates shall be in addition to and not in lieu of the injunctive relief to which the Company
and its affiliates are entitled. Without limiting the rights of the Company and its affiliates under this Section 8 or any other remedies that may
be available to them, if a court of competent jurisdiction determines that the Executive has breached any of the provisions of this Section 8, the
Company or its affiliates will have the right to cease making any payments or providing any benefits otherwise due to Executive under the
terms and conditions of this Agreement, and the right to recover the Annual Bonus that may have been paid as part of the Enhanced Accrued
Benefits and the Severance Payment that the Executive may have received under this Agreement.
Section 9. Severable Provisions. The provisions of this Agreement are severable and the invalidity of any one or more provisions shall not
affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision of this
Agreement or the application thereof is unenforceable in whole or in part because of the duration or scope thereof, the parties hereto agree that
said court in making such determination shall have the power to reduce the duration and scope of such provision to the extent necessary to
make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law.
10
Section 10. Notices. All notices hereunder, to be effective, shall be in writing and shall be delivered by hand or mailed by certified mail,
postage and fees prepaid, as follows:
If to the Company: Loral Space & Communications Inc.
600 Third Avenue
New York, New York 10016
Attention: General Counsel
If to the Executive: Eric J. Zahler
860 Fifth Avenue
New York, NY 10021
or to such other address as a party may notify the other pursuant to a notice given in accordance with this Section 10. All notices to any person
shall be deemed given when actually received by the person.
Section 11. Miscellaneous.
(a) Amendment. This Agreement may not be amended or revised except by a writing signed by the parties.
(b) Assignment and Transfer. The provisions of this Agreement shall be binding on and shall inure to the benefit of any such successor in
interest to the Company. Neither this Agreement nor any of the rights, duties or obligations of the Executive shall be assignable by the
Executive, nor shall any of the payments required or permitted to be made to the Executive by this Agreement be encumbered, transferred or in
any way anticipated, except as required by applicable laws. This Agreement shall not be terminated solely by reason of the merger or
consolidation of the Company with any corporate or other entity or by the transfer of all or substantially all of the assets of the Company to any
other person, corporation, firm or entity. However, all rights of the Executive under this Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable
to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs or representatives.
(c) Withholding. The Company shall be entitled to withhold from any amounts to be paid or benefits provided to the Executive hereunder any
federal, state, local, or foreign withholding or other taxes or charges which it is from time to time required to withhold. The Company shall be
entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise.
(d) Waiver of Breach. A waiver by the Company or the Executive of any breach of any provision of this Agreement by the other party shall not
operate or be construed as a waiver of any other or subsequent breach by the other party.
(e) Survival of Certain Provisions. Provisions of this Agreement shall survive any termination of employment and the expiration of the Term if
so provided herein or if
11
necessary or desirable fully to accomplish the purposes of such provision, including, without limitation, the obligations of the Company under
Section 7 hereof if the Executive is terminated during the Term and the obligations of the Executive under Section 8 hereof.
(f) Attorney's Fees. In the event that any action is brought to enforce any of the provisions of this Agreement, or to obtain money damages for
the breach thereof, all expenses (including reasonable attorneys' fees) shall be paid by the party incurring such fees or expenses; provided,
however, that the Company shall reimburse Executive for such fees and expenses to the extent that the Executive prevails on any issues raised
in such action.
(g) Entire Agreement. This Agreement, the Stock Option Plan, the Option Agreement, the Indemnification Agreement referred to in Section 5
(f) hereof, the Certificates of Incorporation of the Company and of each of its affiliates, the SERP, the Plan of Reorganization and the
Stipulation and Agreement among the Debtors and their Directors and Officers in Respect of Certain Indemnification Claims constitute the
entire understanding of the parties with respect to the subject matter hereof and supercede all prior negotiations, understandings, discussions,
and agreements, whether written or oral, between them.
(h) Captions. Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
(i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and shall have the
same effect as if the signatures hereto and thereto were on the same instrument.
(j) Governing Law. This Agreement shall be construed under and enforced in accordance with the laws of the State of New York.
(k) Jurisdiction and Choice of Forum. The Executive and the Company irrevocably submit for any disputes arising under or in connection with
this Agreement to the exclusive jurisdiction of any state or federal court located in the State of New York. Both the Executive and the
Company (i) acknowledge that the forum stated in this Section has a reasonable relation to this Agreement and to the relationship between the
Executive and the Company, (ii) waive, to the extent permitted by law, any objection to personal jurisdiction or the laying of venue of any
action or proceeding in the forum stated in this section, (iii) agree not to commence any such action or proceeding in any forum other than the
forum stated in this section and (iv) agree that, to the extent permitted by law, a final and non-appealable judgment in any such action or
proceeding in any such court will be conclusive and binding on the Executive and the Company. However, nothing in this Agreement precludes
the Executive or the Company from bringing any action or proceeding in any court for the purposes of enforcing the provisions of this section.
12
(l) Acknowledgement of Representation. The Executive and the Company acknowledge that they have been represented by counsel of their
own choosing and have received a full and complete explanation of their rights and obligations under this Agreement and, therefore, in the
event of a dispute over the meaning of this Agreement or any provision thereof, neither party shall be entitled to any presumption of correctness
in favor of the interpretation advanced by such party or against the interpretation advanced by the other party.
(m) Guarantee. (i) Each of Loral Skynet Corporation and Space Systems/Loral, Inc. (each a "Guarantor") hereby irrevocably and
unconditionally guarantees the due and punctual payment and performance of all obligations of the Company under this Agreement; provided,
however, that a Guarantor's guarantee obligation hereunder shall terminate and cease to have any force or effect immediately upon (x) such
Guarantor ceasing to be a direct or indirect subsidiary or parent of the Company or (y) the sale of all or substantially all of such Guarantor's
assets pursuant to an Approved Transaction (as defined below) in which a Guarantor does not receive all or substantially all of the
consideration of such sale.
(ii) Notwithstanding anything in this Agreement to the contrary and for as long as the Guarantor's obligations hereunder are in effect, the
Executive hereby acknowledges and agrees that at any time a Guarantor may effectuate, and this Agreement shall not in any way prohibit or
restrict the Guarantor from effectuating, and the Executive shall not have any right or claim with respect to, rely upon, or challenge (a) any
transfer by the Guarantor of any or all of its funds, assets or other property to either: (i) the Company or any of its direct or indirect subsidiaries
or their successors (each a "Group Entity"), including by way of dividend, distribution, payment, lease, sale, assignment, transfer, merger,
consolidation or otherwise, or (ii) any other person, pursuant to a transaction that the Guarantor's Board of Directors determines in good faith to
effect in furtherance of a legitimate business purpose of the Guarantor or any Group Entity (an "Approved Transaction") or (b) the liquidation
or dissolution of a Guarantor.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ Bernard L. Schwartz
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
/s/ Eric J. Zahler
----------------------------------------
Eric J. Zahler
13
LORAL SKYNET CORPORATION (solely for purposes of Section 11(m) hereof)
By: /s/ Bernard L. Schwartz
---------------------------------
Name:
-------------------------------
Title:
------------------------------
SPACE SYSTEMS/LORAL, INC. (solely for purposes of Section 11(m) hereof)
By: /s/ Bernard L. Schwartz
---------------------------------
Name:
-------------------------------
Title:
------------------------------
14
Schedule I
Outside Business Relationships
Service as a Director of EasyLink Services Corporation
Perquisites and Individual Benefits
EXECUTIVE
LIFE EXECUTIVE
INSURANCE MEDICAL OTHER
---------- --------- -----
$1,500,000 $4,000
Section 7(c)(iii)(A) Severance Amount
For corporate office employees:
Schedule II
Severance Amount per the Consent Order Approving Key Employee Retention Plan and Other Relief for Certain Employees of the Debtors'
Corporate Headquarters Pursuant to Sections 105(a) and 363(b) of the Bankruptcy Code dated December 18, 2003 is equal to (x) Enhanced
Severance (2003 annual base salary multiplied by the percentage applicable to the Group in which the Executive has been placed, plus (y)
Standard Severance of one week of annual base salary for each year of employment with the Company and its affiliates. As of the Effective
Date, the Severance Amount is set forth below.
ENHANCED STANDARD TOTAL
---------- -------- ----------
$1,750,000 $367,200 $2,117,200
16
Exhibit 10.12
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of the 21st day of November, 2005, by and between Loral Space & Communications Inc., a Delaware corporation (the
"Company"), Richard J. Townsend, a resident of New Canaan, CT (the "Executive") and those subsidiaries of the Company signatory hereto
solely for purposes of Section 11(m) hereof.
WHEREAS, the Company desires to engage the services of the Executive and the Executive desires to be employed by the Company on the
terms and conditions hereinafter set forth; and
WHEREAS, the Company desires to be assured that all proprietary and confidential information of the Company will be preserved for the
exclusive benefit of the Company;
NOW, THEREFORE, in consideration of such employment and the mutual covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows:
Section 1. Employment and Position. The Company hereby employs the Executive as its Executive Vice President & Chief Financial Officer,
and the Executive hereby accepts such employment under and subject to the terms and conditions hereinafter set forth.
Section 2. Term. The term of employment under this Agreement shall begin on the Effective Date, as such term is defined in the Debtors'
Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated June 3, 2005, as modified (the "Plan of
Reorganization"), and, unless sooner terminated as provided in Section 6, shall conclude on the second (2nd) anniversary of the Effective Date
(the "Term"). At the Executive's request within the last six months preceding the expiration of the Term, the Company shall, to the extent
practicable within two weeks after any such request but without any obligation, provide the Executive with notice regarding whether the
Company intends to renew or extend the Term under this Agreement, terminate the employment relationship between the parties on or shortly
after the expiration of the Term or continue the Executive's employment on an "at will" basis with no guaranteed term. Unless the Executive's
employment with the Company is terminated upon the expiration of the Term or the Term under this Agreement is renewed or extended, the
Executive shall be employed by the Company after the Term on an "at will" basis.
Section 3. Duties. The Executive shall perform services in a managerial capacity in a manner consistent with the Executive's position as
Executive Vice President & Chief Financial Officer, subject to the general supervision of the Chief Executive Officer of the Company or his
designee. The Executive hereby agrees to devote his full business time to the faithful performance of such duties and to the promotion and
forwarding of the business and affairs of the Company for the Term, provided, however, that Executive shall be permitted to engage in (i) other
activities of a civic, religious,
political or charitable nature, (ii) managing investments of the Executive and the Executive's family in securities, mutual funds or other
collective investment funds, limited partner interests or similar passive investments,
(iii) corporate directorships and other business activities described in Schedule I attached hereto, or (iv) such other activities as may hereafter
be specifically approved in writing, which in each case and in the aggregate do not materially interfere with the performance of his obligations
hereunder, provided, further, however, that Executive may not engage in any such activities that would result in the Executive being in
Competition (as defined in Section 8(d) below).
Section 4. Compensation.
(a) Salary. In consideration of the services rendered by the Executive under this Agreement, the Company shall pay the Executive a base salary
(the "Base Salary") at the rate of $881,920 per calendar year. The Base Salary shall be paid in such installments and at such times as the
Company pays its salaried executives and shall be subject to all necessary withholding taxes, FICA contributions and similar deductions. The
Board of Directors (the "Board") of the Company may review from time to time the Base Salary payable to Executive hereunder and may, in its
sole discretion, increase but not decrease, the Executive's salary rate. Any such increased salary shall be and become the "Base Salary" for
purposes of this Agreement.
(b) Annual Bonus. The Company shall maintain an annual Management Incentive Bonus program ("MIB Program") for certain executives, and
Executive shall be a participant in the MIB Program and shall be entitled to an annual bonus to the extent payable under such program
("Annual Bonus"). The Executive's target annual bonus opportunity under the MIB Program shall be forty-one percent (41%) of the Executive's
Base Salary (the "Target Annual Bonus"). The Annual Bonus for the 2005 fiscal year under the MIB Program shall be earned and determined
in accordance with the terms and conditions heretofore established by the Compensation Committee of the Board of Directors of Loral Space &
Communications Ltd. With respect to the Annual Bonus for the 2006 fiscal year or any subsequent fiscal year, the Board shall, in its discretion,
establish the terms and conditions of the MIB Program and may amend the MIB Program (other than by reducing the Target Annual Bonus
percentage set forth above) accordingly. The Annual Bonus shall be paid on or before March 15 of the year following the year to which the
Annual Bonus relates.
(c) Stock Options. The Company agrees to grant to the Executive an option to purchase 85,000 shares of common stock of the Company (the
"Option") pursuant to the terms of the Company's 2005 Stock Incentive Plan (the "Stock Option Plan"). Except as set forth in the Option
Agreement (defined below), the Option shall have a per share exercise price equal to $19.00. Such Option shall be granted on or about the
thirtieth (30th) day following the Effective Date. The Option shall have such other terms and conditions as set forth in the Option Agreement
attached hereto as Exhibit A (the "Option Agreement").
Section 5. Benefits. In addition to the compensation detailed in Section 4 of this Agreement, the Executive shall be entitled to the following
additional benefits:
2
(a) Paid Vacation. The Executive shall be entitled to twenty (20) days paid vacation per calendar year in accordance with the Company's
vacation policy in effect from time to time, such vacation shall extend for such periods and shall be taken at such intervals as shall be
appropriate and consistent with the proper performance of the Executive's duties hereunder.
(b) Welfare Plans. During the Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans, programs, practices and policies provided generally by the Company to similarly situated
executives of the Company (including, without limitation, any medical, prescription, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and programs that may be provided by the Company from time to time). Such plans,
programs, practices and policies are subject to change from time to time by the Company.
(c) Other Benefit Plans. During the Term, the Executive shall be entitled to participate in all savings, retirement and pension plans (including
the Company's Supplemental Executive Retirement Plan ("SERP")), programs, practices and policies applicable generally to similarly situated
executives of the Company as determined by the Board from time to time. Such plans, programs, practices and policies are subject to change
from time to time by the Company.
(d) Perquisites and Other Benefits. During the Term, the Executive shall be entitled to such additional perquisites and fringe benefits
appertaining to his position in accordance with any practice established by the Board. During the Term, Executive shall be entitled to receive
all benefits under any individual welfare benefit arrangements (including life insurance coverage) or other benefit arrangements currently in
effect for such Executive in a manner consistent with past practice, and such arrangements are listed on Schedule I attached hereto.
(e) Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable and necessary expenses actually incurred by
the Executive directly in connection with the business affairs of the Company and the performance of his duties hereunder, upon presentation
of proper receipts or other proof of expenditure and subject to such reasonable guidelines or limitations provided by the Company from time to
time. The Executive shall comply with such reasonable limitations and reporting requirements with respect to such expenses as the Board may
establish from time to time.
(f) Indemnification. In addition to indemnification obligations of the Company pursuant to Section 8.7 of the Plan of Reorganization and the
terms of any officers' liability insurance carried by the Company, the Executive (and his heirs, executors and administrators) shall be
indemnified by the Company and its successors and assigns pursuant to a separate Indemnification Agreement in the form attached hereto as
Exhibit B. The Executive shall be an insured person under or otherwise covered by directors and officers liability insurance in an amount
consistent with past practice. The obligations of the Company pursuant to this Section shall survive the expiration of the Term or Executive's
voluntary or involuntary termination or resignation for Good Reason.
