Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:3)(cid:2)
(cid:1)(cid:2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14180
LORAL SPACE & COMMUNICATIONS INC.
(Exact name of registrant specified in the charter)
Jurisdiction of incorporation: Delaware
IRS identification number: 87-0748324
600 Third Avenue
New York, New York 10016
(Address of principal executive offices)
Telephone: (212) 697-1105
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $.01 par value
Name of each exchange on which registered
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:1)(cid:2)(cid:1)(cid:2)(cid:1)(cid:2)(cid:1)(cid:2)No (cid:3)(cid:2)(cid:3)(cid:2)(cid:3)(cid:2)(cid:3)(cid:2)
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:1)(cid:2)(cid:1)(cid:2)(cid:1)(cid:2)(cid:1)(cid:2)No (cid:3)(cid:2)(cid:3)(cid:2)(cid:3)(cid:2)(cid:3)(cid:2)
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:3)(cid:2) No (cid:1)(cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes (cid:1)(cid:2)No (cid:1)(cid:2)
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:3)(cid:2) No (cid:1)(cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Ruler 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)(cid:2) Accelerated filer (cid:3)(cid:2)
Non-accelerated filer (cid:1)(cid:2)
Smaller reporting company (cid:1)(cid:2)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the
Act). Yes (cid:1)(cid:2) No (cid:3)(cid:2)
At March 1, 2010, 20,386,737 shares of the registrant’s voting common stock and 9,505,673 shares of the registrant’s non-
voting common stock were outstanding.
As of June 30, 2009, the aggregate market value of the common stock, the only common equity of the registrant currently
issued and outstanding, held by non-affiliates of the registrant, was approximately $312,334,393
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:3)(cid:2) No (cid:1)(cid:2)
Documents incorporated by reference are as follows:
Document
Loral Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual
Meeting of Stockholders to be held May 18, 2010
Part and Item Number of
Form 10-K into which incorporated
Part II, Item 5(d)
Part III, Items 11 through 14
LORAL SPACE AND COMMUNICATIONS INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2009
PART I
Item 1: Business
Item 1A: Risk Factors
Item 1B: Unresolved Staff Comments
Item 2: Properties
Item 3: Legal Proceedings
Item 4: Removed and Reserved
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
Item 6: Selected Financial Data
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
Item 8: Financial Statements and Supplementary Data
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A: Controls and Procedures
Item 9B: Other Information
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
PART III
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13: Certain Relationships and Related Transactions
Item 14: Principal Accountant Fees and Services
Item 15: Exhibits and Financial Statement Schedules
PART IV
Signatures
Exhibit 10.23
Exhibit 10.31
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
1
13
25
25
26
26
26
28
32
57
58
58
58
61
61
61
61
62
62
62
67
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Table of Contents
Item 1. Business
Overview
PART I
THE COMPANY
Loral Space & Communications Inc., together with its subsidiaries (“Loral”, the “Company”, “we”, “our” and “us”), is a
leading satellite communications company with substantial activities in satellite manufacturing and investments in satellite-based
communications services.
Loral has two segments:
Satellite Manufacturing:
Our subsidiary, Space Systems/Loral, Inc. (“SS/L”), designs and manufactures satellites, space systems and space
system components for commercial and government customers whose applications include fixed satellite services (“FSS”),
direct-to-home (“DTH”) broadcasting, mobile satellite services (“MSS”), broadband data distribution, wireless telephony,
digital radio, digital mobile broadcasting, military communications, weather monitoring and air traffic management.
Satellite Services:
Loral participates in satellite services operations principally through its 64% investment in Telesat Holdings Inc.
(“Telesat Holdco”), which owns Telesat Canada (“Telesat”), the world’s fourth largest FSS provider, with industry leading
backlog, and one of only three FSS providers operating on a global basis. Telesat owns and leases a satellite fleet that
operates in geosynchronous earth orbit approximately 22,000 miles above the equator. In this orbit, satellites remain in a
fixed position relative to points on the earth’s surface and provide reliable, high-bandwidth services anywhere in their
coverage areas, serving as the backbone for many forms of telecommunications.
Segment Overview
Satellite Manufacturing
SS/L has been designing, manufacturing and integrating satellites and space systems for a wide variety of commercial and
government customers for more than 50 years. Its products include mid- and high-powered satellites designed for applications
such as FSS, DTH broadcasting, MSS, broadband data distribution, wireless telephony, digital radio, digital mobile broadcasting,
military communications, weather monitoring and air traffic management. SS/L customers have included such satellite service
providers and government organizations as APT Satellite, AsiaSat, DIRECTV, DISH Network, EchoStar, Globalstar, Hisdesat,
Hispasat, Hughes Network Systems, ICO, Intelsat, Japan’s Ministry of Transport and Civil Aviation Bureau, the National
Oceanic & Atmospheric Administration (NOAA), Optus (SingTel), Satmex, SES, Sirius XM Radio, Telesat, TerreStar
Networks, Thaicom, ViaSat, WildBlue Communications and XTAR. Since its inception, SS/L has delivered more than 230
satellites, which together have achieved more than 1,600 years of cumulative on-orbit service; many of these satellites
significantly exceeded design life expectations. SS/L’s satellite platform provides the flexibility to meet a broad range of
customer requirements for the world’s most powerful commercial satellites with up to 25 kilowatts of power. The capacity
offered on these satellites ranges from one to as many as 150 transponders. According to industry research firm Futron
Corporation, global satellite manufacturing revenue was $10.5 billion in 2008 of which approximately $5.2 billion was for
commercial satellites.
SS/L has a history of technology innovation and currently provides some of the world’s most powerful commercial
satellites. With 170 U.S. patents, the company is an industry leader in research in advanced composites, power conversion,
propulsion systems and on-orbit controls. Its highly flexible satellite platform accommodates a broad range of applications such
as regional and spot-beam technology, hybrid systems that maximize the value of orbital slot location, and imagers for precision
weather forecasting. The SS/L platform accommodates some of the world’s highest power payloads for television, radio and
multimedia broadcast. With increasing demand for mobile devices for video, audio and data, SS/L is also a leader in providing
satellite systems that include Ground Based Beam Forming (GBBF) capability so that upgradeable ground equipment can grow
with new innovations and market demands.
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Satellite construction contract awards over the last few years have resulted in backlog at SS/L of $1.6 billion. In order to
complete construction of all the satellites in backlog and to enable future growth, SS/L has modified and expanded its
manufacturing facilities. SS/L can now accommodate as many as nine to 13 satellite awards per year, depending on the
complexity and timing of the specific satellites, and can accommodate the integration and test of 13 to 14 satellites at any given
time in its Palo Alto facility. The expansion has also reduced the company’s reliance on outside suppliers for certain RF
components and sub-assemblies.
Market and Competition
SS/L participates in the highly competitive commercial satellite manufacturing industry principally on the basis of superior
customer relationships, technical excellence, reliability and pricing. Other competitors for satellite manufacturing contracts
include Boeing, Lockheed Martin and Orbital Sciences in the U.S., Thales Alenia Space and EADS Astrium in Europe and
Mitsubishi Electric Corporation in Japan. SS/L’s continued success depends on its ability to provide highly reliable satellites on a
cost-effective and timely basis. SS/L may also face competition in the future from emerging low-cost competitors in India,
Russia and China. The number of satellite manufacturing contracts awarded varies annually and is difficult to predict. For
example, based on readily available industry information, we believe that, while only two contracts for mid- and high-power (8
kW or higher) commercial satellites were awarded worldwide in 2002, there were 21 and 13 contracts awarded in 2009 and
2008, respectively. The current economic environment may adversely affect the satellite market in the near-term. While we
expect the replacement market to be reliable over the next year, given the current credit crisis, potential customers that are highly
leveraged or in the development stage may not be able to obtain the financing necessary to purchase satellites.
Satellite Manufacturing Performance
Total segment revenues
Eliminations
Revenues from satellite manufacturing as reported
Segment Adjusted EBITDA before eliminations (1)
$
$
$
1,008
(15 )
993
91
$
$
881
(12 )
869
45
$
$
2009
Year ended December 31,
2008
(In millions)
$
$
2007
814
(53 )
761
35
(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 15 to the Loral
consolidated financial statements for the definition of Adjusted EBITDA).
Total SS/L assets, located primarily in California, were $864 million and $799 million as of December 31, 2009 and 2008,
respectively. The increase is primarily due to growth in orbital receivables of $59 million in 2009. Total SS/L assets were $963
million as of December 31, 2007. Backlog at December 31, 2009 was $1.6 billion. This included $225.5 million of backlog for
the construction of Telstar 14R and Nimiq 6 for Telesat and the intercompany portion of ViaSat-1. Backlog at December 31,
2008 was $1.4 billion. This included $80.6 million of backlog for the construction of Nimiq 5 and Telstar 11N for Telesat and
the intercompany portion of ViaSat-1. It is expected that approximately 63% of the backlog as of December 31, 2009, will be
recognized as revenues during 2010. During 2009, three of SS/L’s customers accounted for approximately 22%, 16% and 10%
of our consolidated revenues.
Satellite Services
As of March 12, 2010, Telesat has 12 in-orbit satellites and two satellites under construction, one of which is 100% leased
for at least the design life of the satellite. Telesat provides video distribution and DTH video, as well as end-to-end
communications services using both satellite and hybrid satellite-ground networks.
Telesat categorizes its satellite services operations into broadcast, enterprise services and consulting and other, as follows:
Broadcast:
DTH. Both Canadian DTH service providers (Bell TV and Shaw Direct) use Telesat’s satellites as a distribution
platform for their services, delivering television programming, audio and information channels directly to customers’
homes. In addition, Telesat’s Anik F3 and Nimiq 5 satellites are used by EchoStar (Dish Network) for DTH services in the
United States.