3
Section 6. Termination. This Agreement shall terminate at the end of the Term. The Executive's employment may end earlier as follows:
(a) Death. The employment of the Executive shall automatically terminate upon the death of the Executive.
(b) Disability. In the event of any physical or mental disability of the Executive rendering the Executive substantially unable to perform his
duties hereunder for a period of at least 120 days out of any twelve-month period and the further determination that the disability is permanent
with regard to the Executive's ability to return to work in his full capacity, the Executive's employment shall be terminated on account of the
Executive's disability. Any determination of permanent disability shall be made by the Board in consultation with a qualified physician or
physicians selected by the Board and reasonably acceptable to the Executive. The failure of the Executive to submit to a reasonable
examination by such physician or physicians shall act as an estoppel to any objection by the Executive to the determination of disability by the
Board.
(c) By the Company For Cause. The employment of the Executive may be terminated by the Company for Cause (as defined below) at any
time effective upon written notice to the Executive; provided, however, that if such termination is based upon any event set forth in clauses
(iii), (iv), (v), (vi) or (vii) below, Executive shall be given not less than ten (10) days prior written notice by the Board of the intention to
terminate him for Cause, such notice to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which
the proposed termination for Cause is based, and Executive shall have ten (10) days after the date that such written notice has been given to
Executive in which to address the Board regarding any such alleged act or failure to act. If the Board makes a determination that Cause exists,
the termination shall be effective on the date immediately following the expiration of the ten (10) day notice period. For purposes hereof, the
term "Cause" shall mean that the Board has determined reasonably, in good faith and based on credible evidence that one or more of the
following has occurred:
(i) the Executive shall have been after the Effective Date convicted of, or shall have pleaded guilty or nolo contendere to, any felony or any
other crime that would have constituted a felony under the laws of the State of New York;
(ii) the Executive shall have been indicted for any felony or any other crime that would have constituted a felony under the laws of the State of
New York in connection with or arising from the Executive's employment with the Company;
(iii) the Executive shall have breached any material provision of
Section 8 hereof;
(iv) the Executive shall have committed any fraud, embezzlement, misappropriation of funds, or breach of fiduciary duty against the Company,
in each case of a material nature;
4
(v) the Executive shall have engaged in any willful misconduct resulting in or reasonably likely to result in a material loss to the Company or
substantial damage to its reputation;
(vi) the Executive shall have willfully breached in any material respect any material provision of the Company's Code of Conduct and, to the
extent any such breach is curable, the Executive shall have failed to cure such breach within ten (10) days after written notice of the alleged
breach is provided to the Executive; or
(vii) the Executive shall have willfully breached in any material respect any material provision of Section 3 hereof.
(d) By the Company without Cause. The Company may terminate the Executive's employment at any time without Cause effective upon
written notice to the Executive.
(e) By the Executive Voluntarily. The Executive may terminate his employment at any time effective upon at least thirty (30) days prior written
notice to the Company.
(f) By the Executive for Good Reason. The Executive may terminate his employment for Good Reason by providing the Company thirty (30)
days' written notice setting forth in reasonable specificity the event that constitutes Good Reason, within sixty (60) days of the occurrence of
such event. During such thirty (30) day notice period, the Company shall have a cure right (if curable), and, if not cured within such period,
Executive's termination will be effective upon the expiration of such cure period. For this purpose, the term "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or
responsibilities or any duties which are illegal or unethical or any material diminution of any of the Executive's significant duties;
(ii) any reduction in Base Salary, the Target Annual Bonus or any of the benefits described in Section 5 of this Agreement to the extent not
permitted under Section 5;
(iii) the relocation by the Company of the Executive's primary place of employment with the Company to a location not within a thirty (30)
mile radius of such place of employment as of the Effective Date; provided, however, that such relocation shall not be considered Good Reason
if such location is closer to the Executive's home than the Executive's primary place of employment as of the Effective Date;
(iv) other material breach of this Agreement by the Company; or
5
(v) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company.
Notwithstanding anything in this Agreement to the contrary, any determination by the non-employee directors of the Board regarding the
action the Company shall take with respect to (a) any personal claims of any of the Company's or its affiliates' officers (including Executive) or
directors against the Company or any of its affiliates for indemnification arising from or in connection with alleged acts or omissions that
occurred on or prior to the date of the commencement of the chapter 11 cases of Loral Space & Communications Ltd. and certain of its
affiliates on July 15, 2003; and (b) the Shared Services Agreement or the Management Agreement, each of even date herewith, by and among
the Company, Loral Skynet Corporation and Space Systems/Loral, Inc., shall not constitute Good Reason.
Section 7. Termination Payments and Benefits.
(a) Voluntary Termination, Termination For Cause. Upon any termination of employment during the Term either (i) by the Executive without
Good Reason under
Section 6(e), or (ii) by the Company for Cause as provided in Section 6(c), all payments, salary and other benefits hereunder shall cease at the
effective date of termination. Notwithstanding the foregoing, the Executive shall be entitled to receive from the Company (i) all salary earned
or accrued through the date the Executive's employment is terminated, (ii) reimbursement for any and all monies advanced in connection with
the Executive's employment for reasonable and necessary business expenses incurred by the Executive through the date the Executive's
employment is terminated, (iii) all other payments and benefits to which the Executive may be entitled under the terms of any applicable
compensation arrangement or benefit plan or program of the Company, including any earned and accrued, but unused vacation pay and benefits
under and in accordance with the terms and provisions of the SERP, but excluding any entitlement to severance under any Company severance
policy generally applicable to the Company's salaried employees, and (iv) excluding any accrued and unpaid Annual Bonus for the
immediately preceding year (collectively, "Accrued Benefits").
(b) Death. In the event of a termination due to the Executive's death during the Term, the Company shall have no further obligations to the
Executive or his beneficiaries other than to pay to the Executive's designated beneficiary or, if no beneficiary has been designated by the
Executive, to his estate (i) all Accrued Benefits, plus (ii) any Base Salary through the end of the calendar month in which the Executive's death
occurred, plus (iii) any accrued and unpaid Annual Bonus for the immediately preceding year, and (iv) at the times the Company pays its
executives bonuses in accordance with its general payroll policies, an amount equal to that portion of the Annual Bonus which but for the
Executive's death would have been earned by the Executive during the year of his death, pro rated based on a formula, the denominator of
which shall be 365 and the numerator of which shall be the number of days during the year of his death during which the Executive was
employed by the Company on an active status (the Accrued Benefits and the payment of the amounts set forth in clauses (iii) and
(iv) of this Section 7(b) are collectively referred to as "Enhanced Accrued Benefits"). In
6
addition, any unvested stock options under the Stock Option Plan and any deferred compensation under the Option Agreement that would have
become vested on the next date of vesting applicable thereto shall become vested and shall remain exercisable or be paid as provided under the
terms of the applicable plan or agreement as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator
of which shall be the number of days during the year of his death during which the Executive was employed by the Company on an active
status. The Executive's medical, prescription and dental coverage shall continue for the benefit of the Executive's family members through the
end of the Term.
(c) Termination without Cause or for Good Reason. In the event that the Executive's employment is terminated during the Term by the
Company without Cause or by the Executive for Good Reason, the Executive shall be entitled to receive as his exclusive right and remedy in
respect of such termination, (i) all Enhanced Accrued Benefits, (ii) severance pay equal to the greater of (A) the amount set forth on Schedule II
hereto, or (B) the remaining amount of Base Salary the Executive would have received had the Executive been employed through the end of the
Term ("Severance Payments"), with such Severance Payments to be paid in a lump sum as soon as practicable on or after termination (but not
later than three business days after the release described in Section 7(f) becomes effective and not revocable). In addition, all unvested stock
options under the Stock Option Plan and all deferred compensation under the Option Agreement shall become fully vested and shall remain
exercisable or be paid as provided under the terms of the applicable plan or agreement, and the Executive shall continue to be covered, upon the
same terms and conditions applicable generally to similarly situated executives who remain employed with the Company, by the same or
equivalent medical, dental and life insurance coverage as in effect for the Executive immediately prior to the termination of his employment,
until the earlier of (A) the expiration of a period of months determined by dividing the lump sum amount of severance pay he receives pursuant
to clause (ii) of the preceding sentence by the Executive's monthly salary rate in effect on his date of termination, or (B) the date the Executive
has commenced new employment and has thereby become eligible for comparable benefits, subject to the Executive's rights under COBRA.
For avoidance of doubt, if the Executive is offered employment consistent with the terms of this Agreement with the person that acquires all or
substantially all of the assets or stock of New FSS or New SSL (as such terms are defined in the Plan of Reorganization), any affiliate that
directly or indirectly owns such acquirer, or any successor to the acquirer or any such affiliate and such person assumes this Agreement, the
Executive shall not be treated as having a termination of employment without Cause or for Good Reason, regardless of whether the Executive
refuses the offer of employment, by reason of the sale of such assets or stock.
(d) Termination due to Disability. In the event that the Executive's employment is terminated during the Term due to the Disability of the
Executive, the Company shall have no further obligation to the Executive other than to pay the Executive (in addition to any disability
insurance payments to which the Executive is entitled pursuant to Section 5 above) all Enhanced Accrued Benefits. In addition, any unvested
stock options under the Stock Option Plan and any deferred compensation under the Option Agreement that would have become vested on the
next date of vesting
7
applicable thereto shall become vested and shall remain exercisable or be paid as provided under the terms of the applicable plan or agreement,
as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator of which shall be the number of days
during the year of his Disability during which the Executive was employed by the Company on an active status.
(e) No Other Benefits. Except as specifically provided in this Section 7, the Executive shall not be entitled to any other compensation,
severance or other benefits from the Company or any of its subsidiaries or affiliates upon the termination of this Agreement or the Executive's
employment for any reason whatsoever. Payment by the Company of all Accrued Benefits, Enhanced Accrued Benefits and Severance
Payments (if applicable) and contributions to the cost of the Executive's confirmed participation in the Company's group medical, dental and
life insurance plans that may be due to the Executive under the applicable termination provision of this Section 7 shall constitute the entire
obligation of the Company to the Executive. Notwithstanding anything contained in this Agreement to the contrary, the Executive (or his
beneficiary or estate) shall be entitled, under all circumstances, to payment of all amounts under and in accordance with the terms and
provisions of the SERP, including, without limitation, whether or not the Executive is employed by the Company.
(f) Condition. The Company will not be required to make the payment and provide the benefits stated in this Section 7 unless the Executive
executes and delivers to the Company a waiver and release agreement in the form attached hereto as Exhibit C and such waiver and release is
not unilaterally revocable by the Executive.
(g) Resignation from Company Offices. In the event of the Executive's termination of employment for any reason, the Executive shall resign
and shall be deemed to have resigned immediately from the Board (if the Executive is then a member of the Board) and any and all other
directorships, offices and positions with, on behalf of, or relating to the Company or any of its subsidiaries, effective as of the date of the
Executive's termination of employment with the Company.
Section 8. Restrictive Covenants.
(a) Proprietary Information. In the course of service to the Company, the Executive will have access to confidential specifications, know-how,
strategic or technical data, marketing research data, product research and development data, manufacturing techniques, confidential customer
lists, sources of supply and trade secrets, all of which are confidential and may be proprietary and are owned or used by the Company, or any of
its subsidiaries or affiliates. Such information shall hereinafter be called "Proprietary Information" and shall include any and all items
enumerated in the preceding sentence and coming within the scope of the business of the Company or any of its subsidiaries or affiliates as to
which the Executive may have access, whether conceived or developed by others or by the Executive alone or with others during the
Executive's period of service with the Company, whether or not conceived or developed during regular working hours. Proprietary Information
shall not include any records, data or information which are in the public domain during Executive's service with the Company or after the
Executive's service with the Company has terminated, provided the
8
same are not in the public domain as a consequence of disclosure by the Executive in violation of this Agreement.
(b) Non-Use and Non-Disclosure. The Executive shall not during the Term or at any time thereafter (i) disclose any Proprietary Information to
any person other than (A) the Company, (B) the Company's or its affiliates' directors, officers or employees who, in the reasonable judgment of
the Executive, need to know such Proprietary Information, (C) such other persons to whom the Executive has been specifically instructed to
make disclosure by the Board; and in all such cases only to the extent required in the course of the Executive's service to the Company or (D)
as required by law, or (ii) use any Proprietary Information, directly or indirectly, for his own benefit or for the benefit of any other person or
entity.
(c) Return of Documents. All notes, letters, documents, records, tapes and other media of every kind and description containing Proprietary
Information and any copies, in whole or in part, thereof (collectively, the "Documents"), whether or not prepared by the Executive, shall be the
sole and exclusive property of the Company. The Executive shall safeguard all Documents and shall surrender to the Company at the time his
employment terminates, or at such other time or times as the Board or its designee may specify, all Documents then in the Executive's
possession or control.
(d) Non-Competition. At all times during the Executive's employment with the Company or any affiliate during the Term, and for a period of
twelve (12) months following the termination during the Term of employment with the Company or any affiliate for any reason (the "Restricted
Period"), the Executive will not engage in Competition (as defined below) with the Company. For purposes of this Agreement, "Competition"
shall mean engaging in, or otherwise directly or indirectly being employed by, or acting as a consultant or adviser (paid or unpaid) to, or being
a director, officer, employee, principal, agent, stockholder, member, owner or partner of (i) Boeing, Lockheed, Alcatel Space or Astrium, (ii)
PanAmSat, SES Astra, Intelsat, New Skies Satellites, (iii) any business similar to the businesses described in clause (i) or (ii) above that
competes with the services provided by the Company, (iv) any business that competes with a business that the Company engages in as of the
date of the Executive's termination of employment with the Company, as described or otherwise contemplated in the Company's business plan
for the year of such termination of employment, or (v) any business that competes with a business that the Company is, to the knowledge of the
Executive, preparing to engage in as of the date of the Executive's termination of employment with the Company, and any transferee of or
successor to any of the foregoing businesses. Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or
indirectly, own, solely as an investment, securities of a business enterprise in Competition with the Company or its subsidiaries which are
publicly traded on a national or regional stock exchange or on the over-the-counter market if the Executive (i) is not a controlling person of or a
member of a group which controls such business enterprise and (ii) does not, directly or indirectly, own five percent (5%) or more of any class
of securities of such business enterprise.
(e) Non-Solicitation of Employees. At all times during the Restricted Period, the Executive will not directly or indirectly solicit or in any
manner encourage employees
9
of the Company or any affiliate who were employed by the Company within the six-month period prior to the termination of the Executive's
employment with the Company or any affiliate to leave its employ and will not offer or cause to be offered employment to any such person;
provided, however, that the restrictions in this paragraph shall not apply to (i) general solicitations that are not specifically directed to
employees of the Company or any affiliate and (ii) any administrative support staff.
(f) Non-Solicitation of Customers or Suppliers. At all times during the Restricted Period, the Executive will not knowingly solicit or in any
manner encourage, directly or indirectly, customers of or suppliers to the Company or any affiliate who were customers of or suppliers to the
Company or any affiliate within the twelve-month period prior to the termination of the Executive's employment with the Company or any
affiliate to terminate or diminish their relationship with the Company or any affiliate.
(g) Reasonableness. The Executive has carefully considered the nature, extent and duration of the restrictions and obligations contained in this
Agreement, including, without limitation, provisions of this Section 8 and acknowledges and agrees that such restrictions are fair and
reasonable in all respects to protect the legitimate interests of the Company and its affiliates and that these restrictions are designed for the
reasonable protection of the business of the Company and that of its affiliates.
(h) Remedies. The Executive recognizes that any breach of this Section 8 shall cause irreparable injury to the Company or its affiliates,
inadequately compensable in monetary damages. Accordingly, in addition to any other legal or equitable remedies that may be available to the
Company, Executive agrees that the Company or its affiliates shall be able to seek and obtain injunctive relief in the form of a temporary
restraining order, preliminary injunction, or permanent injunction against the Executive to enforce this Agreement. To the extent that any
damages are calculable resulting from the breach of this Agreement, the Company and its affiliates shall also be entitled to recover damages.
Any recovery of damages by the Company and its affiliates shall be in addition to and not in lieu of the injunctive relief to which the Company
and its affiliates are entitled. Without limiting the rights of the Company and its affiliates under this Section 8 or any other remedies that may
be available to them, if a court of competent jurisdiction determines that the Executive has breached any of the provisions of this Section 8, the
Company or its affiliates will have the right to cease making any payments or providing any benefits otherwise due to Executive under the
terms and conditions of this Agreement, and the right to recover the Annual Bonus that may have been paid as part of the Enhanced Accrued
Benefits and the Severance Payment that the Executive may have received under this Agreement.
Section 9. Severable Provisions. The provisions of this Agreement are severable and the invalidity of any one or more provisions shall not
affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision of this
Agreement or the application thereof is unenforceable in whole or in part because of the duration or scope thereof, the parties hereto agree that
said court in making such determination shall have the power to reduce the duration and scope of such provision to the extent necessary to
make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law.
10
Section 10. Notices. All notices hereunder, to be effective, shall be in writing and shall be delivered by hand or mailed by certified mail,
postage and fees prepaid, as follows:
If to the Company: Loral Space & Communications Inc.
600 Third Avenue
New York, New York 10016
Attention: General Counsel
If to the Executive: Richard J. Townsend
34 White Oak Shade Road
New Canaan, CT 06840
or to such other address as a party may notify the other pursuant to a notice given in accordance with this Section 10. All notices to any person
shall be deemed given when actually received by the person.
Section 11. Miscellaneous.
(a) Amendment. This Agreement may not be amended or revised except by a writing signed by the parties.
(b) Assignment and Transfer. The provisions of this Agreement shall be binding on and shall inure to the benefit of any such successor in
interest to the Company. Neither this Agreement nor any of the rights, duties or obligations of the Executive shall be assignable by the
Executive, nor shall any of the payments required or permitted to be made to the Executive by this Agreement be encumbered, transferred or in
any way anticipated, except as required by applicable laws. This Agreement shall not be terminated solely by reason of the merger or
consolidation of the Company with any corporate or other entity or by the transfer of all or substantially all of the assets of the Company to any
other person, corporation, firm or entity. However, all rights of the Executive under this Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable
to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs or representatives.
(c) Withholding. The Company shall be entitled to withhold from any amounts to be paid or benefits provided to the Executive hereunder any
federal, state, local, or foreign withholding or other taxes or charges which it is from time to time required to withhold. The Company shall be
entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise.
(d) Waiver of Breach. A waiver by the Company or the Executive of any breach of any provision of this Agreement by the other party shall not
operate or be construed as a waiver of any other or subsequent breach by the other party.
(e) Survival of Certain Provisions. Provisions of this Agreement shall survive any termination of employment and the expiration of the Term if
so provided herein or if
11
necessary or desirable fully to accomplish the purposes of such provision, including, without limitation, the obligations of the Company under
Section 7 hereof if the Executive is terminated during the Term and the obligations of the Executive under Section 8 hereof.
(f) Attorney's Fees. In the event that any action is brought to enforce any of the provisions of this Agreement, or to obtain money damages for
the breach thereof, all expenses (including reasonable attorneys' fees) shall be paid by the party incurring such fees or expenses; provided,
however, that the Company shall reimburse Executive for such fees and expenses to the extent that the Executive prevails on any issues raised
in such action.
(g) Entire Agreement. This Agreement, the Stock Option Plan, the Option Agreement, the Indemnification Agreement referred to in Section 5
(f) hereof, the Certificates of Incorporation of the Company and of each of its affiliates, the SERP, the Plan of Reorganization and the
Stipulation and Agreement among the Debtors and their Directors and Officers in Respect of Certain Indemnification Claims constitute the
entire understanding of the parties with respect to the subject matter hereof and supercede all prior negotiations, understandings, discussions,
and agreements, whether written or oral, between them.
(h) Captions. Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
(i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and shall have the
same effect as if the signatures hereto and thereto were on the same instrument.
(j) Governing Law. This Agreement shall be construed under and enforced in accordance with the laws of the State of New York.
(k) Jurisdiction and Choice of Forum. The Executive and the Company irrevocably submit for any disputes arising under or in connection with
this Agreement to the exclusive jurisdiction of any state or federal court located in the State of New York. Both the Executive and the
Company (i) acknowledge that the forum stated in this Section has a reasonable relation to this Agreement and to the relationship between the
Executive and the Company, (ii) waive, to the extent permitted by law, any objection to personal jurisdiction or the laying of venue of any
action or proceeding in the forum stated in this section, (iii) agree not to commence any such action or proceeding in any forum other than the
forum stated in this section and (iv) agree that, to the extent permitted by law, a final and non-appealable judgment in any such action or
proceeding in any such court will be conclusive and binding on the Executive and the Company. However, nothing in this Agreement precludes
the Executive or the Company from bringing any action or proceeding in any court for the purposes of enforcing the provisions of this section.
12
(l) Acknowledgement of Representation. The Executive and the Company acknowledge that they have been represented by counsel of their
own choosing and have received a full and complete explanation of their rights and obligations under this Agreement and, therefore, in the
event of a dispute over the meaning of this Agreement or any provision thereof, neither party shall be entitled to any presumption of correctness
in favor of the interpretation advanced by such party or against the interpretation advanced by the other party.
(m) Guarantee. (i) Each of Loral Skynet Corporation and Space Systems/Loral, Inc. (each a "Guarantor") hereby irrevocably and
unconditionally guarantees the due and punctual payment and performance of all obligations of the Company under this Agreement; provided,
however, that a Guarantor's guarantee obligation hereunder shall terminate and cease to have any force or effect immediately upon (x) such
Guarantor ceasing to be a direct or indirect subsidiary or parent of the Company or (y) the sale of all or substantially all of such Guarantor's
assets pursuant to an Approved Transaction (as defined below) in which a Guarantor does not receive all or substantially all of the
consideration of such sale.
(ii) Notwithstanding anything in this Agreement to the contrary and for as long as the Guarantor's obligations hereunder are in effect, the
Executive hereby acknowledges and agrees that at any time a Guarantor may effectuate, and this Agreement shall not in any way prohibit or
restrict the Guarantor from effectuating, and the Executive shall not have any right or claim with respect to, rely upon, or challenge (a) any
transfer by the Guarantor of any or all of its funds, assets or other property to either: (i) the Company or any of its direct or indirect subsidiaries
or their successors (each a "Group Entity"), including by way of dividend, distribution, payment, lease, sale, assignment, transfer, merger,
consolidation or otherwise, or (ii) any other person, pursuant to a transaction that the Guarantor's Board of Directors determines in good faith to
effect in furtherance of a legitimate business purpose of the Guarantor or any Group Entity (an "Approved Transaction") or (b) the liquidation
or dissolution of a Guarantor.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ Bernard L. Schwartz
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
/s/ Richard J. Townsend
----------------------------------------
Richard J. Townsend
13
LORAL SKYNET CORPORATION (solely for purposes of Section 11(m) hereof)
By: /s/ Bernard L. Schwartz
---------------------------------
Name:
-------------------------------
Title:
------------------------------
SPACE SYSTEMS/LORAL, INC. (solely for purposes of Section 11(m) hereof)
By: /s/ Bernard L. Schwartz
---------------------------------
Name:
-------------------------------
Title:
------------------------------
14
Schedule I
Outside Business Relationships
Perquisites and Individual Benefits
EXECUTIVE
LIFE EXECUTIVE
INSURANCE MEDICAL OTHER
---------- --------- -----
$1,000,000 $4,000
Section 7(c)(iii)(A) Severance Amount
For corporate office employees:
Schedule II
Severance Amount per the Consent Order Approving Key Employee Retention Plan and Other Relief for Certain Employees of the Debtors'
Corporate Headquarters Pursuant to Sections 105(a) and 363(b) of the Bankruptcy Code dated December 18, 2003 is equal to (x) Enhanced
Severance (2003 annual base salary multiplied by the percentage applicable to the Group in which the Executive has been placed, plus (y)
Standard Severance of one week of annual base salary for each year of employment with the Company and its affiliates. As of the Effective
Date, the Severance Amount is set forth below.
ENHANCED STANDARD TOTAL
---------- -------- ----------
$1,400,000 $152,640 $1,552,640
16
Exhibit 10.13
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of the 21st day of November, 2005, by and between Loral Space & Communications Inc., a Delaware corporation (the
"Company"), Avi Katz, a resident of Teaneck, NJ (the "Executive") and those subsidiaries of the Company signatory hereto solely for purposes
of Section 11(m) hereof.
WHEREAS, the Company desires to engage the services of the Executive and the Executive desires to be employed by the Company on the
terms and conditions hereinafter set forth; and
WHEREAS, the Company desires to be assured that all proprietary and confidential information of the Company will be preserved for the
exclusive benefit of the Company;
NOW, THEREFORE, in consideration of such employment and the mutual covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows:
Section 1. Employment and Position. The Company hereby employs the Executive as its Vice President, Secretary and General Counsel, and
the Executive hereby accepts such employment under and subject to the terms and conditions hereinafter set forth.
Section 2. Term. The term of employment under this Agreement shall begin on the Effective Date, as such term is defined in the Debtors'
Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated June 3, 2005, as modified (the "Plan of
Reorganization"), and, unless sooner terminated as provided in Section 6, shall conclude on the second (2nd) anniversary of the Effective Date
(the "Term"). At the Executive's request within the last six months preceding the expiration of the Term, the Company shall, to the extent
practicable within two weeks after any such request but without any obligation, provide the Executive with notice regarding whether the
Company intends to renew or extend the Term under this Agreement, terminate the employment relationship between the parties on or shortly
after the expiration of the Term or continue the Executive's employment on an "at will" basis with no guaranteed term. Unless the Executive's
employment with the Company is terminated upon the expiration of the Term or the Term under this Agreement is renewed or extended, the
Executive shall be employed by the Company after the Term on an "at will" basis.
Section 3. Duties. The Executive shall perform services in a managerial capacity in a manner consistent with the Executive's position as Vice
President, Secretary and General Counsel, subject to the general supervision of the Chief Executive Officer of the Company or his designee.
The Executive hereby agrees to devote his full business time to the faithful performance of such duties and to the promotion and forwarding of
the business and affairs of the Company for the Term, provided, however, that Executive shall be permitted to engage in (i) other activities of a
civic, religious, political or charitable nature, (ii) managing investments of the Executive and the Executive's family
in securities, mutual funds or other collective investment funds, limited partner interests or similar passive investments, (iii) corporate
directorships and other business activities described in Schedule I attached hereto, or (iv) such other activities as may hereafter be specifically
approved in writing, which in each case and in the aggregate do not materially interfere with the performance of his obligations hereunder,
provided, further, however, that Executive may not engage in any such activities that would result in the Executive being in Competition (as
defined in Section 8(d) below).
Section 4. Compensation.
(a) Salary. In consideration of the services rendered by the Executive under this Agreement, the Company shall pay the Executive a base salary
(the "Base Salary") at the rate of $438,048 per calendar year. The Base Salary shall be paid in such installments and at such times as the
Company pays its salaried executives and shall be subject to all necessary withholding taxes, FICA contributions and similar deductions. The
Board of Directors (the "Board") of the Company may review from time to time the Base Salary payable to Executive hereunder and may, in its
sole discretion, increase but not decrease, the Executive's salary rate. Any such increased salary shall be and become the "Base Salary" for
purposes of this Agreement.
(b) Annual Bonus. The Company shall maintain an annual Management Incentive Bonus program ("MIB Program") for certain executives, and
Executive shall be a participant in the MIB Program and shall be entitled to an annual bonus to the extent payable under such program
("Annual Bonus"). The Executive's target annual bonus opportunity under the MIB Program shall be forty percent (40%) of the Executive's
Base Salary (the "Target Annual Bonus"). The Annual Bonus for the 2005 fiscal year under the MIB Program shall be earned and determined
in accordance with the terms and conditions heretofore established by the Compensation Committee of the Board of Directors of Loral Space &
Communications Ltd. With respect to the Annual Bonus for the 2006 fiscal year or any subsequent fiscal year, the Board shall, in its discretion,
establish the terms and conditions of the MIB Program and may amend the MIB Program (other than by reducing the Target Annual Bonus
percentage set forth above) accordingly. The Annual Bonus shall be paid on or before March 15 of the year following the year to which the
Annual Bonus relates.
(c) Stock Options. The Company agrees to grant to the Executive an option to purchase 50,000 shares of common stock of the Company (the
"Option") pursuant to the terms of the Company's 2005 Stock Incentive Plan (the "Stock Option Plan"). Except as set forth in the Option
Agreement (defined below), the Option shall have a per share exercise price equal to $19.00. Such Option shall be granted on or about the
thirtieth (30th) day following the Effective Date. The Option shall have such other terms and conditions as set forth in the Option Agreement
attached hereto as Exhibit A (the "Option Agreement").
Section 5. Benefits. In addition to the compensation detailed in Section 4 of this Agreement, the Executive shall be entitled to the following
additional benefits:
2
(a) Paid Vacation. The Executive shall be entitled to twenty (20) days paid vacation per calendar year in accordance with the Company's
vacation policy in effect from time to time, such vacation shall extend for such periods and shall be taken at such intervals as shall be
appropriate and consistent with the proper performance of the Executive's duties hereunder.
(b) Welfare Plans. During the Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans, programs, practices and policies provided generally by the Company to similarly situated
executives of the Company (including, without limitation, any medical, prescription, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and programs that may be provided by the Company from time to time). Such plans,
programs, practices and policies are subject to change from time to time by the Company.
(c) Other Benefit Plans. During the Term, the Executive shall be entitled to participate in all savings, retirement and pension plans (including
the Company's Supplemental Executive Retirement Plan ("SERP")), programs, practices and policies applicable generally to similarly situated
executives of the Company as determined by the Board from time to time. Such plans, programs, practices and policies are subject to change
from time to time by the Company.
(d) Perquisites and Other Benefits. During the Term, the Executive shall be entitled to such additional perquisites and fringe benefits
appertaining to his position in accordance with any practice established by the Board. During the Term, Executive shall be entitled to receive
all benefits under any individual welfare benefit arrangements (including life insurance coverage) or other benefit arrangements currently in
effect for such Executive in a manner consistent with past practice, and such arrangements are listed on Schedule I attached hereto.