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Video Distribution. Major broadcasters, cable networks and DTH service providers use Telesat satellites for the full-
time transmission of television programming. Additionally, certain broadcasters and DTH service providers bundle value-
added services that include satellite capacity, digital encoding of video channels and uplinking and downlinking services to
and from Telesat satellites and teleport facilities. Telstar 18 delivers video distribution and contribution throughout Asia and
offers connectivity to the U.S. mainland via Hawaiian teleport facilities, Telstar 12 is also used to transmit television
services. In both Brazil and Chile, Telesat provides video distribution services on Telstar 14/Estrela do Sul.
Occasional Use Services. Occasional use services consist of satellite transmission services for the timely broadcast of
video news, sports and live event coverage on a short-term basis enabling broadcasters to conduct on-the-scene
transmissions using small, portable antennae.
Enterprise Services:
Data networks in North America and the related ground segment and maintenance services supporting these networks.
Telesat operates very small aperture terminal, or VSAT, networks in North America, managing thousands of VSAT
terminals at customer sites. For some of these customers Telesat offers end-to-end services including installation and
maintenance of the end user terminal, maintenance of the VSAT hub, and provision of satellite capacity. Other customers
may be provided a subset of these services. Examples of North American data network services include point of sale
services for customers in Canada and communications services to remote locations for the oil and gas industry.
International Enterprise Networks. Telesat provides Internet Protocol-based terrestrial extension services that allow
enterprises to reach multiple locations worldwide — many of which cannot be connected via terrestrial means. In addition,
these managed services also enable multi-cast and broadcast functionality, as with traditional video broadcast distribution,
which takes full advantage of satellite’s one to many attributes. These services are delivered to enterprises whose
headquarters are typically in the United States or Europe through both terrestrial partners and directly.
Ka-band Internet Services. Telesat provides Ka-band, two-way broadband Internet services in Canada through
Barrett Xplore Inc. and other resellers, and Ka-band satellite capacity to WildBlue which uses it to provide services in the
United States.
Telecommunication Carrier Services. Telesat provides satellite capacity and end-to-end services for data and voice
transmission to telecommunications carriers located throughout the world. These services include (i) connectivity and voice
circuits to remote locations in Canada for customers such as Bell Canada and NorthwesTel and (ii) space segment capacity
and terrestrial facilities for Internet backhaul and access, GSM backhaul, and services such as rural telephony to carriers
around the world.
Government Services. The United States Government is the largest single consumer of fixed satellite services in the
world and a significant user of Telesat’s international satellites. Over the course of several years, Telesat has implemented a
successful strategy to sell through government service integrators, rather than directly to United States Government
agencies. Satellite services are also provided to the Canadian Government, including a variety of services from a maritime
network for a Canadian Government entity to protected satellite capacity to the Department of National Defense for the
North Warning System.
Consulting & Other:
Consulting operations allow for increased operating efficiencies by leveraging Telesat’s existing employees and
facility base. With 40 years of engineering and technical experience, Telesat is a leading consultant in establishing,
operating and upgrading satellite systems worldwide, having provided services to businesses and governments in over 35
countries across six continents. Currently, the international consulting business provides satellite-related services in
approximately 18 countries.
Telesat is the world’s fourth largest FSS operator and one of only three FSS operators operating on a global basis. Telesat
has a powerful international platform supporting (i) strong video distribution and DTH neighborhoods in North America
characterized by long-term contracts with blue chip customers, significant contractual backlog and a fully contracted expansion
DTH satellite, (ii) an efficient enterprise and government services business that provides North American customers with end-to-
end communications services, and (iii) a strong international video distribution, enterprise services and government services
business.
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Through its deep commitment to customer service and focus on innovation and technical expertise, Telesat has developed
strong relationships with a diverse range of high-quality customers, including many of the world’s largest video and data service
providers. Telesat current customers include North American DTH providers Bell TV, Shaw Direct and EchoStar, and leading
telecommunications and media firms such as HBO and Canadian Broadcasting Corporation.
Telesat’s North American Broadcast and Enterprise Services customer service contracts are typically multi-year in duration and,
in the past, Telesat has successfully contracted all or a significant portion of a satellite’s capacity prior to commencing
construction. As a result, Telesat had approximately $5.2 billion in contracted revenue backlog as of December 31, 2009, of
which approximately 11% will be recognized as revenues during 2010.
Market and Competition
Telesat is one of three global FSS operators. Telesat competes against other global, regional and national FSS operators
and, to a lesser extent, with providers of terrestrial-based communications services.
Fixed Satellite Operators
The other two global FSS operators are Intelsat, Ltd. (‘‘Intelsat’’) and SES S.A. (‘‘SES’’). Telesat also competes with a
number of nationally or regionally focused FSS operators around the world, including Eutelsat S.A. (“Eutelsat”), the third largest
FSS operator in the world.
Intelsat, SES and Eutelsat are each substantially larger than Telesat in terms of both the number of satellites they have in-
orbit as well as their revenues. Telesat believes that Intelsat and its subsidiaries together have a global fleet of over fifty
satellites, that SES and its subsidiaries have a fleet of over forty satellites, and that Eutelsat and its subsidiaries have a fleet of
over twenty satellites and additional capacity on another four satellites. Due to their larger sizes, these operators are able to take
advantage of greater economies of scale, may be more attractive to customers, and may (depending on the specific satellite and
orbital location in question) have greater flexibility to restore service to their customers in the event of a partial or total satellite
failure. In addition, their larger sizes may enable them to devote more resources, both human and financial, to sales, operations,
product development and strategic alliances and acquisitions.
Regional and domestic providers: Telesat also competes against regional FSS operators, including:
•
•
•
in Europe, Middle East, Africa: Eutelsat, SES Astra, Arabsat, Nilesat, HellaSat and Turksat;
in Asia: AsiaSat, Measat, Thaicom, APT, PT Telkom, and Optus; and
in Latin America: Satmex, Star One, Arsat and HispaSat.
A number of other countries have domestic satellite systems against which Telesat competes in those markets. In Canada,
Telesat’s largest market, Ciel, whose majority equity shareholder is SES, has begun operations in the DBS band, successfully
launched Ciel 2 in 2008, and in February 2009 announced that it had begun providing commercial service on Ciel 2 at the 129°
WL orbital location. In June 2008, Industry Canada granted Ciel six approvals in principle to develop and operate satellite
services in other frequency bands and orbital positions.
The Canadian Government opened Canadian satellite markets to foreign satellite operators as part of its 1998 World Trade
Organization commitments to liberalize trade in basic telecommunications services. As of January 2010, approximately 78 non-
Canadian FSS satellites had been approved by Industry Canada for use in Canada.
Terrestrial Service Providers
Providers of terrestrial-based communications services compete with satellite operators. Increasingly, in developed and
developing countries alike, governments are providing funding and other incentives to encourage the expansion of terrestrial
networks resulting in increased competition for FSS operators.
Consulting Services
The market for satellite consulting services is generally comprised of a few companies qualified to provide services in
specific areas of expertise. Telesat’s competitors are primarily United States- and European-based companies.
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Satellite Fleet & Ground Resources
As of March 12, 2010, Telesat has 12 in-orbit satellites and two satellites under construction, one of which is 100% leased
for at least the design life of the satellite. In addition, Telesat leases fiber capacity around the world for use in developing hybrid
terrestrial/satellite data networks for network services customers.
Telesat also has ground facilities located around the world, providing both control services to its satellite fleet, as well as to
the satellites of other operators as part of its consulting services offerings. It has two control centers located in Ottawa, Ontario
and Allan Park, Ontario. In addition, Telesat leases other technical facilities that provide customers with a host of teleport and
hub services.
Telesat’s North American focused fleet is comprised of three owned FSS satellites, Anik F1-R, Anik F2 and Anik F3, and
four owned direct broadcast services, or DBS, satellites, Nimiq 1, Nimiq 2, Nimiq 4 and Nimiq 5. Telesat’s international fleet is
comprised of five owned FSS satellites, Anik F1, Telstar 11N, Telstar 12, Telstar 14/Estrela do Sul and Telstar 18.