(e) Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable and necessary expenses actually incurred by
the Executive directly in connection with the business affairs of the Company and the performance of his duties hereunder, upon presentation
of proper receipts or other proof of expenditure and subject to such reasonable guidelines or limitations provided by the Company from time to
time. The Executive shall comply with such reasonable limitations and reporting requirements with respect to such expenses as the Board may
establish from time to time.
(f) Indemnification. In addition to indemnification obligations of the Company pursuant to Section 8.7 of the Plan of Reorganization and the
terms of any officers' liability insurance carried by the Company, the Executive (and his heirs, executors and administrators) shall be
indemnified by the Company and its successors and assigns pursuant to a separate Indemnification Agreement in the form attached hereto as
Exhibit B. The Executive shall be an insured person under or otherwise covered by directors and officers liability insurance in an amount
consistent with past practice. The obligations of the Company pursuant to this Section shall survive the expiration of the Term or Executive's
voluntary or involuntary termination or resignation for Good Reason.
3
Section 6. Termination. This Agreement shall terminate at the end of the Term. The Executive's employment may end earlier as follows:
(a) Death. The employment of the Executive shall automatically terminate upon the death of the Executive.
(b) Disability. In the event of any physical or mental disability of the Executive rendering the Executive substantially unable to perform his
duties hereunder for a period of at least 120 days out of any twelve-month period and the further determination that the disability is permanent
with regard to the Executive's ability to return to work in his full capacity, the Executive's employment shall be terminated on account of the
Executive's disability. Any determination of permanent disability shall be made by the Board in consultation with a qualified physician or
physicians selected by the Board and reasonably acceptable to the Executive. The failure of the Executive to submit to a reasonable
examination by such physician or physicians shall act as an estoppel to any objection by the Executive to the determination of disability by the
Board.
(c) By the Company For Cause. The employment of the Executive may be terminated by the Company for Cause (as defined below) at any
time effective upon written notice to the Executive; provided, however, that if such termination is based upon any event set forth in clauses
(iii), (iv), (v), (vi) or (vii) below, Executive shall be given not less than ten (10) days prior written notice by the Board of the intention to
terminate him for Cause, such notice to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which
the proposed termination for Cause is based, and Executive shall have ten (10) days after the date that such written notice has been given to
Executive in which to address the Board regarding any such alleged act or failure to act. If the Board makes a determination that Cause exists,
the termination shall be effective on the date immediately following the expiration of the ten (10) day notice period. For purposes hereof, the
term "Cause" shall mean that the Board has determined reasonably, in good faith and based on credible evidence that one or more of the
following has occurred:
(i) the Executive shall have been after the Effective Date convicted of, or shall have pleaded guilty or nolo contendere to, any felony or any
other crime that would have constituted a felony under the laws of the State of New York;
(ii) the Executive shall have been indicted for any felony or any other crime that would have constituted a felony under the laws of the State of
New York in connection with or arising from the Executive's employment with the Company;
(iii) the Executive shall have breached any material provision of
Section 8 hereof;
(iv) the Executive shall have committed any fraud, embezzlement, misappropriation of funds, or breach of fiduciary duty against the Company,
in each case of a material nature;
4
(v) the Executive shall have engaged in any willful misconduct resulting in or reasonably likely to result in a material loss to the Company or
substantial damage to its reputation;
(vi) the Executive shall have willfully breached in any material respect any material provision of the Company's Code of Conduct and, to the
extent any such breach is curable, the Executive shall have failed to cure such breach within ten (10) days after written notice of the alleged
breach is provided to the Executive; or
(vii) the Executive shall have willfully breached in any material respect any material provision of Section 3 hereof.
(d) By the Company without Cause. The Company may terminate the Executive's employment at any time without Cause effective upon
written notice to the Executive.
(e) By the Executive Voluntarily. The Executive may terminate his employment at any time effective upon at least thirty (30) days prior written
notice to the Company.
(f) By the Executive for Good Reason. The Executive may terminate his employment for Good Reason by providing the Company thirty (30)
days' written notice setting forth in reasonable specificity the event that constitutes Good Reason, within sixty (60) days of the occurrence of
such event. During such thirty (30) day notice period, the Company shall have a cure right (if curable), and, if not cured within such period,
Executive's termination will be effective upon the expiration of such cure period. For this purpose, the term "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or
responsibilities or any duties which are illegal or unethical or any material diminution of any of the Executive's significant duties;
(ii) any reduction in Base Salary, the Target Annual Bonus or any of the benefits described in Section 5 of this Agreement to the extent not
permitted under Section 5;
(iii) the relocation by the Company of the Executive's primary place of employment with the Company to a location not within a thirty (30)
mile radius of such place of employment as of the Effective Date; provided, however, that such relocation shall not be considered Good Reason
if such location is closer to the Executive's home than the Executive's primary place of employment as of the Effective Date;
(iv) other material breach of this Agreement by the Company; or
5
(v) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company.
Notwithstanding anything in this Agreement to the contrary, any determination by the non-employee directors of the Board regarding the
action the Company shall take with respect to (a) any personal claims of any of the Company's or its affiliates' officers (including Executive) or
directors against the Company or any of its affiliates for indemnification arising from or in connection with alleged acts or omissions that
occurred on or prior to the date of the commencement of the chapter 11 cases of Loral Space & Communications Ltd. and certain of its
affiliates on July 15, 2003; and (b) the Shared Services Agreement or the Management Agreement, each of even date herewith, by and among
the Company, Loral Skynet Corporation and Space Systems/Loral, Inc., shall not constitute Good Reason.
Section 7. Termination Payments and Benefits.
(a) Voluntary Termination, Termination For Cause. Upon any termination of employment during the Term either (i) by the Executive without
Good Reason under
Section 6(e), or (ii) by the Company for Cause as provided in Section 6(c), all payments, salary and other benefits hereunder shall cease at the
effective date of termination. Notwithstanding the foregoing, the Executive shall be entitled to receive from the Company (i) all salary earned
or accrued through the date the Executive's employment is terminated, (ii) reimbursement for any and all monies advanced in connection with
the Executive's employment for reasonable and necessary business expenses incurred by the Executive through the date the Executive's
employment is terminated, (iii) all other payments and benefits to which the Executive may be entitled under the terms of any applicable
compensation arrangement or benefit plan or program of the Company, including any earned and accrued, but unused vacation pay and benefits
under and in accordance with the terms and provisions of the SERP, but excluding any entitlement to severance under any Company severance
policy generally applicable to the Company's salaried employees, and (iv) excluding any accrued and unpaid Annual Bonus for the
immediately preceding year (collectively, "Accrued Benefits").
(b) Death. In the event of a termination due to the Executive's death during the Term, the Company shall have no further obligations to the
Executive or his beneficiaries other than to pay to the Executive's designated beneficiary or, if no beneficiary has been designated by the
Executive, to his estate (i) all Accrued Benefits, plus (ii) any Base Salary through the end of the calendar month in which the Executive's death
occurred, plus (iii) any accrued and unpaid Annual Bonus for the immediately preceding year, and (iv) at the times the Company pays its
executives bonuses in accordance with its general payroll policies, an amount equal to that portion of the Annual Bonus which but for the
Executive's death would have been earned by the Executive during the year of his death, pro rated based on a formula, the denominator of
which shall be 365 and the numerator of which shall be the number of days during the year of his death during which the Executive was
employed by the Company on an active status (the Accrued Benefits and the payment of the amounts set forth in clauses (iii) and
(iv) of this Section 7(b) are collectively referred to as "Enhanced Accrued Benefits"). In
6
addition, any unvested stock options under the Stock Option Plan and any deferred compensation under the Option Agreement that would have
become vested on the next date of vesting applicable thereto shall become vested and shall remain exercisable or be paid as provided under the
terms of the applicable plan or agreement as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator
of which shall be the number of days during the year of his death during which the Executive was employed by the Company on an active
status. The Executive's medical, prescription and dental coverage shall continue for the benefit of the Executive's family members through the
end of the Term.
(c) Termination without Cause or for Good Reason. In the event that the Executive's employment is terminated during the Term by the
Company without Cause or by the Executive for Good Reason, the Executive shall be entitled to receive as his exclusive right and remedy in
respect of such termination, (i) all Enhanced Accrued Benefits, (ii) severance pay equal to the greater of (A) the amount set forth on Schedule II
hereto, or (B) the remaining amount of Base Salary the Executive would have received had the Executive been employed through the end of the
Term ("Severance Payments"), with such Severance Payments to be paid in a lump sum as soon as practicable on or after termination (but not
later than three business days after the release described in Section 7(f) becomes effective and not revocable). In addition, all unvested stock
options under the Stock Option Plan and all deferred compensation under the Option Agreement shall become fully vested and shall remain
exercisable or be paid as provided under the terms of the applicable plan or agreement, and the Executive shall continue to be covered, upon the
same terms and conditions applicable generally to similarly situated executives who remain employed with the Company, by the same or
equivalent medical, dental and life insurance coverage as in effect for the Executive immediately prior to the termination of his employment,
until the earlier of (A) the expiration of a period of months determined by dividing the lump sum amount of severance pay he receives pursuant
to clause (ii) of the preceding sentence by the Executive's monthly salary rate in effect on his date of termination, or (B) the date the Executive
has commenced new employment and has thereby become eligible for comparable benefits, subject to the Executive's rights under COBRA.
For avoidance of doubt, if the Executive is offered employment consistent with the terms of this Agreement with the person that acquires all or
substantially all of the assets or stock of New FSS or New SSL (as such terms are defined in the Plan of Reorganization), any affiliate that
directly or indirectly owns such acquirer, or any successor to the acquirer or any such affiliate and such person assumes this Agreement, the
Executive shall not be treated as having a termination of employment without Cause or for Good Reason, regardless of whether the Executive
refuses the offer of employment, by reason of the sale of such assets or stock.
(d) Termination due to Disability. In the event that the Executive's employment is terminated during the Term due to the Disability of the
Executive, the Company shall have no further obligation to the Executive other than to pay the Executive (in addition to any disability
insurance payments to which the Executive is entitled pursuant to Section 5 above) all Enhanced Accrued Benefits. In addition, any unvested
stock options under the Stock Option Plan and any deferred compensation under the Option Agreement that would have become vested on the
next date of vesting
7
applicable thereto shall become vested and shall remain exercisable or be paid as provided under the terms of the applicable plan or agreement,
as to a portion thereof based on a formula, the denominator of which shall be 365 and the numerator of which shall be the number of days
during the year of his Disability during which the Executive was employed by the Company on an active status.
(e) No Other Benefits. Except as specifically provided in this Section 7, the Executive shall not be entitled to any other compensation,
severance or other benefits from the Company or any of its subsidiaries or affiliates upon the termination of this Agreement or the Executive's
employment for any reason whatsoever. Payment by the Company of all Accrued Benefits, Enhanced Accrued Benefits and Severance
Payments (if applicable) and contributions to the cost of the Executive's confirmed participation in the Company's group medical, dental and
life insurance plans that may be due to the Executive under the applicable termination provision of this Section 7 shall constitute the entire
obligation of the Company to the Executive. Notwithstanding anything contained in this Agreement to the contrary, the Executive (or his
beneficiary or estate) shall be entitled, under all circumstances, to payment of all amounts under and in accordance with the terms and
provisions of the SERP, including, without limitation, whether or not the Executive is employed by the Company.
(f) Condition. The Company will not be required to make the payment and provide the benefits stated in this Section 7 unless the Executive
executes and delivers to the Company a waiver and release agreement in the form attached hereto as Exhibit C and such waiver and release is
not unilaterally revocable by the Executive.
(g) Resignation from Company Offices. In the event of the Executive's termination of employment for any reason, the Executive shall resign
and shall be deemed to have resigned immediately from the Board (if the Executive is then a member of the Board) and any and all other
directorships, offices and positions with, on behalf of, or relating to the Company or any of its subsidiaries, effective as of the date of the
Executive's termination of employment with the Company.
Section 8. Restrictive Covenants.
(a) Proprietary Information. In the course of service to the Company, the Executive will have access to confidential specifications, know-how,
strategic or technical data, marketing research data, product research and development data, manufacturing techniques, confidential customer
lists, sources of supply and trade secrets, all of which are confidential and may be proprietary and are owned or used by the Company, or any of
its subsidiaries or affiliates. Such information shall hereinafter be called "Proprietary Information" and shall include any and all items
enumerated in the preceding sentence and coming within the scope of the business of the Company or any of its subsidiaries or affiliates as to
which the Executive may have access, whether conceived or developed by others or by the Executive alone or with others during the
Executive's period of service with the Company, whether or not conceived or developed during regular working hours. Proprietary Information
shall not include any records, data or information which are in the public domain during Executive's service with the Company or after the
Executive's service with the Company has terminated, provided the
8
same are not in the public domain as a consequence of disclosure by the Executive in violation of this Agreement.
(b) Non-Use and Non-Disclosure. The Executive shall not during the Term or at any time thereafter (i) disclose any Proprietary Information to
any person other than (A) the Company, (B) the Company's or its affiliates' directors, officers or employees who, in the reasonable judgment of
the Executive, need to know such Proprietary Information, (C) such other persons to whom the Executive has been specifically instructed to
make disclosure by the Board; and in all such cases only to the extent required in the course of the Executive's service to the Company or (D)
as required by law, or (ii) use any Proprietary Information, directly or indirectly, for his own benefit or for the benefit of any other person or
entity.
(c) Return of Documents. All notes, letters, documents, records, tapes and other media of every kind and description containing Proprietary
Information and any copies, in whole or in part, thereof (collectively, the "Documents"), whether or not prepared by the Executive, shall be the
sole and exclusive property of the Company. The Executive shall safeguard all Documents and shall surrender to the Company at the time his
employment terminates, or at such other time or times as the Board or its designee may specify, all Documents then in the Executive's
possession or control.
(d) Non-Competition. At all times during the Executive's employment with the Company or any affiliate during the Term, and for a period of
twelve (12) months following the termination during the Term of employment with the Company or any affiliate for any reason (the "Restricted
Period"), the Executive will not engage in Competition (as defined below) with the Company. For purposes of this Agreement, "Competition"
shall mean engaging in, or otherwise directly or indirectly being employed by, or acting as a consultant or adviser (paid or unpaid) to, or being
a director, officer, employee, principal, agent, stockholder, member, owner or partner of (i) Boeing, Lockheed, Alcatel Space or Astrium, (ii)
PanAmSat, SES Astra, Intelsat, New Skies Satellites, (iii) any business similar to the businesses described in clause (i) or (ii) above that
competes with the services provided by the Company, (iv) any business that competes with a business that the Company engages in as of the
date of the Executive's termination of employment with the Company, as described or otherwise contemplated in the Company's business plan
for the year of such termination of employment, or (v) any business that competes with a business that the Company is, to the knowledge of the
Executive, preparing to engage in as of the date of the Executive's termination of employment with the Company, and any transferee of or
successor to any of the foregoing businesses. Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or
indirectly, own, solely as an investment, securities of a business enterprise in Competition with the Company or its subsidiaries which are
publicly traded on a national or regional stock exchange or on the over-the-counter market if the Executive (i) is not a controlling person of or a
member of a group which controls such business enterprise and (ii) does not, directly or indirectly, own five percent (5%) or more of any class
of securities of such business enterprise.