The table below summarizes selected data relating to Telesat’s owned and leased in-orbit satellites as of March 12, 2010 :
Launch
Date
May 1999
Manufacturer’s
End-of-Service-
Life
2011
Expected
End-of-
Orbital
Transponders (1)
Maneuver Life (1) C-band (2) Ku-band (2)
32@24MHz
—
2024
Ka-band
—
L-band (3)
—
December 2002
2015
2021
—
11@24MHz
—
—
Model
A2100 AX
(Lockheed Martin)
A2100 AX
(Lockheed Martin)
E3000 (EADS Astrium)
September
2008
September
2009
72.7° WL Canada,
Continental United
States
107.3°WL South America November 2000
111.1° WL Canada,
Continental United
States
107.3° WL North America
July 2004
September
2005
April 2007
2023
2024
2016
2019
2020
2022
2027
2035
2016
2027
2023
2026
32@24 MHz
32@24MHz
8@54 MHz
SS/L 1300
12@36MHz
24@36MHz
16@27MHz
—
32@27MHz 31@56/112 MHz —
—
6@500MHz
1@56/112MHz
BSS702 (Boeing)
BSS702
(Boeing)
E3000 (EADS Astrium)
24@36MHz
24@36MHz
32@27MHz
32@27MHz
2@20MHz
—
2@75MHz —
(500MHz)
E3000 (EADS Astrium)
February 2009
2024
2026
39@27/54MHz
SS/L 1300
October 1999
2012
2016
—
37@54MHz
—
—
SS/L 1300
January 2004
2019
2011
—
—
—
SS/L 1300
9@72MHz
9@36MHz
2@28MHz
1@56MHz
June 2004
2017
2018
17@36MHz
1@54MHz
6@54MHz
1@40MHz
—
—
SS/L 1300
Nimiq 1
Nimiq 2 (4)
Nimiq 4
Nimiq 5
Anik F1 (5)
Anik F2
Anik F1R (3)
Anik F3
Telstar 11N
Telstar 12 (6)
Telstar
14/Estrela
do Sul
Telstar 18 (7)
Orbital Location
Regions
Covered
91.1°WL Canada,
Continental United
States
91.1°WL Canada,
Continental United
States
82° WL Canada
118.7°WL Canada,
Continental United
States
37.55° WL North and
Central America,
Europe, Africa and the
maritime Atlantic
Ocean region
15°WL Eastern United
States, SE Canada,
Europe, Russia, Middle
East, South Africa,
portions of South and
Central America
63°WL Brazil And
portions of Latin
America, North
America, Atlantic
Ocean
138° EL India, South
East Asia, China,
Australia And Hawaii
(1)
Telesat’s current estimate of when each satellite will be decommissioned, taking account of anomalies and malfunctions the
satellites have experienced to date and other factors such as remaining fuel levels, consumption rates and other available
engineering data. These estimates are subject to change and it is possible that the actual orbital maneuver life of any of
these satellites will be shorter than Telesat currently anticipates. Further, it is anticipated that the payload capacity of each
satellite may be reduced prior to the estimated end of commercial service life. For example, Telesat currently anticipates
that it will need to commence the turndown of transponders on Anik F1 in 2011, as a result of further degradation in
available power.
(2)
(3)
Includes the DBS Ku-Band, extended C-band and extended Ku-band in certain cases.
Telesat does not provide service in the L-band. The L-band payload is licensed to Telesat’s customer by the FCC.
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(4)
(5)
(6)
(7)
It is expected that the available capacity in Nimiq 2 will be reduced over time as a result of power system limitations due to
malfunctions affecting available power. The number of Ku-band transponders stated above refers to the number of active
saturated Ku-band transponders as of December 31, 2009.
Anik F1’s commercial service life is constrained by power availability.
Telstar 12 has 38 54 MHz transponders. Four of these transponders are leased to Eutelsat to settle coordination issues and
Telesat leases back three of these transponders.
Includes 16.6 MHz of C-band capacity provided to the Government of Tonga in lieu of a cash payment for the use of the
orbital location. The satellite carries additional transponders (the “APT transponders”), not shown on the table, as to which
APT has a prepaid lease through the end of life of the satellite in consideration for APT’s funding a portion of the satellite’s
cost. This transaction was accounted for as a sales-type lease, because substantially all of the benefits and risks incident to
the ownership of the leased transponders were transferred to APT. Telesat has agreed with APT among other things that if
Telesat is able to obtain the necessary approvals and licenses from the U.S. government under U.S. export laws, it would
transfer title to the APT transponders on Telstar 18 to APT, as well as a corresponding interest in the elements on the
satellite that are common to or shared by the APT transponders and the Telesat transponders. As required under its
agreement with APT, Telesat acquired two transponders from APT for an additional payment in August 2009.
In addition, Telesat has the rights to the following satellite capacity to end of life of these satellites:
•
•
•
Satmex 5: Three-36MHz Ku-band transponders;
Satmex 6: Two-36MHz C-band transponders; Two-36MHz Ku-band transponders; and
Agila 2 (Mabuhay): Two-36MHz C-band transponders and five and one half 36 MHz Ku-band transponders
The table below summarizes selected data relating to Telesat’s satellites under construction as of December 31, 2009:
Orbital Location
Regions Covered
Planned In-Service Date
Manufacturer’s End-of- Service-Life
Customer Committed Capacity
Transponders:
Ku-band
Model
Satellite Services Performance
Telstar 14R
63 o WL
South America,
Continental US,
Andean Region,
North and Mid-Atlantic Ocean Region
Second half of 2011
2026
—
58 @36 MHz
SSL 1300
Nimiq 6
TBD
Canada,
Continental US
Mid-2012
2027
100%
32 @ 24 MHz
SSL 1300
Until October 31, 2007, the operations of our satellite services segment were conducted through Loral Skynet Corporation
(“Loral Skynet”), which leased transponder capacity to commercial and government customers for video distribution and
broadcasting, high-speed data distribution, Internet access and communications, and provided managed network services to
customers using a hybrid satellite and ground-based system. It also provided professional services such as fleet operating
services to other satellite operators. At October 31, 2007, Loral Skynet had four in-orbit satellites and had one satellite under
construction at SS/L.
On October 31, 2007, Loral and its Canadian partner, Public Sector Pension Investment Board (“PSP”), through Telesat
Holdco, a newly-formed joint venture, completed the acquisition of Telesat from BCE Inc. (“BCE”). In connection with this
acquisition, Loral transferred on that same date substantially all of the assets and related liabilities of Loral Skynet to Telesat.
Loral holds a 64% economic interest and a 33 1 / 3 % voting interest in Telesat Holdco, the ultimate parent company of the
resulting new entity (see Note 6 to the Loral consolidated financial statements). We use the equity method of accounting for our
investment in Telesat Holdco.
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We refer to the acquisition of Telesat and the related transfer of Loral Skynet to Telesat as the Telesat transaction.
References to Telesat with respect to periods prior to the closing of this transaction are references to the subsidiary of BCE and
with respect to the period after the closing of this transaction are references to Telesat Holdco and/or its subsidiaries, as
appropriate. Similarly, unless otherwise indicated, references to Loral Skynet with respect to periods prior to the closing of this
transaction are references to the operations of Loral’s satellite services segment as conducted through Loral Skynet and with
respect to the period commencing on and after the closing of this transaction are, if related to the fixed satellite services business,
references to the Loral Skynet operations within Telesat.
Revenue:
Total segment revenues
Eliminations
Affiliate eliminations (2)
Revenues from satellite services as reported
Adjusted EBITDA:
Total segment Adjusted EBITDA
Eliminations
Affiliate eliminations (2)
Adjusted EBITDA from satellite services after eliminations (3)
2009
Year ended December 31,
2008
(In millions)
2007 (1)
$
$
$
$
692
—
(692 )
—
488
—
(488 )
—
$
$
$
$
685
—
(685 )
—
436
—
(427 )
9
$
$
$
$
241
(2 )
(118 )
121
118
(2 )
(65 )
51
(1)
(2)
(3)
Satellite Services segment’s performance for 2007 includes Loral Skynet through October 30, 2007 and Telesat for the
period from October 31, 2007 to December 31, 2007.
Affiliate eliminations represent the elimination of amounts attributable to Telesat.
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 15 to the consolidated
financial statements for the definition of Adjusted EBITDA).
Total Telesat assets were $5.0 billion and $4.3 billion as of December 31, 2009 and 2008, respectively. The increase in
asset carrying value is primarily due to exchange rate changes. Backlog was approximately $5.2 billion and $4.2 billion as of
December 31, 2009 and 2008, respectively. The increase in backlog is primarily due to the lease of all capacity on the Nimiq 6
satellite, which is under construction, and exchange rate changes. It is expected that approximately 11% of the backlog at
December 31, 2009 will be recognized as revenue in 2010.
We use the equity method of accounting for our investment in Telesat Holdco, and its results are not consolidated in our
financial statements. Our share of the operating results from our investment in this company is included in equity in net income
(losses) of affiliates in our consolidated statements of operations and our investment is included in investments in affiliates in our
consolidated balance sheet.
The following chart summarizes operating revenues and Adjusted EBITDA for Telesat before the closing of the Telesat
transaction. Telesat’s Adjusted EBITDA as shown below is calculated in the same manner as Adjusted EBITDA in the segment
chart above. The amounts presented below are in Canadian dollars (“CAD”) and are presented in accordance with Canadian
generally accepted accounting principles.
Total operating revenues
Adjusted EBITDA
7
Telesat
For the Period from
January 1,
2007 to
October 30,
2007
CAD 457.8
CAD 263.2
Table of Contents
Other
We also own 56% of XTAR, LLC (“XTAR”), a joint venture between Loral and Hisdesat Servicios Estrategicos, S.A.
(“Hisdesat”). XTAR owns and operates an X-band satellite, XTAR-EUR located at 29 o E.L., which entered service in
March 2005. The satellite is designed to provide X-band communications services exclusively to United States, Spanish and
allied government users throughout the satellite’s coverage area, including Europe, the Middle East and Asia. The government of
Spain granted XTAR rights to an X-band license, normally reserved for government and military use, to develop a commercial
business model for supplying X-band capacity in support of military, diplomatic and security communications requirements.
XTAR also leases 7.2, 72 MHz X-band transponders on the Spainsat satellite located at 30 o W.L. owned by Hisdesat, which
entered commercial service in April 2006. These transponders, designated as XTAR-LANT, allow XTAR to provide its
customers in the U.S. and abroad with additional X-band services and greater flexibility. XTAR currently has contracts to
provide X-band services to the U.S. Department of State, the Spanish Ministry of Defense, the Belgium Ministry of Defense and
the Danish armed forces, but the take-up rate in its service continues to be slower than anticipated. For more information on
XTAR see Note 6 to the Loral consolidated financial statements.