(e) Non-Solicitation of Employees. At all times during the Restricted Period, the Executive will not directly or indirectly solicit or in any
manner encourage employees
9
of the Company or any affiliate who were employed by the Company within the six-month period prior to the termination of the Executive's
employment with the Company or any affiliate to leave its employ and will not offer or cause to be offered employment to any such person;
provided, however, that the restrictions in this paragraph shall not apply to (i) general solicitations that are not specifically directed to
employees of the Company or any affiliate and (ii) any administrative support staff.
(f) Non-Solicitation of Customers or Suppliers. At all times during the Restricted Period, the Executive will not knowingly solicit or in any
manner encourage, directly or indirectly, customers of or suppliers to the Company or any affiliate who were customers of or suppliers to the
Company or any affiliate within the twelve-month period prior to the termination of the Executive's employment with the Company or any
affiliate to terminate or diminish their relationship with the Company or any affiliate.
(g) Reasonableness. The Executive has carefully considered the nature, extent and duration of the restrictions and obligations contained in this
Agreement, including, without limitation, provisions of this Section 8 and acknowledges and agrees that such restrictions are fair and
reasonable in all respects to protect the legitimate interests of the Company and its affiliates and that these restrictions are designed for the
reasonable protection of the business of the Company and that of its affiliates.
(h) Remedies. The Executive recognizes that any breach of this Section 8 shall cause irreparable injury to the Company or its affiliates,
inadequately compensable in monetary damages. Accordingly, in addition to any other legal or equitable remedies that may be available to the
Company, Executive agrees that the Company or its affiliates shall be able to seek and obtain injunctive relief in the form of a temporary
restraining order, preliminary injunction, or permanent injunction against the Executive to enforce this Agreement. To the extent that any
damages are calculable resulting from the breach of this Agreement, the Company and its affiliates shall also be entitled to recover damages.
Any recovery of damages by the Company and its affiliates shall be in addition to and not in lieu of the injunctive relief to which the Company
and its affiliates are entitled. Without limiting the rights of the Company and its affiliates under this Section 8 or any other remedies that may
be available to them, if a court of competent jurisdiction determines that the Executive has breached any of the provisions of this Section 8, the
Company or its affiliates will have the right to cease making any payments or providing any benefits otherwise due to Executive under the
terms and conditions of this Agreement, and the right to recover the Annual Bonus that may have been paid as part of the Enhanced Accrued
Benefits and the Severance Payment that the Executive may have received under this Agreement.
Section 9. Severable Provisions. The provisions of this Agreement are severable and the invalidity of any one or more provisions shall not
affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision of this
Agreement or the application thereof is unenforceable in whole or in part because of the duration or scope thereof, the parties hereto agree that
said court in making such determination shall have the power to reduce the duration and scope of such provision to the extent necessary to
make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law.
10
Section 10. Notices. All notices hereunder, to be effective, shall be in writing and shall be delivered by hand or mailed by certified mail,
postage and fees prepaid, as follows:
If to the Company: Loral Space & Communications Inc.
600 Third Avenue
New York, New York 10016
Attention: General Counsel
If to the Executive: Avi Katz
1460 Hudson Road
Teaneck, NJ 07666
or to such other address as a party may notify the other pursuant to a notice given in accordance with this Section 10. All notices to any person
shall be deemed given when actually received by the person.
Section 11. Miscellaneous.
(a) Amendment. This Agreement may not be amended or revised except by a writing signed by the parties.
(b) Assignment and Transfer. The provisions of this Agreement shall be binding on and shall inure to the benefit of any such successor in
interest to the Company. Neither this Agreement nor any of the rights, duties or obligations of the Executive shall be assignable by the
Executive, nor shall any of the payments required or permitted to be made to the Executive by this Agreement be encumbered, transferred or in
any way anticipated, except as required by applicable laws. This Agreement shall not be terminated solely by reason of the merger or
consolidation of the Company with any corporate or other entity or by the transfer of all or substantially all of the assets of the Company to any
other person, corporation, firm or entity. However, all rights of the Executive under this Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable
to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs or representatives.
(c) Withholding. The Company shall be entitled to withhold from any amounts to be paid or benefits provided to the Executive hereunder any
federal, state, local, or foreign withholding or other taxes or charges which it is from time to time required to withhold. The Company shall be
entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise.
(d) Waiver of Breach. A waiver by the Company or the Executive of any breach of any provision of this Agreement by the other party shall not
operate or be construed as a waiver of any other or subsequent breach by the other party.
(e) Survival of Certain Provisions. Provisions of this Agreement shall survive any termination of employment and the expiration of the Term if
so provided herein or if
11
necessary or desirable fully to accomplish the purposes of such provision, including, without limitation, the obligations of the Company under
Section 7 hereof if the Executive is terminated during the Term and the obligations of the Executive under Section 8 hereof.
(f) Attorney's Fees. In the event that any action is brought to enforce any of the provisions of this Agreement, or to obtain money damages for
the breach thereof, all expenses (including reasonable attorneys' fees) shall be paid by the party incurring such fees or expenses; provided,
however, that the Company shall reimburse Executive for such fees and expenses to the extent that the Executive prevails on any issues raised
in such action.
(g) Entire Agreement. This Agreement, the Stock Option Plan, the Option Agreement, the Indemnification Agreement referred to in Section 5
(f) hereof, the Certificates of Incorporation of the Company and of each of its affiliates, the SERP, the Plan of Reorganization and the
Stipulation and Agreement among the Debtors and their Directors and Officers in Respect of Certain Indemnification Claims constitute the
entire understanding of the parties with respect to the subject matter hereof and supercede all prior negotiations, understandings, discussions,
and agreements, whether written or oral, between them.
(h) Captions. Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
(i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and shall have the
same effect as if the signatures hereto and thereto were on the same instrument.
(j) Governing Law. This Agreement shall be construed under and enforced in accordance with the laws of the State of New York.
(k) Jurisdiction and Choice of Forum. The Executive and the Company irrevocably submit for any disputes arising under or in connection with
this Agreement to the exclusive jurisdiction of any state or federal court located in the State of New York. Both the Executive and the
Company (i) acknowledge that the forum stated in this Section has a reasonable relation to this Agreement and to the relationship between the
Executive and the Company, (ii) waive, to the extent permitted by law, any objection to personal jurisdiction or the laying of venue of any
action or proceeding in the forum stated in this section, (iii) agree not to commence any such action or proceeding in any forum other than the
forum stated in this section and (iv) agree that, to the extent permitted by law, a final and non-appealable judgment in any such action or
proceeding in any such court will be conclusive and binding on the Executive and the Company. However, nothing in this Agreement precludes
the Executive or the Company from bringing any action or proceeding in any court for the purposes of enforcing the provisions of this section.
12
(l) Acknowledgement of Representation. The Executive and the Company acknowledge that they have been represented by counsel of their
own choosing and have received a full and complete explanation of their rights and obligations under this Agreement and, therefore, in the
event of a dispute over the meaning of this Agreement or any provision thereof, neither party shall be entitled to any presumption of correctness
in favor of the interpretation advanced by such party or against the interpretation advanced by the other party.
(m) Guarantee. (i) Each of Loral Skynet Corporation and Space Systems/Loral, Inc. (each a "Guarantor") hereby irrevocably and
unconditionally guarantees the due and punctual payment and performance of all obligations of the Company under this Agreement; provided,
however, that a Guarantor's guarantee obligation hereunder shall terminate and cease to have any force or effect immediately upon (x) such
Guarantor ceasing to be a direct or indirect subsidiary or parent of the Company or (y) the sale of all or substantially all of such Guarantor's
assets pursuant to an Approved Transaction (as defined below) in which a Guarantor does not receive all or substantially all of the
consideration of such sale.
(ii) Notwithstanding anything in this Agreement to the contrary and for as long as the Guarantor's obligations hereunder are in effect, the
Executive hereby acknowledges and agrees that at any time a Guarantor may effectuate, and this Agreement shall not in any way prohibit or
restrict the Guarantor from effectuating, and the Executive shall not have any right or claim with respect to, rely upon, or challenge (a) any
transfer by the Guarantor of any or all of its funds, assets or other property to either: (i) the Company or any of its direct or indirect subsidiaries
or their successors (each a "Group Entity"), including by way of dividend, distribution, payment, lease, sale, assignment, transfer, merger,
consolidation or otherwise, or (ii) any other person, pursuant to a transaction that the Guarantor's Board of Directors determines in good faith to
effect in furtherance of a legitimate business purpose of the Guarantor or any Group Entity (an "Approved Transaction") or (b) the liquidation
or dissolution of a Guarantor.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ Bernard L. Schwartz
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
/s/ Avi Katz
----------------------------------------
Avi Katz
13
LORAL SKYNET CORPORATION (solely for purposes of Section 11(m) hereof)
By: /s/ Bernard L. Schwartz
------------------------------
Name:
------------------------------
Title:
------------------------------
SPACE SYSTEMS/LORAL, INC. (solely for purposes of Section 11(m) hereof)
By: /s/ Bernard L. Schwartz
------------------------------
Name:
------------------------------
Title:
------------------------------
14
Schedule I
Outside Business Relationships
Perquisites and Individual Benefits
EXECUTIVE
LIFE EXECUTIVE
INSURANCE MEDICAL OTHER
---------- --------- -----
$1,000,000 $4,000
Section 7(c)(iii)(A) Severance Amount
For corporate office employees:
Schedule II
Severance Amount per the Consent Order Approving Key Employee Retention Plan and Other Relief for Certain Employees of the Debtors'
Corporate Headquarters Pursuant to Sections 105(a) and 363(b) of the Bankruptcy Code dated December 18, 2003 is equal to (x) Enhanced
Severance (2003 annual base salary multiplied by the percentage applicable to the Group in which the Executive has been placed, plus (y)
Standard Severance of one week of annual base salary for each year of employment with the Company and its affiliates. As of the Effective
Date, the Severance Amount is set forth below.
ENHANCED STANDARD TOTAL
-------- -------- --------
$708,750 $92,664 $801,414
16
SSL 2002
Exhibit 10.17
SPACE SYSTEMS/LORAL, INC. SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
Informally Known As
The SS/L SERP
and also as
The Loral SERP
Effective April 23, 1996
Restated to reflect
amendments made through
December 17, 2002
TABLE OF CONTENTS
Page
----
INTRODUCTION............................................................. iv
Article I - Definitions.................................................. 1
Annuity Starting Date................................................. 1
Advisory Committee.................................................... 2
Basic Plan............................................................ 2
Basic Plan Benefit.................................................... 2
Beneficiary........................................................... 2
Board................................................................. 2
Code.................................................................. 2
Committee............................................................. 3
Employer.............................................................. 3
ERISA................................................................. 3
Investment Committee.................................................. 3
Participant........................................................... 3
Plan.................................................................. 4
Proper Application.................................................... 4
QDRO or Qualified Domestic Relations Order............................ 4
SS/L.................................................................. 5
Trust Agreement or Trust.............................................. 5
Trustee............................................................... 5
Article II - Benefits.................................................... 6
2.1 Amount of Benefits............................................. 6
2.1.1 Formula Benefit................................................ 6
2.1.2 Actual Benefit................................................. 6
2.2 Post-Retirement Death Benefits................................. 7
2.3 Pre-Retirement Death Benefits.................................. 8
2.4 Special Rules.................................................. 8
2.4.1 Small Benefit Cashout.......................................... 8
2.4.2 Lump Sum Benefit Limitation.................................... 8
2.4.3 No Insured Death Benefit....................................... 9
2.5 Benefits under Multiple Qualified Plans........................ 9
2.5.1 Different Annuity Starting Dates............................... 9
2.5.2 Same Annuity Starting Dates.................................... 10
2.5.3 Death Benefits................................................. 10
Article III - Administration; Accrued Benefits; Right to Amend........... 11
3.1 Committee's Discretionary Power to Interpret and
Administer the Plan......................................... 11
i
3.1.1 Appointment.................................................... 11
3.1.2 Role under ERISA............................................... 11
3.1.3 Committee establishes Plan procedures.......................... 11
3.1.4 Role of Human Resource and Benefits Personnel.................. 11
3.1.5 Discretionary Power to Interpret Plan.......................... 11
3.2 Rules of the Committee......................................... 12
3.3 Claims Procedure............................................... 13
3.4 QDRO Claim..................................................... 15
3.5 Indemnification of Committee, Investment Committee, and
Advisory Committee Members..................................... 16
3.6 Power to Execute Plan and Other Documents...................... 16
3.7 Conclusiveness of Records...................................... 17
3.8 No Personal Liability.......................................... 17
3.9 How Plan Benefits are Accrued.................................. 17
3.10 Right to Amend................................................. 17
3.10.1 General Power to Amend......................................... 17
3.10.2 No Cut-Back of Accrued Benefits................................ 18
3.11 Investment Committee........................................... 18
3.11.1 Appointment of Investment Committee............................ 18
3.11.2 Powers of the Investment Committee............................. 18
3.12.1 Appointment of Advisory Committee.............................. 20
3.12.2 Powers of the Advisory Committee............................... 20
Article IV - Vesting and Forfeiture...................................... 22
4.1 Vesting........................................................ 22
4.2 Dismissed for Cause............................................ 22
4.3 Forfeiture after Plan Benefits have Commenced.................. 23
4.4 Determinations by Committee.................................... 23
Article V - General Provisions........................................... 24
5.1 No Assignment or Alienation of Benefits........................ 24
5.2 Withholding Taxes.............................................. 24
5.3 No Right to Continue Employment................................ 24
5.4 Unfunded Plan.................................................. 24
5.5 Governing Law.................................................. 25
5.6 Payment of Benefits............................................ 25
5.7 Section Headings............................................... 25
5.8 Payment to a Minor or Incompetent.............................. 25
5.9 Doubt as to Right to Payment................................... 26
5.10 Missing Payees................................................. 27
5.11 Mistaken Payments.............................................. 27
5.12 Receipt and Release for Payments............................... 28
5.13 Illegality of Particular Provisions............................ 28
5.14 Discharge of Liability......................................... 28
ii
ADDENDUM - SUMMARY PLAN DESCRIPTION INFORMATION.......................... 30
Requesting Benefits................................................... 30
Who should answer your questions about the Plan....................... 30
Benefit review procedure.............................................. 30
Giving Away Your Plan Benefits........................................ 31
Divorce And Your Plan Benefits........................................ 31
Future Of The Plan................................................. 32
Tax Laws.............................................................. 32
Plan Limitations...................................................... 32
Plan Benefits are Not Insured......................................... 32
Statement Of Your Rights Under ERISA.................................. 32
Other Important Facts................................................. 33
iii
INTRODUCTION
In response to certain limitations under the Internal Revenue Code, as amended, on the maximum amount of compensation that can be taken
into account and the maximum amount of benefits that can be paid from a qualified defined benefit plan, Space Systems/Loral, Inc. ("SS/L")
has adopted this Plan effective April 23, 1996 to permit employees and their beneficiaries to be able to enjoy the benefits that would have been
provided to them but for these limitations. The Plan is therefore an "excess benefit plan" as defined by the Employee Retirement Income
Security Act of 1974, as amended. The Plan shall be known as the Space Systems/Loral, Inc. Supplemental Executive Retirement Plan, or as
the SS/L SERP, or as the Loral SERP. The plan was restated, effective April 23, 1996, to reflect amendments made through December 17,
2002.
iv
The following terms shall have the designated meaning, unless a different meaning is clearly required by the context:
Article I - Definitions
Annuity Starting Date.
Subject to Section 2.5, "Annuity Starting Date" shall mean:
(a) generally, the "Annuity Starting Date" defined in the Basic Plan, provided that the Participant is fully vested under Article IV, and Proper
Application has been made.
(b) With respect to any lump sum, the first day of the month coincident with or next following the date as of which the Participant is both (1)
eligible to receive Plan payment and (2) has completed his Proper Application.
(c) With respect to any one of a series of payments over the life or life expectancy of one or more distributees, the first day of the month for
which the Plan benefit is paid, even if this date is not the date of actual payment.
(d) The term "Annuity Starting Date" shall be determined with respect to Plan payments made to the Participant, rather than with respect to any
survivor benefit payments.
(e) The term "Annuity Starting Date" shall, in all events, be defined by Code Regulation Section 1.401(a)-20.
Advisory Committee.
The group of one or more persons created and appointed, at the discretion of the Board, having authority to provide advice concerning the
investment of Trust assets, as described in Section ?.
Basic Plan.
The qualified defined benefit pension plan sponsored by SS/L or an Employer in which an employee participates. If an employee has an
interest in more than one such plan, then the term "Basic Plan" shall refer to such plans collectively except as the context shall otherwise
require.
Basic Plan Benefit.
The amount accrued by a Participant from a Basic Plan.
Beneficiary.
Beneficiary means the person, trust, estate, or other entity entitled to receive benefits (if any) after the Participant's death under the Plan, which
Beneficiary shall be the same as such Participant's beneficiary under the Basic Plan.
Board.
The Board of Directors of Space Systems/Loral, Inc., or the Board's Executive Committee.
Code.
The Internal Revenue Code of 1986, as amended from time to time, and all
2
appropriate regulations and administrative guidance.
Committee.
The administrative Committee appointed to administer the Plan pursuant to Article III.
Employer.
Any subsidiary or affiliate of SS/L which has adopted this Plan and its related trust, so as to become a participating employer in the Plan, with
the consent of SS/L. Each Employer shall act by resolution of its Board of Directors. If the context of the Plan provision requires, the term
"Employer" shall also include SS/L. Further, with respect to Article IV, "Employer" shall also include Loral Space & Communications Ltd.
ERISA.
The Employee Retirement Income Security Act of 1974, as amended, and all appropriate regulations and administrative guidance.
Investment Committee.
The group of one or more persons created, at the discretion of the Board, having investment authority over Trust assets, as described in Section
3.11.
Participant.
A Participant in a Basic Plan who accrues benefits thereunder on or after April 1, 1996 and whose Basic Plan Benefit is limited by Section 415
of the Code or whose compensation for purposes of calculating a Basic Plan Benefit is limited by Section 401(a)(17) of the Code. As context
demands, the term "Participant" shall also include a former Participant.
3
Plan.
This Space Systems/Loral, Inc. Supplemental Executive Retirement Plan, as amended, and as from time to time in effect.
Proper Application.
For all Plan purposes, making any election, granting any consent, giving any notice or information, and making any communication whatsoever
to the Committee or its delegates, in compliance with all Plan procedures, on forms provided by the Committee, and providing all information
required by the Committee. A Proper Application will be deemed to have been made only if it is properly completed, as determined by the
Committee.
QDRO or Qualified Domestic Relations Order.
A QDRO shall mean an order as defined in Code Section 414(p) and ERISA
Section 206(d)(3), and shall be subject to all administrative rules established under the Basic Plan. The Committee shall have full discretionary
authority to determine whether any court order is a QDRO.
4
SS/L.
Space Systems/Loral, Inc., and depending on the context, its subsidiaries or affiliates. SS/L shall act by resolution of the Board.
Trust Agreement or Trust.
The document executed by SS/L and by the Trustee fixing the rights and liabilities of each with respect to holding assets to be used to pay Plan
benefits, should any such assets be held in the Trust. The Trust is established pursuant to SS/L's intention that the Plan shall be an unfunded
plan, as detailed in Section 5.4.
Trustee.
The trustee or trustees that may, from time to time, be in office, pursuant to the Trust Agreement.
5
2.1 Amount of Benefits.
Article II - Benefits
The benefit payable from this Plan shall be in the form of a monthly annuity equal to the amount determined under Section 2.1.1 minus the
amount determined under Section 2.1.2. Subject to Section 2.2, such benefit shall be payable as of the Participant's Annuity Starting Date and
continue for the remainder of the Participant's life.
2.1.1 Formula Benefit. The benefit that would be payable to a Participant under the Basic Plan, in the form elected by the Participant pursuant
to the provisions of the Basic Plan, irrespective of any limitations imposed by Section 415 or Section 401(a)(17)of the Code.
2.1.1.1 Notwithstanding the preceding paragraph, the benefit payable under this Section 2.1.1 shall be calculated to credit any deferred
compensation that is paid after retirement, even if such deferred compensation would not be credited under the Basic Plan. That is, such
deferred compensation shall, for the purposes of the preceding paragraph, be deemed to be credited by the Basic Plan, for the purposes of
Section 2.1.1 (so as to augment the benefit payable by this Plan).
2.1.2 Actual Benefit. The Basic Plan Benefit actually paid to the Participant in whichever form he elects, after compliance with Sections 415
and 401(a)(17) of the Code, plus any additional benefits paid to the Participant under any non-qualified defined benefit plan (besides this Plan)
sponsored by an
6
Employer.
2.1.2.1 Deferred compensation paid after retirement which is not credited under the Basic Plan, shall not be considered to be a 'Basic Plan
Benefit that is actually paid, for the purposes of Section
2.1.2 (even if such deferred compensation is credited under Section 2.1.1.1.) Thus, such deferred compensation paid after retirement will never
be used to reduce benefits calculated under this Section 2.1, if such deferred compensation is not credited under the Basic Plan.
2.1.2.2 If benefits under the Basic Plan are increased as a result of a change in the law that "raises the ceiling" in the limitations under Code
Sections 415 or 401 (a)(17) (or corresponding provisions of applicable law), benefits under this Plan shall be reduced by the amount of any
such increase.
2.2 Post-Retirement Death Benefits.
Upon the death of the Participant after his Annuity Starting Date, benefits will continue to be paid to such Participant's Beneficiary in an
amount equal to the benefit determined under Section 2.1 multiplied by a fraction, the numerator of which is the benefit payable from the Basic
Plan after the Participant's death, and the denominator of which is the benefit payable from the Basic Plan immediately before the Participant's
death. No amount will be paid after the Participant's death under this Plan if no such benefits are paid under the Basic Plan.
7
2.3 Pre-Retirement Death Benefits.
Upon the death of the Participant prior to his Annuity Starting Date, his Beneficiary shall receive a benefit equal to the difference between the
benefit received by such Beneficiary under the Basic Plan and the benefit that would have been paid under the Basic Plan irrespective of any
limitations imposed by Sections 415 or 401(a)(17) of the Code. No amount will be paid under this Plan on account of the Participant's death
prior to his Annuity Starting Date unless such benefits are paid under the Basic Plan.
2.4 Special Rules.
The following rules shall apply notwithstanding any other provision of this Plan.
2.4.1 Small Benefit Cashout. If the actuarial present value (utilizing the assumptions set forth in the small benefit cashout provisions of the
Basic Plan) of a Participant's benefit under Section 2.1 or a Beneficiary's benefit under Section 2.3 is $3,500 or less (or whatever other amount
is applicable, under Code Section 411(a)(11), to the Participant's Annuity Starting Date), then payment will be made from this Plan in a single
lump sum as soon as practicable after the Annuity Starting Date (with respect to a benefit paid pursuant to Section 2.1) and the death of the
Participant (with respect to a benefit paid pursuant to Section 2.3). Effective Should the amount of $3,500 be changed, under Code Section
411(a)(11), then the provisions of this Section 2.4.1 shall be construed to reflect this amended amounted
2.4.2 Lump Sum Benefit Limitation. Unless special approval of the Committee is obtained, and except for benefits paid pursuant to Section
2.4.1, no benefits
8
under this Plan shall be paid in a lump sum. Accordingly, if any benefits are paid under the Basic Plan to a Participant in a lump sum, the
amount payable under this Plan pursuant to the methodology set forth in Section 2.1 shall nevertheless be paid in the form of a straight life
annuity for the Participant, beginning on the Annuity Starting Date and ending with the payment for the month in which the Participant dies.
2.4.3 No Insured Death Benefit. No benefit pursuant to Section 2.3 shall be paid with respect to any death benefit under the Basic Plan which is
provided by insurance, to the extent that such benefit exceeds the minimum benefit required to be provided under the Basic Plan under Code
Section 401(a)(11).
2.5 Benefits under Multiple Qualified Plans.
The following rules shall apply if a Participant has a benefit under more than one Basic Plan:
2.5.1 Different Annuity Starting Dates. Benefits under this Plan shall be payable as of the Participant's earliest Annuity Starting Date under all
such Basic Plans. In the event that the Participant has benefits payable under different Basic Plans, with different Annuity Starting Dates, then
the amount of his benefit under this Plan shall initially be determined based only on the Basic Plans for which the Participant's Annuity Starting
Date has occurred, as though such Plans were the only Basic Plans in which the Participant had accrued a benefit. When benefits later begin
under the other Basic Plans, benefits hereunder shall be increased to reflect the intent of this Plan to fully make up to the Participant the
benefits he had not received under all Basic Plans, as a result of the
9
Code's limitations.
2.5.2 Same Annuity Starting Dates. If a Participant's Annuity Starting Date is the same under all Basic Plans, then benefits under this Plan shall
generally be payable as of such date, provided the Participant is fully vested under Article IV, and that Proper Application has been made.
2.5.3 Death Benefits. If benefits are paid under the Basic Plans in different forms, the death benefits pursuant to Section 2.2 shall be determined
with respect to each individual plan.
10
3.1 Committee's Discretionary Power to Interpret and Administer the Plan
Article III - Administration; Accrued Benefits; Right to Amend
3.1.1 Appointment. The Committee shall be appointed from time to time by the Board to serve at its pleasure. Any member of the Committee
may resign by delivering his written resignation to the Board.
3.1.2 Role under ERISA. The Committee is the "named fiduciary" for operation and administration of the Plan, and the "administrator" under
ERISA. The Committee is designated as agent for service of legal process.
3.1.3 Committee establishes Plan procedures. The Committee and its delegates shall from time to time establish rules and procedures for the
administration and interpretation of the Plan and the transaction of its business.
3.1.4 Role of Human Resource and Benefits Personnel. Employees of an Employer who are human resources personnel or benefits
representatives are the Committee's delegates and shall, under the authority of the Committee, perform the routine administration of the Plan,
such as distributing and collecting forms and providing information about Plan procedures. They shall also establish Plan rules and procedures.
3.1.5 Discretionary Power to Interpret Plan.
3.1.5.1 The Committee has complete discretionary and final authority to (1) determine all questions concerning eligibility, elections,
11
contributions, and benefits under the Plan, (2) construe all terms under the Plan and the Trust, including any uncertain terms, and (3) determine
all questions concerning Plan administration. All administrative decisions made by the Committee, and all its interpretations of the Plan
documents, shall be given full deference by any court of law.
3.1.5.2 Information that concerns an interpretation of the Plan or a discretionary determination, can be properly provided only by the
Committee, and not by any delegate (other than legal counsel).
3.1.5.3 Should any individual receive oral or written information concerning the Plan, which is contradicted by a subsequent determination by
the Committee, then the Committee's final determination shall control.
3.2 Rules of the Committee.
3.2.1 Any act which the Plan authorizes or requires the Committee to do may be done by a majority of its members. The action of such
majority, shall constitute the action of the Committee and shall have the same effect for all purposes as if made by all members of the
Committee at the time in office. The Committee may act without any writing that records its decisions, and need not document its meetings or
teleconferences. The Committee may also act through any authorized representative.
3.2.2 The members of the Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or
perform any other act
12
which the Plan authorizes or requires the Committee to do.
3.2.3 The Committee may employ counsel and other agents and may procure such clerical, accounting, actuarial and other services as they may
require in carrying out the provisions of the Plan. Legal counsel are authorized as the Committee's delegates.
3.2.4 No member of the Committee shall receive any compensation for his services as such. All expenses of administering the Plan, including,
but not limited to, fees of accountants, counsel and actuaries shall be paid by each Employer, to the extent that they are not paid under the
Trust.
3.2.5 Each member of the Committee may delegate Committee responsibilities among Employer directors, officers, or employees, and may
consult with or hire outside experts. The expenses of such experts shall be paid by each Employer, to the extent that they are not paid under the
Trust.
3.3 Claims Procedure.
3.3.1 The Committee shall determine Participants' and Beneficiaries' rights to benefits under the Plan, In the event that a Participant or
Beneficiary disputes an initial determination made by the Committee, then he may dispute the determination only by filing a written claim for
benefits.
13
3.3.2 If a claim is wholly or partially denied, the Committee shall provide the claimant with a notice of denial, generally within 90 days of
receipt, written in a manner calculated to be understood by the claimant and setting forth:
3.3.2.1 The specific reason(s) for such denial;
3.3.2.2 Specific references to the pertinent Plan provisions on which the denial is based;
3.3.2.3 A description of any additional material or information necessary for the claimant to perfect the claim with an explanation of why such
material or information is necessary (if applicable); and
3.3.2.4 Appropriate information as to the steps to be taken if the claimant wishes the Committee to revise its initial denial. The notice of denial
shall be given within a reasonable time period but no later than 90 days after the claim is received, unless circumstances require an extension of
time for processing the claim. If such extension is required, written notice shall be furnished to the claimant within 90 days of the date the
claim was received stating that an extension of time and the date by which a decision on the claim can be expected, which shall be no more
than 180 days from the date the claim was filed.
3.3.2.5 If no written notice of denial is provided by the Committee, then the claim shall be deemed to be denied, and the claimant may appeal
the claim as though the claim had been denied.
14
3.3.3 The claimant and/or his representative may appeal the denied claim and may:
3.3.3.1 Request a review by making a written request to the Committee provided that such a request is made, within 65 days of the date of the
notification of the denied claim;
3.3.3.2 Review pertinent documents.
3.3.4 Upon receipt of a request for review, the Committee shall within a reasonable time period but not later than 60 days after receiving the
request, provide written notification of its decision to the claimant stating the specific reasons and referencing specific plan provisions on
which its decision is based, unless special circumstances require an extension for processing the review. If such an extension is required, the
Committee shall notify the claimant of the date, no later than 120 days after receiving the request for review, on which the Committee will
notify the claimant of its decision.
3.3.5 In the event of any dispute over benefits under this Plan, all remedies available to the disputing individual under this Article must be
exhausted, within the specified deadlines, before legal recourse of any type is sought.