Loral has formed subsidiaries for the purpose of providing wholesale Ka-band transponder capacity and gateway services to
Canadian broadband service providers. Loral has purchased the Canadian coverage portion of the ViaSat-1 satellite that is
currently being constructed by SS/L and is contributing this asset to one of its subsidiaries. The ViaSat-1 satellite is a high
capacity Ka-band spot beam satellite for broadband services that is scheduled to be launched in early 2011 into the 115 o West
longitude orbital location. Loral entered into an agreement with Barrett Xplore Inc. (“Barrett”), Canada’s largest rural broadband
provider, to deliver high throughput satellite Ka-band capacity for broadband services in Canada. Under the agreement, Loral
will lease Canadian capacity on the ViaSat-1 satellite and associated gateway services to Barrett for the expected life of the
satellite, projected to commence in mid-2011. Lease payments over the 15-year life of the satellite will range from CAD
133 million to CAD 262 million depending on capacity levels. The cost of the satellite, including launch and insurance, and the
costs of the gateways and related equipment are expected to be approximately $70 million by the time the service is initiated.
Approximately $30 million has been invested through December 31, 2009, with the remaining $40 million to be invested in 2010
and 2011. A portion of these costs will be funded by prepayments in 2010 from Barrett of between CAD 2.5 million and CAD
13 million as required under the agreement.
Satellite Manufacturing
Export Regulation and Economic Sanctions Compliance
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 foreign persons generally. Commercial communications satellites and
certain related items, technical data and services are on the United States Munitions List and are subject to the Arms Export
Control Act and the International Traffic in Arms Regulations. Export jurisdiction over these products and services resides in the
U.S. Department of State. Other Loral exports are subject to the jurisdiction of the U.S. Department of Commerce, pursuant to
the Export Administration Act and the Export Administration Regulations.
U.S. Government licenses or other approvals generally must be obtained before satellites and related items, technical data
and services are exported and may be required before they are re-exported or transferred from one foreign person to another
foreign person. For example, U.S. Government licenses or approvals generally will have to be obtained for the transfer of
technical data and defense services between Loral and Telesat, and between Telesat and its U.S. subsidiaries. There can be no
assurance that such licenses or approvals will be granted. Also, licenses or approvals may be granted with limitations, provisos or
other requirements imposed by the U.S. Government as a condition of approval, which may affect the scope of permissible
activity under the license or approval.
In addition, if a satellite project involves countries, individuals or entities that are the subject of U.S. economic sanctions
(“Sanctions Targets”) or, in certain situations, is intended to provide services to Sanctions Targets, SS/L’s participation in the
project may be prohibited altogether or licenses or other approvals from the U.S. Treasury Department’s Office of Foreign
Assets Control (“OFAC”) may also be required. See Item 1A — “Segment Risk Factors — We are subject to export control and
economic sanctions laws, which may result in delays, lost business and additional costs.”
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Satellite Services
Telecommunications Regulation
As an operator of a global satellite system, Telesat is regulated by government authorities in Canada, the United States and
other countries in which it operates and is subject to the frequency and orbital slot coordination process of the International
Telecommunication Union (“ITU”). Telesat’s ability to provide satellite services in a particular country or region is subject also
to the technical constraints of its satellites, international coordination, local regulation and licensing requirements.
Canadian Regulatory Environment
the Canadian Radio-Television and Telecommunications Commission
Telesat’s operations are subject to regulation and licensing by Industry Canada pursuant to the Radiocommunication Act
the
(Canada) and by
Telecommunications Act (Canada). Industry Canada has the authority to issue licenses, establish standards, assign Canadian
orbital locations and plan the allocation and use of the radio frequency spectrum, including the radio frequencies upon which
Telesat’s satellites and earth stations depend. The Minister responsible for Industry Canada has broad discretion in exercising
this authority to issue licenses, fix and amend conditions of licenses and to suspend or even revoke licenses. Telesat’s licenses to
operate the Anik F and Nimiq satellites require it to comply with research and development and other industrial and public
benefit commitments, to pay annual radio authorization fees, to provide all-Canada satellite coverage and to comply with foreign
ownership restrictions.
(“CRTC”), under
The Canadian foreign ownership and control restrictions, with which Telesat must comply as a condition of its Industry
Canada licenses, are set out in regulations under the Radiocommunication Act and in Industry Canada policies. These require
Telesat to be Canadian owned and controlled within the meaning of those regulations and various other provisions of Canadian
telecommunications law and policy. The government of Canada in March 2010 announced that it is proposing to remove the
existing restrictions on foreign ownership of Canadian satellites. Legislation to implement the government’s proposal has not yet
been introduced, however, and, if introduced, there is no assurance as to exactly what changes will be proposed, whether in fact
such legislation will be adopted and, if adopted, how current regulations governing the foreign ownership and control of satellites
may be changed. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Future
Outlook” for further discussion of these proposed changes.
Industry Canada traditionally licensed satellite radio spectrum and associated orbital locations on a first-come, first-served
basis. Currently, however, a competitive licensing process is employed for certain spectrum resources where it is anticipated that
demand will likely exceed supply, including the licensing of certain fixed-satellite service (“FSS”) and broadcasting satellite
service (“BSS”) orbital locations and associated spectrum resources. Authorizations are granted for the life of a satellite,
although radio licenses (e.g., FSS licenses) are renewed annually. As a result of policy concerns about the continuity of service
and other factors, there is generally a strong presumption of renewal provided license conditions are met.
The Canadian Government opened Canadian satellite markets to foreign-licensed satellite operators as part of its 1998
World Trade Organization (“WTO”) commitments to liberalize trade in basic telecommunications services, with the exception of
direct-to-home (“DTH”) television services that are provided through FSS or DBS facilities. In September 2005, the Canadian
Government revised its satellite-use policy to permit the use of foreign-licensed satellites for digital audio radio services in
Canada. Further liberalization of the policy may occur and could result in increased competition in Canadian satellite markets.
On June 13, 2007, Industry Canada announced that Telesat would be awarded five new licenses for Canadian satellite spectrum
and rights to the related orbital positions. At that time, Industry Canada also announced that another Canadian-licensed satellite
operator, Ciel, would be awarded seven new spectrum licenses. Ciel subsequently declined one of its licenses, which was
subsequently awarded to Telesat.
The Telecommunications Act authorizes the CRTC to regulate various aspects of the provision of telecommunications
services by Telesat and other telecommunications service providers. Since the passage of the Act in 1993, the CRTC has
gradually forborne from regulating an increasing number of services provided by regulated companies. As of March 1, 2000,
coincident with the end of Telesat’s FSS monopoly in Canada, the CRTC abandoned rate-of-return regulation of Telesat’s FSS
services and no longer requires it to file tariffs in respect of these services. Under the current regulatory regime, Telesat has
pricing flexibility subject to a price ceiling of CAD 170,000 per transponder per month on certain full period FSS services
offered in Canada under minimum five-year arrangements. Telesat’s DBS services offered within Canada are also subject to
CRTC regulation, but have been treated as distinct from its fixed satellite services and facilities. To date, Telesat has sought and
received CRTC approval of customer agreements relating to the sale of capacity on all Nimiq DBS satellites, including the rates,
terms and conditions of service set out therein. Section 28(2) of the Telecommunications Act provides that the CRTC may
allocate satellite capacity to particular broadcasting undertakings if it is satisfied that the allocation will further the
implementation of the broadcasting policy for Canada.
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Telesat was originally established by the Government of Canada in 1969, under the Telesat Act. As part of the Canadian
government’s divestiture of its shares in Telesat, pursuant to the Telesat Reorganization and Divestiture Act (1991), or the
Telesat Divestiture Act, Telesat was continued on March 27, 1992 as a business corporation under the Canada Business
Corporations Act, the Telesat Act was repealed and the Government sold its shares in Telesat. Under the Telesat Divestiture Act,
Telesat remains subject to certain special conditions and restrictions. The Telesat Divestiture Act provides that no legislation
relating to the solvency or winding-up of a corporation applies to Telesat and that its affairs cannot be wound up unless
authorized by an Act of Parliament. In addition, Telesat and its shareholders and directors cannot apply for Telesat’s continuation
in another jurisdiction or dissolution unless authorized by an Act of Parliament.
United States Regulatory Environment
The Federal Communications Commission, or FCC, regulates the provision of satellite services to, from or within the
United States. Certain of Telesat’s satellites are owned and operated through a US subsidiary and are regulated by the FCC.
Telesat has chosen to operate its US-authorized satellites on a non-common carrier basis, and it is not subject to rate
regulation or other common carrier regulations enacted under the US Communications Act of 1934. Telesat pays FCC filing fees
in connection with its space station and earth station applications and annual fees to defray the FCC’s regulatory expenses.
Annual and quarterly status reports must be filed with the FCC for interstate/international telecommunications, and Telesat must
contribute funds supporting the FCC’s Universal Service Fund, or USF, with respect to eligible United States telecom revenues
on a quarterly and annual basis. The USF contribution rate is adjusted quarterly and is currently set at 14.1% for the first quarter
of 2010. At the present time, the eligible revenue to determine USF contributions excludes revenue from bare transponder
capacity (space segment only agreements).
The FCC currently grants satellite authorizations on a first-come, first-served basis to applicants who demonstrate that they
are legally, technically and financially qualified, and where the public interest will be served by the grant. There are no
assurances that applications will be granted. Under licensing rules, a bond must be posted for up to $3 million when an FSS
satellite authorization is granted. Some or the entire amount of the bond may be forfeited if there is failure to meet any of the
milestones imposed under the authorization (including milestones for satellite construction, launch and commencement of
operations). Under current licensing rules, the FCC will issue new satellite licenses for an initial 15-year term and will provide a
licensee with an “expectancy” that a subsequent license will be granted for the replacement of an authorized satellite using the
same frequencies. At the end of the 15 year term, a satellite that has not been replaced, or that has been relocated to another
orbital location following its replacement, may be allowed to continue operations for a limited period of time subject to certain
restrictions.
Telesat, through its U.S. subsidiary, Skynet Satellite Corporation, has FCC authorization for two existing U.S.-licensed
satellites which operate in the Ku-band: Telstar 12 at 15° WL and Telstar 11N at 37.55° WL.
To facilitate the provision of FSS satellite services in C- and Ku-band frequencies in the United States market, foreign
licensed operators may apply to have their satellites placed on the FCC’s Permitted Space Station List. Telesat’s Anik Fl, Anik
Fl-R, Anik F2 and Anik F3 satellites are currently on this list. The FCC Order placing Anik F2 on the list also approved Telesat’s
application to use Ka-band capacity on this satellite to provide two-way broadband communications services in the United
States.
The United States made no WTO commitment to open its DTH, DBS or digital audio radio services to foreign competition,
and instead indicated that provision of these services by foreign operators would be considered on a case-by-case basis, based on
an evaluation of the effective competitive opportunities open to United States operators in the country in which the foreign
satellite was licensed (i.e., an ECO-sat test) as well as other public interest criteria. While Canada currently does not satisfy the
ECO-sat test in the case of DTH and DBS service, the FCC has found, in a number of cases, that provision of these services into
the United States using Canadian-licensed satellites would provide significant public interest benefits and would therefore be
allowed. United States service providers, Digital Broadband Applications Corp., DIRECTV and EchoStar, have all received FCC
approval to access Canadian-authorized satellites under Telesat’s direction and control in Canadian-licensed orbital locations to
provide DTH-FSS or DBS service into the United States.
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The approval of the FCC for the Telesat transaction was conditioned upon compliance by Telesat with commitments made
to the Department of Justice, the Federal Bureau of Investigation and the Department of Homeland Security relating to the
availability of certain records and communications in the United States in response to lawful United States law enforcement
requests for such access.
Regulation Outside Canada and the United States
Telesat also operates satellites through licenses granted by countries other than Canada and the United States.
The Brazilian national telecommunications agency, ANATEL, has authorized Telesat, through its subsidiary, Telesat Brasil
Capacidade de Satelites Ltda. (TBCS), to operate a Ku-band FSS satellite at the 63° WL orbital location. In December 2008,
TBCS entered into a new 15-year Concession Agreement with ANATEL which requires TBCS to dedicate a minimum amount
of bandwith to serve Brazil until 2014. After May 2014, this requirement will be removed. The Concession Agreement obligates
TBCS to operate the satellite in accordance with Brazilian telecommunications law and contains provisions to enable ANATEL
to levy fines for failure to perform according to the Concession terms. Brazil also has a Universal Service Fund (“FUST”) to
subsidize the cost of telecommunications service in Brazil. The sale of “bare transponder capacity” in Brazil, however, which is
TBCS’ primary business, is not considered a telecommunications service and revenues from such sales are not assessable for
contributions to the fund.
Telesat, through its subsidiary Telesat Satellite LP, owns Telstar 18, which operates at the 138° EL orbital location under an
agreement with APT, which has been granted the right to use the 138° EL orbital location by The Kingdom of Tonga. APT is the
direct interface with these regulatory bodies. Because Telesat gained access to this orbital location through APT, there is greater
uncertainty with respect to its ability to maintain access to this orbital location for replacement satellites.
In addition to regulatory requirements governing the use of orbital locations, most countries regulate transmission of signals
to and from their territory. Telesat has landing rights in more than 140 countries worldwide.
International Regulatory Environment — International Telecommunication Union
The ITU is responsible for allocating the use by different countries of a finite number of orbital locations and radio
frequency spectrum available for use by commercial communications satellites. The ITU Radio Regulations set forth the
processes that governments must follow to apply for and secure rights to use orbital locations and the obligations and restrictions
that govern such use. The ITU Radiocommunication Bureau (ITU-BR) is responsible for receiving, examining, tracking and
otherwise managing the applications in the context of the rules set forth in the Radio Regulations. The process includes, for
example, a “first in time, first in right” system for assigning rights to orbital locations and time limits for bringing orbital
locations into use.
In accordance with the ITU Radio Regulations, as noted above, the Canadian and other governments have rights to use
certain orbital locations and frequencies. These governments have in turn authorized Telesat to use several orbital locations and
radio frequencies in addition to those used by its current satellites. Under the ITU Radio Regulations, Telesat must begin using
these orbital locations and frequencies within a fixed period of time, or the governments in question would lose their priority
rights and the orbital location and frequencies likely would become available for use by another satellite operator.
The ITU Radio Regulations also govern the process used by satellite operators to coordinate their operations with other
nearby satellites, so as to avoid harmful interference. Under current international practice, satellite systems are entitled to
protection from harmful radio frequency interference from all other satellite systems and other transmitters in the same frequency
band only if the operator’s authorizing government registers the orbital location, frequency and use of the satellite system in the
ITU’s Master International Frequency Register, or MIFR. Each member state is required to give notice of, coordinate and
register its proposed use of radio frequency assignments and associated orbital locations with the ITU-BR. This ensures that
there is an orderly process to accommodate each country’s orbital location needs.
Once a member state has advised the ITU-BR that it desires to use a given frequency at a given orbital location, other
member states notify that state and the ITU-BR of any use or intended use that would conflict with the original proposal. These
nations are then obligated to negotiate with each other in an effort to coordinate the proposed uses and resolve interference
concerns. If all outstanding issues are resolved, the member state governments so notify the ITU-BR, and the frequency use is
registered in the MIFR. Following this notification, the registered satellite networks are entitled under international law to
interference protection from subsequent or nonconforming uses. A state is not entitled to invoke the protections in the ITU Radio
Regulations against harmful interference if that state decided to operate a satellite at the relevant orbital location without
completing the coordination and notification process.
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In the event disputes arise during the coordination process or thereafter, the ITU Radio Regulations do not contain a
mandatory dispute resolution mechanism or an enforcement mechanism. Rather, the rules invite a consensual dispute resolution
process for parties to reach a mutually acceptable agreement. Neither the rules nor international law provide a clear remedy for a
party where this voluntary process fails. Some of Telesat’s satellites have been coordinated and registered in the MIFR and
therefore enjoy priority over all later-filed requests for coordination and any non-conforming uses. In other cases, entry into the
MIFR is still pending. While the ITU Radio Regulations, however, set forth procedures for resolving disputes, as a practical
matter, there is no mandatory dispute resolution and no mechanism by which to enforce an agreement or entitlement under the
rules.
Although non-governmental entities, including Telesat, participate at the ITU, only national administrations have full
standing as ITU members. Consequently, Telesat must rely on the government administrations of Canada, the United States,
Brazil, Tonga, the United Kingdom and China (respectively, Industry Canada, the FCC, ANATEL, the Tonga administration,
OFCOM and MII through APT) to represent its interests in those jurisdictions, including filing and coordinating orbital locations
within the ITU process with the national administrations of other countries, obtaining new orbital locations and resolving
disputes through the consensual process provided for in the ITU’s rules.
Satellite Manufacturing
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 170
patents in the United States and has applications for nine patents pending in the United States. SS/L patents include those relating
to communications, station keeping, power control systems, antennae, filters and oscillators, phased arrays and thermal control as
well as assembly and inspection technology. The SS/L patents that are currently in force expire between 2010 and 2025.
Satellite Services
As of December 31, 2009 Telesat had eleven patents, all in the United States. These patents expire between 2016 and 2021.
There can be no assurance that any of the foregoing pending patent applications will be issued. Moreover, there can be no
assurance that infringement of existing third party patents has not occurred or will not occur. Additionally, because the U.S. and
Canadian patent application process is confidential, there can be no assurance that third parties, including competitors, do not
have patents pending that could result in issued patents which we or Telesat would infringe. In such event, to obtain a license
from a patent holder, royalties would have to be paid, which would increase the cost of doing business. Moreover, in the case of
SS/L, it would be required to refund money to customers for components that are not useable as a result of such infringement or
redesign its products in a manner to avoid infringement. SS/L may also be required under the terms of its customer contracts to
indemnify its customers for related damages.
Satellite Manufacturing
RESEARCH AND DEVELOPMENT
SS/L’s research and development expenditures involve the design, experimentation and the development of space and
satellite products. Research and development costs are expensed as incurred. SS/L’s research and development costs were
$23 million for 2009, $35 million for 2008 and $37 million for 2007, respectively, and are included in selling, general and
administrative expenses.
Satellite Services
Telesat’s research and development expenditures are incurred for the studies associated with advanced satellite system
designs, and experimentation and development of space, satellite and ground communications products. This also includes the
development of innovative and cost effective satellite applications for sovereignty, defense, broadcast, broadband and enterprise
services segments. Telesat has undertaken proof-of-concept interactive broadband technologies trials to provide much needed
health, education, government and other applications to remote and under-served areas. Telesat continues to research advanced
compression and transmission technology to support HDTV and other advanced television services and evaluate technology on
behalf of the World Broadcast Union and European Space Agency.
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Loral’s revenues from foreign customers, primarily in Europe, Canada and Asia represented 46%, 30% and 20% of our
consolidated revenues for the years ended December 31, 2009, 2008 and 2007, respectively.