3.4 QDRO Claim.
Claims relating to or affected by a domestic relations order as defined by Code Section 414(p) ("QDROs") or draft order shall be determined
under the Basic Plan Committee's
15
procedures concerning domestic relations orders. The claims procedure described in the preceding section shall not apply to any such domestic
relations order claim.
3.5 Indemnification of Committee, Investment Committee, and Advisory Committee Members.
To the fullest extent permitted by law, each Employer agrees to indemnify, to defend, and hold harmless the members of the Investment
Committee and the Advisory Committee (if either is created) and the Committee and its delegates, individually and collectively, against any
liability whatsoever for any action taken or omitted by them in good faith in connection with this Plan or their duties hereunder and for any
expenses or losses for which they may become liable as a result of any such actions or non-actions unless resultant from their own willful
misconduct; and each Employer will purchase insurance for the Investment Committee, the Advisory Committee, and the Committee and its
delegates to cover any of their potential liabilities with regard to the Plan.
3.6 Power to Execute Plan and Other Documents.
The Vice President of Administration of Loral SpaceCom Corporation or of Loral Space & Communications Ltd. and the Committee shall have
the authority to execute governmental filings or other documents relating to the Plan (including the Plan document), or this authority may be
delegated to another officer or employee of an Employer by either the Vice President of Administration of Loral SpaceCom Corporation, or of
Loral Space & Communications Ltd., or the Board, or the Committee.
16
3.7 Conclusiveness of Records.
In administering the Plan, the Committee may conclusively rely upon the Basic Plan employer's payroll and personnel records maintained in
the ordinary course of business.
3.8 No Personal Liability
No Committee member or delegate shall be personally liable by reason of any contract or other instrument executed by him or on his behalf in
his capacity as a member or delegate of a Committee nor for any mistake of judgment made in good faith, and each Employer shall indemnify
and hold harmless each member of the Committee and each other officer, employee, or director of any Employer to whom any duty or power
relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expenses (including counsel fees)
or liability (including any sum in settlement of a claim with the approval of the Board) arising out of any act or omission to act in connection
with the Plan unless arising out of such person's own fraud or bad faith.
3.9 How Plan Benefits are Accrued.
Benefits that would be accrued under the Basic Plan, but for the limiting provisions of Code Sections 415 and/or 401 (a)(l7), shall be deemed to
be accrued under the Plan.
3.10 Right to Amend.
3.10.1 General Power to Amend. The Board may at any time amend the Plan in any respect or suspend or terminate the Plan in whole or in part
without the consent of any Participant or Beneficiary or any Employer whose employees are covered by this Plan, subject to Section 3.10.2.
Any such amendment, suspension or termination may be made with or without retroactive effect, save as provided in Section 3.10.2.
17
3.10.2 No Cut-Back of Accrued Benefits. Notwithstanding the previous Section 3.10.1, this Plan may not be amended or terminated in any
respect that has the effect of reducing or eliminating any Plan benefit that had accrued as of the effective date of the amendment or termination,
unless the affected Participants or Beneficiaries each gives his consent. That is, there shall be no retroactive cut-backs of accrued Plan benefits,
without individual consent.
3.11 Investment Committee.
3.11.1 Appointment of Investment Committee. The Board may, within its discretion, appoint an Investment Committee, of at least one person.
The appointment of an Investment Committee shall relieve the Board, SS/L, and all other participating Employers from all fiduciary
responsibility for all Trust assets under the control of the Investment Committee, or its delegates, as provided by law. The Investment
Committee, if it is created by the Board, shall be a fiduciary of the Plan, but shall not be the named fiduciary. The Board may also, within its
discretion, decline to create an Investment Committee, or disband it at any time.
3.11.2 Powers of the Investment Committee. The
18
Investment Committee, if appointed, has final authority regarding the investment and management of Trust assets. The Investment Committee
may delegate its responsibilities, appoint investment managers, oversee its delegates, and each Investment Committee member may execute
documents on behalf of the Investment Committee, with respect to Trust assets. Should the Investment Committee appoint an investment
manager, as that term is defined in ERISA, then the Investment Committee shall be relieved of all fiduciary duty with respect to Trust assets
under the control of such an investment manager. The Investment Committee shall exercise its powers subject to the terms of the Trust.
3.11.2.1 Any act which the Plan or Trust authorizes or requires the Investment Committee to do may be done by a majority of its members. The
action of such majority, shall constitute the action of the Investment Committee and shall have the same effect for all purposes as if made by all
members of the Committee at the time in office. The Investment Committee may act without any writing that records its decisions, and need
not document its meetings or teleconferences. The Investment Committee may also act through any authorized representative.
3.11.2.2 The members of the Investment Committee may authorize one or more of their number to execute or deliver any instrument, make any
payment or perform any other act which the Plan authorizes or requires the Investment Committee to do.
3.11.2.3 The Investment Committee may employ counsel, outside experts, and other agents and may procure such clerical, accounting,
actuarial and other
19
services as they may require in carrying out the provisions of the Plan.
3.11.2.4 No member of the Investment Committee shall receive any compensation for his services as such. All expenses relating to the
Investment Committee's activities, including, but not limited to, fees of accountants, counsel and actuaries shall be paid by each Employer, to
the extent that they are not paid under the Trust.
3.12 Advisory Committee
3.12.1 Appointment of Advisory Committee. The Board may, within its discretion, appoint an Advisory Committee, of at least one person. Its
role shall be merely to advise the fiduciary that has authority to invest the Plan's assets, including the Investment Committee, if one is
appointed. However, the Advisory Committee itself shall not have any authority or control over Plan investments, and shall not be a fiduciary
of the Plan. The appointment of an Advisory Committee shall not relieve any other person or entity from any fiduciary responsibility for Trust
assets. The Board may also, within its discretion, decline to create an Advisory Committee, or disband it at any time.
3.12.2 Powers of the Advisory Committee. The Advisory Committee, if appointed, shall be authorized to propose investment guidelines and to
generally offer investment advice to whichever fiduciary has final authority over the investment and management of Trust assets. The Advisory
Committee may delegate its responsibilities, appoint investment managers, and oversee its delegates, and each Advisory Committee member
may execute documents on behalf of the Advisory Committee. The Advisory Committee shall exercise its powers subject to the terms of the
Trust, although the Advisory Committee shall
20
retain its powers under this Plan, even if its appointment is not provided for in the Trust.
3.12.2.1 Any act which the Plan or Trust authorizes or requires the Advisory Committee to do may be done by a majority of its members. The
action of such majority, shall constitute the action of the Advisory Committee and shall have the same effect for all purposes as if made by all
members of the Committee at the time in office. The Advisory Committee may act without any writing that records its decisions, and need not
document its meetings or teleconferences. The Advisory Committee may also act through any authorized representative.
3.12.2.2 The members of the Advisory Committee may authorize one or more of their number to execute or deliver any instrument, make any
payment or perform any other act which the Plan authorizes or requires the Advisory Committee to do.
3.12.2.3 The Advisory Committee may employ counsel, outside experts, and other agents and may procure such clerical, accounting, actuarial
and other services as they may require in carrying out the provisions of the Plan.
3.12.2.4 No member of the Advisory Committee shall receive any compensation for his services as such. All expenses relating to the Advisory
Committee's activities, including, but not limited to, fees of accountants, counsel and actuaries shall be paid by each Employer, to the extent
that they are not paid under the Trust.
21
4.1. Vesting.
Article IV - Vesting and Forfeiture
4.1.1. A Participant shall be entitled to a benefit under this Plan only upon satisfying the vesting requirements set out in this Section 4.1.
4.1.2. Vesting, as defined by this Section 4.1, shall occur only when the Participant has (i) satisfied the vesting requirements of the Basic Plan
and made any contributions that are required to receive benefits under the Basic Plan, (ii) terminated employment with his respective
Employer, (iii) satisfied all eligibility requirements for benefits under this Plan, and (iv) applied and received Committee approval to receive
Plan benefits, with respect to the forfeiture issues addressed by Section 4.1.3.
4.1.3. A Participant shall not be fully vested under this Section 4.1 until, following his termination and application for Plan benefits, the
Committee has determined that he is not subject to forfeiture of his Plan benefits under this Section 4.1. Forfeiture of all Plan benefits
(including death benefits and Plan benefits previously paid) under this Section 4.1 shall take place, notwithstanding any contrary Plan
provision, if a Participant: (i) is Dismissed for Cause, as defined in Section 4.2, (ii) becomes employed by a company in substantial competition
with an Employer, or (iii) engages in conduct detrimental or contrary to the best interests of an Employer.
4.2 Dismissed for Cause.
"Dismissed for Cause" means termination of employment for (a) theft, embezzlement, or malicious destruction of an Employer's property; (b)
fraud or other wrongdoing against an Employer; or (c) improper disclosure of an Employer's trade secrets.
22
4.3 Forfeiture after Plan Benefits have Commenced.
Even though the Committee has made an initial favorable vesting determination under Section 4.1., it may nevertheless determine that a
Participant's Plan benefits, after payment has commenced, are forfeited, if the Committee reconsiders the issues addressed in Section 4.1.3 and
determines that forfeiture is in fact warranted. Such a forfeiture shall be effective as of the date that the Committee determines the events of
forfeiture have occurred, as set out in Section 4.1.3. The Committee may therefore make a retroactive forfeiture determination. Any Plan
benefits that have been paid after the effective date of the retroactive forfeiture determination shall be considered a mistaken payment under
Section 5.11.
4.4 Determinations by Committee.
The Committee shall have full, final, and discretionary authority to make determinations under this Article IV. Any forfeiture determination
made by the Committee shall be final, binding, and conclusive upon the Participant and his Beneficiaries.
23
5.1 No Assignment or Alienation of Benefits.
Article V - General Provisions
Subject to Sections 2.2 and 2.3, and to any QDROs, payment of benefits pursuant to this Plan shall be made only to Participants. Such benefits
shall not be subject in any manner to the debts or other obligations of the person to whom they are payable and shall not be subject to transfer,
anticipation, sale, assignment, bankruptcy, pledge, attachment, charge or encumbrance in any manner, either voluntarily or involuntarily.
5.2 Withholding Taxes.
Whenever under the Plan payment is made to a Participant or Beneficiary, SS/L shall be entitled to require as a condition of payment that the
recipient remit an amount, sufficient in SS/L's opinion, to satisfy all FICA, federal and other withholding tax requirements related thereto. SS/L
shall be entitled to deduct such amount from any payment.
5.3 No Right to Continue Employment.
This Plan is voluntary on the part of SS/L and shall not be deemed to constitute an employment contract between SS/L and a Participant and/or
consideration for or an inducement for or condition of employment of any Participant. Nothing in this Plan shall be deemed to give any
employee the right to be retained in the service of SS/L or to interfere with the right of SS/L to discharge, terminate or lay off any Participant at
any time for any reason.
5.4 Unfunded Plan.
The Plan is intended to constitute an unfunded, nonqualified pension plan for a
24
select group of management or highly compensated employees, for the purposes of
ERISA.
5.5 Governing Law.
It is intended that the Plan conform to and meet the applicable requirements of ERISA and the Code. Except to the extent preempted by
ERISA, the validity of the Plan or of any of its provisions shall be determined under, and it shall be construed and administered according to,
the laws of the State of New York (including its statute of limitations and all substantive and procedural law, and without regard to its conflict
of laws provisions).
5.6 Payment of Benefits.
All benefits payable under the Plan shall be paid under the Trust Agreement. The rights or entitlement of any Participant or Beneficiary shall be
no greater than those of an unsecured general creditor of SS/L, subject to the Trust Agreement.
5.7 Section Headings.
The section headings contained in the Plan are for purposes of convenience only and are not intended to define or limit the contents of said
sections.
5.8 Payment to a Minor or Incompetent.
If any amount is payable under this Plan to a minor or other legally incompetent person, such amount may be paid in any one or more of the
following ways, as the Committee in its sole discretion shall determine:
5.8.1 To the legal representatives of such minor or other incompetent person;
5.8.2 Directly to such minor or other incompetent person;
25
5.8.3 To a parent or guardian of such minor on other incompetent person, to the person with whom such minor or other incompetent person
shall reside, or to a custodian for such minor under the Uniform Gifts to Minors Act (or similar statute) of any jurisdiction. Payment to any
person in accordance with the foregoing provisions shall pro tanto discharge SS/L, the members of the Committee, and any person or
corporation making such payment pursuant to the direction of the Committee, and none of the foregoing shall be required to see to the proper
application of any such payment to such person pursuant to the provisions of this Section 5.8. Without in any manner limiting or qualifying the
provisions of this Section 5.8, if any amount is payable under this Plan to a minor or any other legally incompetent person, the Committee may
in its discretion utilize the procedures described in Section 5.8.
5.9 Doubt as to Right to Payment.
If at any time any doubt exists as to the right of any person to any payment under this Plan or the amount or time of such payment (including,
without limitation, any case of doubt as to identity, or any case in which any notice has been received from any other person claiming any
interest in amounts payable hereunder, or any case in which a claim from other persons may exist by reason of community property or similar
laws), the Committee shall be entitled, in its discretion, to direct that such sum be held as a segregated amount in trust until such right or
amount or time is determined or until order of a court of competent jurisdiction, or to pay such sum into court in accordance with appropriate
rules of law in such case then provided, or to make payment only upon receipt of a bond or similar indemnification (in such amount and in such
form as is satisfactory to the Committee).
26
5.10 Missing Payees.
If all or portion of a Participant's vested Plan benefit becomes payable and the Committee after a reasonable search cannot locate the
Participant (or his Beneficiary if such Beneficiary is entitled to payment), then, 5 years after the Participant's benefit first became payable under
the Plan, a notice shall be mailed to the last known address of the Participant. If the Participant does not respond within three months, the
Committee may elect, upon advice of counsel, to remove all records of the Participant's accrued benefit from the Plan's current records and that
benefit shall be used to offset future employer contributions. If the Participant or his Beneficiary subsequently presents a valid claim for
benefits to the Committee, the Committee shall restore and pay the appropriate Plan benefit.
5.11 Mistaken Payments.
No Participant or Beneficiary shall have any right to any payment made
(1) in error, (2) in contravention to the terms of the Plan, the Code, or ERISA, or (3) because the Committee or its delegates were not informed
of any death. The Committee shall have full rights under the law and ERISA to recover any such mistaken payment, and the right to recover
attorney's fees and other costs incurred with respect to such recovery. Recovery shall be made from future Plan payments, or by any other
available means.
27
5.12 Receipt and Release for Payments.
Any payment to any Participant, Beneficiary, or to any such person's legal representative, parent, guardian, or any person or entity specified by
Section 5.8 or under any other Plan provision, shall be in full satisfaction of all claims that can be made under the Plan against the Trustee and
SS/L. The Trustee and SS/L may require such Participant, Beneficiary, legal representative, or any other person or entity described in this
Section 5.12, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the
Trustee or SS/L.
5.13 Illegality of Particular Provisions.
The illegality of any particular provision of this Plan shall not affect the other provisions thereof, but the Plan shall be construed in all respects
as if such invalid provision were omitted.