FOREIGN OPERATIONS
Satellite Manufacturing
SS/L’s revenues from foreign customers, primarily in Europe, Canada and Asia represented 46%, 29% and 16% of SS/L
revenues for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009 and 2008, substantially
all of our long-lived assets were located in the United States. See Item 1A — Risk Factors below for a discussion of the risks
related to operating internationally. See Note 15 to the Loral consolidated financial statements for detail on our domestic and
foreign sales.
Satellite Services
Telesat’s revenues from non-U.S. customers, primarily in Canada, Asia, Europe and Latin America represented 68% and
66% of its consolidated revenues for the years ended December 31, 2009 and 2008, respectively. At December 31, 2009,
substantially all of its long-lived assets were located outside of the United States, primarily in Canada, with the exception of in-
orbit satellites.
EMPLOYEES
As of December 31, 2009, Loral had approximately 2,400 full-time employees and approximately 150 contract employees,
none of whom are subject to collective bargaining agreements. Almost all of the foregoing employees are employed in the
satellite manufacturing segment. We consider our employee relations to be good.
As of December 31, 2009, Telesat, including subsidiaries, had 500 full and part time employees, approximately 2% of
whom are subject to collective bargaining agreements. Telesat considers its employee relations to be good.
OTHER
Loral, a Delaware corporation, was formed on June 24, 2005, to succeed to the business conducted by its predecessor
registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal bankruptcy laws on
November 21, 2005 (the “Effective Date”) pursuant to the terms of the fourth amended joint plan of reorganization, as modified
(“the Plan of Reorganization”).
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 Avenue, 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 and Telesat Investment Risk Factors
Our revenues and profitability may be adversely affected by the sustained global financial downturn, and negative global
economic conditions may have a material adverse effect on our customers and suppliers.
Since the end of 2007, worldwide economic conditions have deteriorated significantly affecting the global financial markets
and have caused significant reductions in available capital and liquidity from banks and other providers of credit, substantial
reductions in equity and currency values in financial markets and extreme volatility in credit, equity and fixed income markets
and general economic uncertainty. Though markets improved in 2009, continuing adverse global economic conditions may have
a material adverse effect on us due to potential insolvency of suppliers and customers, inability of customers to obtain financing
for their satellites and transponder leases, decreased or delayed customer demand, delays in supplier performance and contract
terminations. Our customers may not have access to capital or a willingness to spend capital on satellites and transponder leases,
and/or their levels of cash liquidity with which to pay for satellites and transponder leases may be adversely affected. Further, the
economic downturn may adversely affect our suppliers’ access to capital and liquidity with which to maintain their inventories,
production levels and/or product quality, could cause them to raise prices or result in their ceasing operations. If global economic
conditions remain uncertain or deteriorate further, we may experience a material adverse effect on our business, operating results
and financial condition. These potential effects of the global financial situation are difficult to forecast and mitigate.
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We have had a history of losses.
Although we had net income in 2009, in the past, we have had a history of losses. We incurred net losses of approximately
$693 million and $87 million (not including the gain on the contribution of Loral Skynet to Telesat and related derivative gains
of $194 million from financial commitments that locked in foreign exchange rates on debt that financed the Telesat transaction in
2007, and the tax effect of $78 million) for the years ended December 31, 2008 and 2007, respectively. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” There can be no assurance that Loral will continue
to achieve profitability in the future.
The SS/L credit agreement is subject to financial and other covenants that must be met for SS/L to utilize the revolving
facility.
On October 16, 2008, SS/L entered into a credit agreement with several banks and other financial institutions. The SS/L
credit agreement provides for a $100 million senior secured revolving credit facility. The revolver is for a term of three years,
maturing on October 16, 2011. This credit agreement contains certain covenants, both financial and non-financial, which SS/L
must be able to meet to draw on the revolver. The covenants include, among other things, a consolidated leverage ratio test, a
consolidated interest coverage ratio test and restrictions on the incurrence of additional indebtedness, capital expenditures,
investments, dividends or stock repurchases, asset sales, mergers and consolidations, liens, changes to the line of business and
other matters customarily restricted in such agreements. While SS/L has been in compliance with all covenants to date, there can
be no assurance that SS/L will be able to meet its covenant requirements in the future and maintain the availability to use the
revolver. SS/L’s liquidity would be materially and adversely affected if it is unable to do so.
We are projecting negative cash flow for 2010, and there can be no assurance that we will have sufficient funds to meet
our cash requirements in the future.
Although our projections for 2010 reflect negative cash flows, mainly due to growth in orbital receivables and capital
expenditures, we expect to have sufficient funds to meet our cash requirements in 2010. There can be no assurance, however,
that we will have sufficient funds to meet our cash requirements in future years beyond 2010. If we do not have sufficient funds,
SS/L will be required to borrow under its credit agreement or we will have to obtain new financing, either in the form of debt or
equity, to increase our cash availability. In light of current market conditions, there can be no assurance that we will be able to
obtain such financing on favorable terms, if at all. If we are not successful in obtaining such financing, our ability to manage
unforeseen cash requirements, to meet contingencies and to fund growth opportunities will be materially and adversely affected.
Loral Space & Communications Inc., the parent company, is a holding company with no current operations; we are
dependent on cash flow from our operating subsidiaries and affiliates to meet our financial obligations.
The parent company is a holding company with four primary assets, its equity interest in its wholly-owned subsidiary, SS/L,
its equity interests in its affiliates, Telesat and XTAR and its ownership of the Canadian payload on the ViaSat-1 satellite. Other
than the Canadian payload on ViaSat-1, the parent company has no independent operations or operating assets and has ongoing
cash requirements that as of December 31, 2009 include approximately $40 million of additional expenditures expected to be
incurred in 2010 and 2011 to complete the Canadian payload on ViaSat-1 and related gateway infrastructure. The ability of SS/L,
Telesat and XTAR to make payments or distributions to the parent company, whether as dividends or as payments under
applicable management agreements or otherwise, will depend on their operating results, including their ability to satisfy their
own cash flow requirements and obligations including, without limitation, their debt service obligations. Moreover, covenants
contained in the debt agreements of SS/L and Telesat impose substantial limitations on their ability to dividend funds to the
parent company. Even if the applicable debt covenants would permit Telesat to pay dividends, the parent company will not have
the ability to cause Telesat to do so. See below “While we own 64% of Telesat on an economic basis, we own only 33 1 / 3 % of
its voting stock and therefore do not have the right to elect or appoint a majority of its Board of Directors.” Likewise, any
dividend payments by XTAR would require the prior consent of our Spanish partner in the joint venture.
The parent company earns a management fee of $5 million a year from Telesat. Telesat’s loan documents permit this
management fee from Telesat to be paid to the parent company only in the form of notes, with such fee becoming payable in
cash only at such time that Telesat meets certain financial performance criteria set forth in the loan documents. We do not expect
Telesat to be able to meet these criteria in the next year.
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SS/L pays the parent company a management fee of $1.5 million in cash each year. The parent company also allocates a
portion of its annual overhead expenses to SS/L. The parent company required SS/L to make overhead expense allocation
payments to it in 2009. The SS/L credit agreement restricts these overhead expense allocation payments to an amount not to
exceed $15 million in any fiscal year and imposes a liquidity restriction that must be met for SS/L to make such payment. The
SS/L credit agreement also limits loans by SS/L to the parent company. There can be no assurance that SS/L will be permitted to
make expense allocation payments or loans to the parent company in the future.
While we own 64% of Telesat on an economic basis, we own only 33 1 / 3 % of its voting stock and therefore do not have
the right to elect or appoint a majority of its Board of Directors.
Because of Canadian foreign ownership restrictions, while we own 64% of the economic interests of Telesat, we hold only
33 1 / 3 % of its voting interests and cannot hold additional voting power in Telesat absent a change in law. Although the
government of Canada announced in March 2010 that it is proposing to remove the existing restrictions on foreign ownership of
Canadian satellites, legislation to implement the government’s proposal has not yet been introduced, and, if introduced, there is
no assurance as to exactly what changes will be proposed, whether in fact such legislation will be adopted and, if adopted, how
current laws and regulations governing the foreign ownership and control of satellites may be changed. Even if changes in law
and regulations are effected to allow us to own more voting stock of Telesat Holdco than we currently own, we would still be
subject to our shareholders agreement with PSP. Under our shareholders agreement, the governance and management of Telesat
is vested in its 10-member Board of Directors, comprised of three Loral appointed directors, three PSP appointed directors and
four independent directors, two of whom also own Telesat shares with nominal economic value and 30% and 6 2 / 3 % of the
voting interests for Telesat directors, respectively. While we own a greater voting interest in Telesat than any other single
stockholder with respect to election of directors and we and PSP, which owns 30% of the voting interests for directors and 66 2 /
3 % of the voting interests for all other matters, together own a majority of Telesat’s voting power, circumstances may occur
where our interests and those of PSP diverge or are in conflict. In that case, PSP, with the agreement of at least three of the four
independent directors may, subject to veto rights that we have under Telesat’s shareholders agreement, cause Telesat to take
actions contrary to our wishes. These veto rights are, however, limited to certain extraordinary actions — for example, the
incurrence of more than $100 million of indebtedness or the purchase of assets at a cost in excess of $100 million. Moreover, our
right to block these actions under the shareholders agreement falls away if, subject to certain exceptions, either (i) ownership or
control, directly or indirectly by Dr. Mark H. Rachesky (President of MHR Fund Management LLC, or MHR, which, through its
affiliated funds is our largest stockholder) of our voting stock falls below certain levels or (ii) there is a change in the
composition of a majority of the members of Loral’s board of directors over a consecutive two-year period.
Our equity investment in Telesat may be at risk because of Telesat’s leverage.
At December 31, 2009, Telesat had outstanding indebtedness of CAD 3.0 billion and additional borrowing capacity of CAD
153 million under its revolving facility, based on a U.S. dollar/Canadian dollar exchange rate of $1.00/CAD 1.0532.
Approximately CAD 2.1 billion of this total borrowing capacity is debt that is secured by substantially all of the assets of
Telesat. This indebtedness represents a significant amount of indebtedness for a company the size of Telesat. The agreements
governing this indebtedness impose operating and financial restrictions on Telesat’s activities. These restrictions on Telesat’s
ability to operate its business could seriously harm its business by, among other things, limiting its ability to take advantage of
financing, merger and acquisition and other corporate opportunities, which could in time adversely affect the value of our
investment in Telesat.
As of December 31, 2009, Telesat had indebtedness of $2.1 billion which bears interest at variable rates. If market interest
rates were to rise, this would result in higher debt service requirements. To alleviate a portion of this risk, in 2007 Telesat entered
into interest rate swaps that converted $600 million of its outstanding floating U.S. dollar debt and CAD 630 million of its
outstanding Canadian dollar debt into fixed rate debt for periods extending into 2010 and 2011. In 2009, Telesat extended the
maturity of the existing CAD 630 million floating to fixed interest rate swaps to October 2014 and entered into an additional
delayed-start floating to fixed CAD 300 million interest rate swap maturing in October 2014.
Telesat’s indebtedness includes $1.7 billion that is denominated in U.S. dollars and is unhedged with respect to foreign
exchange rates. Unfavorable exchange rate changes could affect Telesat’s ability to repay or refinance this debt.
A breach of the covenants contained in any of Telesat’s loan agreements, including without limitation, a failure to maintain
the financial ratios required under such agreements, could result in an event of default. If an event of default were to occur,
Telesat’s lenders would be able to accelerate repayment of the related indebtedness, and it may also trigger a cross default under
other Telesat indebtedness. If Telesat is unable to repay its secured indebtedness when due (whether at the maturity date or upon
acceleration as a result of a default), the lenders will have the right to proceed against the collateral granted to them to secure
such indebtedness, which consists of substantially all of the assets of Telesat and its subsidiaries. Telesat’s ability to make
payments on, or repay or refinance, its debt, will depend largely upon its future operating performance. In the event that Telesat
is not able to service its indebtedness, there would be a material adverse effect on the value of our equity investment in Telesat.
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Telesat also has CAD 141 million of 7% (8.5% following a performance failure) senior preferred stock that may be
redeemed by the holders thereof commencing October 31, 2019. This preferred stock enjoys rights of priority over the Telesat
equity securities held by us.
Certain asset sales by Telesat may trigger material adverse tax consequences for us.
Upon completion of the Telesat transaction, we deferred a tax gain of approximately $308 million arising from the
contribution by Loral Skynet to Telesat of substantially all of its assets and related liabilities. If Telesat were to sell or otherwise
dispose of substantially all of such contributed assets in one or more taxable transactions prior to November 1, 2012, we would
be required to recognize this deferred gain with retroactive effect to 2007, resulting in additional tax liability to us of
approximately $119 million plus interest. Telesat has agreed that prior to November 1, 2012, without our prior consent, it will
not dispose of assets having a value, whether individually or in the aggregate, in excess of $50 million if such disposition would,
in our reasonable determination, result in an adverse tax consequence to us. If we were to exercise this veto right and prevent
Telesat from consummating such an asset sale, it may, however, adversely affect the value of our investment in Telesat.
The Telesat information in this report is based solely on information provided to us by Telesat.
Because we do not control Telesat, we do not have the same control and certification processes with respect to the
information contained in this report on our satellite services segment that we have for the reporting on our satellite
manufacturing segment. We are also not involved in managing Telesat’s day to day operations. Accordingly, the Telesat
information contained in this report is based solely on information provided to us by Telesat and has not been separately verified
by us.
Telesat’s financial results and our U.S. dollar reporting of Telesat’s financial results will be affected by volatility in the
Canadian/U.S. dollar exchange rate.
Portions of Telesat’s revenue, expenses and debt are denominated in U.S. dollars and changes in the U.S. dollar/Canadian
dollar exchange rate may have a negative impact on Telesat’s financial results and affect the ability of Telesat to repay or
refinance its borrowings.
Loral reports its investment in Telesat in U.S. dollars while Telesat reports its financial results in Canadian dollars. Loral
reports its investment in Telesat using the equity method of accounting. As a result, Telesat’s results of operations are subject to
conversion from Canadian dollars to U.S. dollars. Changes in the U.S. dollar relationship to the Canadian dollar affect how our
financial results as they relate to Telesat are reported in our consolidated financial statements. There was a significant movement
in US$/CAD exchange rates during 2009; the exchange rate moved from US$1.00/CAD 1.2188 at December 31, 2008 to
US$1.00/CAD 1.0532 at December 31, 2009.
Our potential indebtedness makes us vulnerable to adverse developments.
On October 16, 2008, SS/L entered into a $100 million secured credit agreement that contains financial and non-financial
covenants under which SS/L must operate if it is to maintain the availability of the facility. As of December 31, 2009, there were
no borrowings under this facility, and there are currently no restrictions on the parent company incurring additional indebtedness.
If new debt is added, such indebtedness could impose additional restrictive covenants. The incurrence of the SS/L debt and any
additional significant debt that we may incur would make us vulnerable to, among other things, adverse changes in general
economic, industry and competitive conditions.
XTAR has not generated sufficient revenues to meet all of its contractual obligations, which are substantial.
XTAR’s take-up rate in its service has been slower than anticipated. As a result, it has deferred certain payments owed to
us, Hisdesat and Telesat, including payments due under an agreement with Hisdesat to lease certain transponders on the Spainsat
satellite. These lease obligations were $23 million in 2009 with increases thereafter to a maximum of $28 million per year
through the end of the useful life of the satellite, which is estimated to be in 2021. In addition, XTAR has entered into an
agreement with Hisdesat whereby the past due balance on the Spainsat transponders of $32.3 million as of December 31, 2008,
together with a deferral of $6.7 million in payments due in 2009, became payable to Hisdesat over 12 years through annual
payments of $5 million. XTAR’s lease and other obligations to Hisdesat, which will aggregate in excess of $376 million over the
life of the satellite, are substantial, especially in light of XTAR’s limited revenues to date. XTAR has agreed that most of its
excess cash balance would be applied towards making limited payments on these obligations, as well as payments of other
amounts owed to us, Hisdesat and Telesat in respect of services provided by them to XTAR. Unless XTAR is able to generate a
substantial increase in its revenues, these obligations will continue to accrue and grow, which may have a material and adverse
effect on our equity interest in XTAR. As of December 31, 2009, $1.3 million was due to Loral from XTAR.
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Significant changes in discount rates, actual investment return on pension assets and other factors could affect our
statement of operations, equity and pension contributions in future periods.
Our statement of operations may be positively or negatively affected by the amount of expense we record for our pension
and other postretirement benefit plans. Generally accepted accounting principles in the United States (GAAP) require that we
calculate expense for the plans using actuarial valuations. These valuations reflect assumptions that we make relating to financial
market and other economic conditions. Changes in key economic indicators may result in changes in the assumptions we use.
The most significant year-end assumptions used to estimate pension or other postretirement expense for the following year are
the discount rate, the expected long-term rate of return on plan assets and expected future medical inflation. In addition, we are
required to make an annual measurement of plan assets and liabilities and, at the time of the measurement, we may be required to
take a significant charge to equity through a reduction to other comprehensive income. For a discussion regarding how our
financial statements may 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.” During 2009, we recorded expense of $21.9 million related to pension and other postretirement benefit plans
and made $24.5 million in employer contributions. During 2010, based upon current estimates, we expect to expense
approximately $18.9 million related to pension and other postretirement benefit plans and make approximately $28.9 million in
employer contributions. Our expense and contributions in the future will depend, among other things, on the key economic
factors underlying these assumptions.
We expect significant increases in funding requirements subsequent to 2010. While fluctuations in the value of pension
assets will increase or decrease annual pension costs, additional asset decreases like those experienced during 2008 could further
increase future expenses recognized in our statement of operations and increase, typically over seven years, the requirement for
future cash contributions by us.
II. Segment Risk Factors
•
Risk Factors Associated With Satellite Manufacturing
The satellite manufacturing market is highly competitive and fixed costs are high.
SS/L competes with companies such as Lockheed Martin, Boeing and Orbital Sciences in the United States, Thales Alenia
Space and EADS Astrium in Europe and Mitsubishi Electric Corp. in Japan, nearly all of which are larger and better capitalized
than we are. SS/L may also face competition in the future from emerging low-cost competitors in India, Russia and China. The
number of annual satellite manufacturing awards varies and is difficult to predict. In addition, U.S. satellite manufacturers must
comply with U.S. export control and other federal regulations that put them at a disadvantage when competing for foreign
customers. Moreover, as a result of our interest in Telesat, SS/L may experience difficulty in obtaining orders from certain
customers engaged in the satellite services business who compete with Telesat. 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
and other material contractual terms, such as those allocating risk between the manufacturer and its customers. Buyers, as a
result, have had the advantage over suppliers in negotiating prices, terms and conditions resulting in reduced margins and
increased assumption of risk by manufacturers such as SS/L.
SS/L is a large-scale systems integrator, requiring a large staff of highly-skilled and specialized workers, as well as
specialized manufacturing and test facilities in order to perform under its satellite construction contracts. In order to maintain its
ability to compete as one of the leading prime contractors for technologically advanced space satellites, SS/L must continuously
retain the services of a core group of specialists in a wide variety of disciplines for each phase of the design, development,
manufacture and testing of its products, thus reducing SS/L’s flexibility to take action to reduce workforce costs in the event of a
slowdown or downturn in its business. Further, SS/L’s ability to compete is dependent upon its maintaining specialized
manufacturing and test facilities with fixed costs that cannot be adjusted to account for significant variance in production
requirements or economic conditions.