5.14 Discharge of Liability.
If distribution in respect of a Participant is made under this Plan in a form, or to a person, reasonably believed by the Committee or its delegate
to be proper, the Plan shall have no further liability with respect to the Participant (or his spouse or Beneficiary) to the extent of such
distribution.
28
IN WITNESS WHEREOF, on behalf of Space Systems/Loral, Inc. and each of the Employers, and as agent for each Employer, the Vice
President of Administration of Loral SpaceCom Corporation, an officer authorized under this Plan, has executed this Plan, the Space
Systems/Loral, Inc. Supplemental Executive Retirement Plan, informally known as the Loral SERP, this 7th day of JAN, 2003.
On behalf of SPACE SYSTEMS/LORAL, INC.
By: /s/ Stephen L. Jackson
------------------------------------
Stephen L. Jackson
Vice President of Administration
Loral SpaceCom Corporation
Exhibit 10.21
EXECUTION COPY
NON-QUALIFIED
STOCK OPTION AGREEMENT
UNDER
LORAL SPACE & COMMUNICATIONS INC.
2005 STOCK INCENTIVE PLAN
THIS AGREEMENT, made as of this 28th day of March, 2006 (the "Grant Date"), by and between Loral Space & Communications Inc., a
Delaware corporation (the "Company"), and Michael B. Targoff (the "Optionee").
WHEREAS, the Optionee is employed by or is providing services to the Company or an Affiliate in a key capacity, and the Company desires
to have Optionee remain in such employment or service and to afford Optionee the opportunity to acquire, or enlarge, Optionee's stock
ownership of the Company's Common Stock, par value $.01 per share (the "Stock"), so that Optionee may have a direct proprietary interest in
the Company's success;
WHEREAS, all capitalized terms not otherwise defined herein shall have the same meaning as set forth in Company's 2005 Stock Incentive
Plan (the "Plan");
WHEREAS, the Company and the Optionee have entered into an Employment Agreement, of even date hereof (the "Employment
Agreement"); and
WHEREAS, the Company intends to seek shareholder and any other necessary approvals required to amend the Plan to increase the number of
shares available for grant thereunder (the "Approvals").
NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein and in the Plan, and subject to obtaining the Approvals, the
Company hereby grants to the Optionee, during the period commencing on the Grant Date and ending on the date that is five years from the
Grant Date (the "Option Period"), the right and option (the right to purchase any one share of Stock hereunder being an "Option") to purchase
from the Company, at an exercise price of $26.915 per share (the "Option Price"), an aggregate of 825,000 shares of Stock. The Options are not
intended to be "incentive stock options", as defined in Section 422 of the Internal Revenue Code of 1986, as amended. To the extent the
Approvals are not obtained by December 31, 2007, the Options granted hereunder and this Agreement shall be void.
2. [RESERVED].
3. EXERCISE OF OPTIONS.
(a) Subject to the terms and conditions set forth herein and provided the Optionee's employment continues, the Options shall vest and become
exercisable in accordance with the following schedule:
(i) 12 1/2% of the Options shall vest and become exercisable on the Grant Date;
(ii) an additional 25% of the Options shall vest and become exercisable on the first anniversary of the Grant Date;
(iii) an additional 25% of the Options shall vest and become exercisable on the second anniversary of the Grant Date;
(iv) an additional 25% of the Options shall vest and become exercisable on the third anniversary of the Grant Date; and
(v) the remainder of the Options shall vest and become exercisable on the fourth anniversary of the Grant Date;
provided, however, that no Options shall become exercisable (even though vested) prior to the date on which the Approvals have been obtained
and the Options that would have become exercisable prior to the date the Approvals are obtained, but for this prohibition on exercisability prior
to the date the Approvals are obtained, shall become exercisable on the date that the Approvals are obtained.
(b) The Options shall vest only as to full shares of Stock rounded down to the nearest full share during the first three vesting dates and all
fractions shall be amalgamated and become exercisable on the last vesting date. Except as otherwise stated in this Agreement, the Options shall
expire on the five-year anniversary of the Grant Date.
4. TERMINATION OF EMPLOYMENT.
(a) If the Optionee's employment or service with the Company and all Affiliates is terminated for Cause, all Options (whether vested or not)
shall immediately expire.
(b) If the Optionee resigns from employment or service with the Company and all Affiliates other than for "Good Reason," all unvested
Options shall expire and all vested Options shall remain outstanding and exercisable, but shall be exercisable only to the extent such Options
are exercisable at the time of termination or become exercisable prior to the earlier of (i) three months following the date of termination or (ii)
the remainder of the Option Period.
(c) If the Optionee's employment or service with the Company and all Affiliates is terminated by the Company or an Affiliate other than for
Cause or the
-2-
Optionee resigns for "Good Reason", all unvested Options shall vest immediately, but shall not be exercisable unless the Approvals have been
obtained, and all vested Options (including those that vest upon such termination) shall remain outstanding and exercisable, but shall be
exercisable only to the extent such Options are exercisable at the time of termination, for the shorter of (i) the Post Termination Exercise Period
(as defined below) or (ii) the remainder of the Option Period. The Post Termination Exercise Period shall mean (x) the period that is two years
following the date of termination, if the termination occurs prior to the third anniversary of the Grant Date, or (y) the period that is one year
following the date of termination, if the termination occurs on or following the third anniversary of the Grant Date but prior to the fifth
anniversary of the Grant Date; provided, however, that if the Optionee's employment is terminated on account of death or Disability, the Post
Termination Exercise Period shall not be shorter than one year following the date of the Optionee's termination of employment.
(d) If the Optionee's employment or service with the Company and all Affiliates terminates on account of the Optionee's death or Disability, a
pro-rata portion of the next vesting traunch of the Option shall vest, all remaining unvested Options shall immediately expire and all vested
Options will remain outstanding and exercisable, but shall be exercisable only to the extent such Options are exercisable at the time of
termination or become exercisable prior to the earlier of (i) the Post Termination Exercise Period or (ii) the Option Period.
5. METHOD OF EXERCISING OPTION.
(a) Options which have become exercisable may be exercised by delivery of written notice of exercise to the Committee accompanied by
payment of the Option Price. Payment for shares of Stock acquired pursuant to Options shall be made in full, upon exercise of the Options in
immediately available funds in United States dollars, by certified or bank cashier's check or, in the discretion of the Committee, (i) by surrender
to the Company of Mature Shares held by the Participant; (ii) by delivering to the Committee a copy of irrevocable instructions to a
stockbroker to deliver promptly to the Company an amount of sale or loan proceeds sufficient to pay the aggregate Option exercise price; (iii)
through a net exercise of the Options whereby the Participant instructs the Company to withhold that number of shares of Stock having a fair
market value equal to the aggregate Option Price of the Options being exercised and deliver to the Participant the remainder of the shares
subject to exercise or (iv) by any other means approved by the Committee. For purposes of this paragraph, the term "Mature Shares" shall mean
shares of Stock for which the Optionee has good title, free and clear of all liens and encumbrances, and which the Optionee either (i) has held
for at least six months or (ii) has purchased on the open market.
(b) At the time of exercise, (i) the Company shall have the right to withhold from the number of shares of Stock to be issued upon exercise, the
minimum number of shares necessary or (ii) at the discretion of the Committee, the Optionee shall be obligated to pay to the Company such
amount as the Company deems necessary, in either event, to satisfy its obligation to withhold Federal, state or local income or other taxes
incurred by reason of the exercise or the transfer of shares thereupon.
-3-
6. ISSUANCE OF SHARES. As promptly as practical after receipt by the Company of a written notice of exercise and full payment to the
Company of the aggregate Option Price and any required income tax withholding amount, the Company shall issue or transfer to the Optionee
the number of shares of Stock with respect to which Options have been so exercised, or the net number of shares of Stock in the event of an
exercise pursuant to Section 5(a)(iii), or to the extent applicable in Section 5(a)(iv), or after application of Section 5(b), or both, and shall
deliver to the Optionee (or the Optionee's estate or beneficiary, if applicable) a certificate or certificates therefore, registered in the name of the
Optionee (or such estate or beneficiary).
7. NON-TRANSFERABILITY. The Options are not transferable by the Optionee otherwise than by will or the laws of descent and distribution
and are exercisable during the Optionee's lifetime only by Optionee. No assignment or transfer of the Options, or of the rights represented
thereby, whether voluntary or involuntary, by operation of law or otherwise (except by will or the laws of descent and distribution), shall vest
in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Options shall
terminate and become of no further effect.
8. RIGHTS AS STOCKHOLDER. Neither the Optionee nor a permitted transferee of the Options shall have any rights as a stockholder with
respect to any share of Stock covered by the Options until the Optionee or any transferee shall have become the holder of record of such share,
and no adjustment shall be made for dividends or distributions or other rights in respect of such share for which the record date is prior to the
date upon which the Optionee or any transferee shall become the holder of record thereof.
9. COMPLIANCE WITH LAW. Notwithstanding any of the provisions hereof, the Optionee hereby agrees that Optionee will not exercise the
Options, and that the Company will not be obligated to issue or transfer any shares of Stock to the Optionee hereunder, if the exercise hereof or
the issuance or transfer of such shares shall constitute a violation by the Optionee or the Company of any provisions of any law or regulation of
any governmental authority. Any determination in this connection by the Committee shall be final, binding and conclusive. The Company shall
in no event be obliged to register any securities pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) or to take any
other affirmative action in order to cause the exercise of the Options or the issuance or transfer of shares of Stock pursuant thereto to comply
with any law or regulation of any governmental authority.
10. NOTICE. Every notice or other communication relating to this Agreement shall be in writing, and shall be mailed to or delivered to the
party for whom it is intended at such address as may from time to time be designated by it in a notice mailed or delivered to the other party as
herein provided, provided that, unless and until some other address be so designated, all notices or communications by the Optionee to the
Company shall be mailed or delivered to the Company at its principal executive office, and all notices or communications by the Company to
the Optionee may be given to the Optionee personally or may be mailed to Optionee at the Optionee's last known address, as reflected in the
Company's records.
11. BINDING EFFECT. Subject to Section 7 hereof, this Agreement shall be binding upon the heirs, executors, administrators and successors
of the parties hereto.
-4-
12. GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with the laws of the state of Delaware, without
regard to the principles of conflicts of law thereof.
13. PLAN. The terms and provisions of the Plan are incorporated herein by reference; provided, however, that upon an acceleration of vesting
of the Options in the event of a Change in Control, as provided in Section 13(a) of the Plan, the Options shall not be exercisable unless the
Approvals have been obtained by the time the Change in Control occurs. In the event of a conflict or inconsistency between discretionary terms
and provisions of the Plan and the express provisions of this Agreement, this Agreement shall govern and control. Except as specifically
provided herein, in all other instances of conflicts or inconsistencies or omissions, the terms and provisions of the Plan shall govern and
control.
-5-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ Avi Katz
-----------------------------
Name:
Title:
/s/ Michael B. Targoff
----------------------------
Optionee
Accepted:
Address
Social Security Number
LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION
COMPUTATION OF DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES
Exhibit 12.1
Successor
Registrant
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005 (3)
Years Ended December 31,
2004
2003
Loss from continuing operations before income taxes, equity
income (losses) in affiliates and minority interest
$
(5,395 )
$
(65,570 )
$ (207,852 )
$
(368,355 )
Plus fixed charges:
Interest expense
Interest component of rent expense (1)
Less: capitalized interest
Earnings available to cover fixed charges
Fixed charges (2)
Deficiency of earnings to cover fixed charges
4,408
1,625
—
638
(8,700 )
8,062
$
$
$
3,982
4,949
—
(56,639 )
(8,931 )
65,570
3,904
9,059
(957 )
$ (195,846 )
$
(12,963 )
$ 208,809
28,223
10,402
(14,143 )
(343,873 )
(45,345 )
389,218
$
$
$
$
$
$
(1) The interest component of rent expense is deemed to be approximately 25% of total rent expense.
(2) Preferred dividends have not been adjusted for income taxes, due to the composition of the taxing jurisdictions underlying our operations
and the resulting impact on our effective tax rate. Fixed charges include the accrual of preferred dividends and interest on unsecured debt
obligations (excluding bank debt) through July 15, 2003, the date of our Chapter 11 filing.
(3) Does not reflect the effect of the gain on the discharge of pre-petition obligations and fresh-start adjustments, and the interest expense and
income tax benefit recognized in connection with the Plan of Reorganization.
The active subsidiaries owned directly or indirectly by Loral Space & Communications Inc. as of March 1, 2006, all 100% owned (except as
noted below) consist of the following:
EXHIBIT 21.1
Loral Space & Communications Holdings Corporation Delaware
Loral Skynet Corporation1 Delaware
Loral Asia Pacific Satellite (HK) Limited Hong Kong
Loral Skynet International, L.L.C. Delaware
Loral Satellite, Inc. Delaware
Loral Holdings Ltd. Bermuda
Loral Space do Brasil Ltda. Brazil
Loral Skynet do Brasil Ltda. Brazil
Loral Skynet (IOM) Limited Isle of Man
Loral SpaceCom Corporation Delaware
Loral Communications Services, Inc. Delaware
Loral Ground Services, L.L.C. Delaware
Earth Station Ecuador CIA Ltda. Ecuador
Loralsat CIA Ltda.2 Ecuador
Loral Skynet Network Services, Inc. Delaware
Loral Skynet Network Services (Europe) Ltd. United Kingdom
LAD Telecommunications GmbH Germany
Loral Skynet Network Services Holdings L.L.C. Delaware
Loral CyberStar International, Inc. Delaware
Tel-Link Communications Private Limited India
Loral CyberStar GmbH3 Germany
ONS-Mauritius Mauritius
Loral CyberStar Services, Inc. Delaware
Loral CyberStar Holdings, L.L.C. Delaware
Loral CyberStar de Argentina SRL Argentina
Loral CyberStar, L.L.C. Delaware
CyberStar, L.L.C. Delaware
Loral Satmex Ltd. Bermuda
Space Systems/Loral, Inc. Delaware
International Space Technology, Inc4 Delaware
Cosmotech Russian Federation
Loral General Partner, Inc. Delaware
LGP (Bermuda) Ltd. Bermuda
Loral Holdings L.L.C. Delaware
Mexico Satellite, LLC5 Delaware
Loral Global Services N.V. Netherlands Antilles
Loral Global Services B.V. Netherlands
NOTES
1 100% of Loral Skynet Series A 12% Non-convertible Preferred Stock is owned by third parties
2 Only 95% owned directly or indirectly
3 Only 99.5 % owned directly or indirectly 4 Only 51.0 % owned directly or indirectly 5 Only 77.78% owned directly or indirectly
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael B. Targoff, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Loral Space & Communications Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
March 28, 2006
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard J. Townsend, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Loral Space & Communications Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ RICHARD J. TOWNSEND
Richard J. Townsend
Executive Vice President and Chief Financial Officer
March 28, 2006
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Loral Space & Communications Inc. (the “Company”) on Form 10-K for the period ending
December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael B. Targoff, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
March 28, 2006
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Loral Space & Communications Inc. (the “Company”) on Form 10-K for the period ending
December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Townsend, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ RICHARD J. TOWNSEND
Richard J. Townsend
Executive Vice President and Chief Financial Officer
March 28, 2006