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SS/L’s contracts are subject to adjustments, cost overruns 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 profits or increase of losses, borne solely by SS/L. Under such contracts, SS/L may
receive progress payments, or it may receive partial payments upon the attainment of certain program milestones. If performance
on these milestones is delayed, SS/L’s receipt of the corresponding payments will also be delayed. As the prime contractor, SS/L
is generally liable to its customer for schedule delays and other non-performance by SS/L’s suppliers, which may be largely
outside of its control.
Non-performance may increase costs and subject SS/L to damage claims from customers and termination of the contract for
SS/L’s default. SS/L’s contracts contain detailed and complex technical specifications to which the satellite must be built. It is
very common that satellites built by SS/L do not conform in every single respect to, and contain a small number of minor
deviations from, the technical specifications. Customers typically accept the satellite with such minor deviations. In the case of
more significant deviations, however, SS/L may incur increased costs to bring the satellite within or close to the contractual
specifications or a customer may exercise its contractual right to terminate the contract for default. In some cases, such as when
the actual weight of the satellite exceeds the specified weight, SS/L may incur a predetermined penalty with respect to the
deviation. As of March 12, 2010, SS/L and a customer have agreed to suspend final construction of a satellite pending, among
other things, further analysis relating to efforts to meet the satellite performance criteria and/or confirmation that alternative
performance criteria would be acceptable. The customer has also stated that it is currently evaluating potential alternative uses
for the satellite. There can be no assurance that a dispute will not arise as to whether the satellite meets its technical performance
specifications or if such a dispute did arise that SS/L would prevail. See Note 14 to the Loral consolidated financial statements
for further detail on this matter.
A failure by SS/L to deliver a satellite to its customer by the specified delivery date, which may result from factors beyond
SS/L’s control, such as delayed performance or non-performance by its subcontractors or failure to obtain necessary
governmental licenses for delivery, would also be harmful to SS/L unless mitigated by applicable contract terms, such as
excusable delay. As a general matter, SS/L’s failure to deliver beyond any contractually provided grace period would result in
the incurrence of liquidated damages by SS/L, which may be substantial, and if SS/L is still unable to deliver the satellite upon
the end of the liquidated damages period, the customer will generally have the right to terminate the contract for default. If a
contract is terminated for default, SS/L would be liable for a refund of customer payments made to date, and could also have
additional liability for excess re-procurement costs and other damages incurred by its customer, although SS/L would own the
satellite under construction and attempt to recoup any losses through resale to another customer. A contract termination for
default could have a material adverse effect on SS/L and us. As of March 12, 2010, SS/L has a contract-in-process with an
estimated delivery date later than the contractually specified date after which the customer may terminate the contract for default.
See Note 14 to the Loral consolidated financial statements for further detail on this contract.
In addition, many of SS/L’s contracts may be terminated for convenience by the customer or the prime contractor. In the
event of such a termination, SS/L is normally entitled to recover the purchase price for delivered items, reimbursement for
allowable costs for work in process and an allowance for profit or an adjustment for loss, depending on whether completion of
the project would have resulted in a profit or loss.
SS/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.
Certain of SS/L’s customers are highly leveraged and may not fulfill their contractual payment obligations to SS/L.
Historically, SS/L’s customers have been primarily large multinational corporations and U.S. and foreign governments for
which the creditworthiness was generally substantial. In recent years, however, SS/L has added commercial customers that are
highly leveraged, as well as those in the development stage that are only partially funded. There is a risk that these customers
will be unable to meet their payment obligations to SS/L under their construction contracts. This risk is increased due to the
current economic conditions. For example, in 2009, two of SS/L’s customers filed for chapter 11 bankruptcy protection. For
further details about the effect on SS/L of these bankruptcies, see Note 14 to the Loral consolidated financial statements. A
customer’s inability to fulfill its payment obligations to SS/L may materially and adversely affect SS/L’s cash flows and
liquidity.
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Moreover, many of SS/L’s satellite contracts permit SS/L’s customers to pay a portion of the purchase price for the satellite
over time subject to the continued performance of the satellite (“orbitals”), and certain of SS/L’s satellite contracts may require
SS/L to provide vendor financing to its customers, or a combination of these contractual terms. To the extent that SS/L provides
vendor financing to customers, its financial exposure is further increased. In some cases, these arrangements are provided to
customers that are start-up companies, companies in the early stages of building their businesses or highly leveraged companies,
in some cases, with near-term debt maturities. 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. As of
December 31, 2009, SS/L had recorded orbital receivables of $240 million, of which $32 million was from these companies.
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. SS/L generally does not insure for these incentive
payments (also known as orbital payments) and in some cases agrees with its customers not to insure them.
SS/L records the present value of orbital payments as revenue during the construction of the satellite. SS/L generally
receives the present value of these incentive payments if there is a launch failure or a failure caused by customer error. SS/L
forfeits some or all of these payments, however, if the loss is caused by satellite failure or as a result of its own error. As of
December 31, 2009, SS/L had recorded orbital receivables of $240 million. Since these orbital receivables could be affected by
future satellite performance, there can be no assurance that SS/L will be able to collect all or a portion of these receivables. See
above “SS/L’s contracts are subject to adjustments, cost overruns and termination.”
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 14 to the Loral consolidated financial statements). These contingent liabilities are not
insured by SS/L. We have recorded reserves in our financial statements based on our current estimates of SS/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.
Some satellites built by SS/L, including one satellite operated by Telesat, have experienced minor losses of power from
their solar arrays.
Thirty of the satellites built by SS/L and launched since 1997 have experienced partial losses of power from their solar
arrays. There can be no assurance that one or more will not experience an additional power loss that could lead to a loss of
transponder capacity and performance degradation. A partial or complete loss of a satellite could result in an incurrence of
warranty payments by, or a loss of orbital incentive payments to, SS/L. SS/L has implemented remediation measures that SS/L
believes will reduce this type of anomaly for satellites launched after June 2001. For further details see Note 14 to the Loral
consolidated financial statements.
Some satellites built by SS/L have the same design as another SS/L-built satellite that has experienced a partial failure.
In November 2004, Galaxy 27 (formerly Telstar 7) experienced an anomaly which caused it to completely cease operations
for several days before it was partially recovered. In June 2008, Galaxy 26 (formerly Telstar 6) experienced a similar anomaly
which caused the loss of power to one of the satellite’s solar arrays. Three other satellites manufactured by SS/L for other
customers have designs similar to Galaxy 27 and Galaxy 26 and, therefore, could be susceptible to similar anomalies in the
future. A partial or complete loss of these satellites could result in the incurrence of warranty payments by SS/L of up to
$3.3 million, of which $0.8 million has been accrued as of December 31, 2009.
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We are subject to export control and economic sanctions laws, which may result in delays, lost business and additional
costs.
SS/L is required by the U.S. State Department to obtain licenses and enter into technical assistance agreements to export
satellites and related equipment and to disclose technical data or provide defense services to foreign persons. In addition, if a
satellite project involves countries, individuals or entities that are the subject of U.S. economic sanctions, which we refer to here
as Sanctions Targets, or is intended to provide services to Sanctions Targets, SS/L’s participation in the project may be
prohibited altogether or licenses or other approvals from the U.S. Treasury Department’s Office of Foreign Assets Control
(“OFAC”) may be required. The delayed receipt of or the failure to obtain the necessary U.S. Government licenses, approvals
and agreements may prohibit entry into or interrupt the completion of a satellite contract by SS/L and could lead to a customer’s
termination of a contract for SS/L default, monetary penalties and/or the loss of incentive payments. We have in the past failed to
obtain the export licenses necessary to deliver satellites to our Chinese customers.
Some of our customers and potential customers, along with insurance underwriters and brokers, have asserted that
U.S. export control laws and regulations governing disclosures to foreign persons excessively restrict their access to information
about the satellite during construction and on-orbit. OFAC sanctions and requirements may also limit certain business
opportunities or also delay or restrict our ability to contract with potential foreign customers or operators. To the extent that our
non-U.S. competitors are not subject to these export control or economic sanctions laws and regulations, they may enjoy a
competitive advantage with foreign customers, and, to the extent that our foreign competitors continue to gain market share, it
could become increasingly difficult for the U.S. satellite manufacturing industry, including SS/L, to recapture this lost market
share. For example, one of our European competitors, Thales Alenia Space, is offering “ITAR-free” telecommunications
satellites, that purport to contain no components obtained from United States sources that are subject to the export and re-export
limitations imposed by the U.S. International Traffic in Arms Regulations or ITAR. Customers concerned over the possibility
that the U.S. government may deny the export license necessary for SS/L to deliver to them their purchased satellite, or the
restrictions or delays imposed by the U.S. government licensing requirements even where an export license is granted, may elect
to choose a purportedly “ITAR-free” satellite over an SS/L satellite. We are further disadvantaged by the fact that an “ITAR-
free” satellite may be launched in China on the substantially cheaper Chinese Long March rocket, a launch vehicle that, because
of ITAR restrictions, is not available to SS/L or other suppliers subject to ITAR restrictions.
The recent trend toward industry consolidation in the satellite services industry may adversely affect us; we do not
control satellite procurement decisions at Telesat.
The recent industry consolidation trend has resulted in the formation of satellite operators with greater satellite resources
and increased coverage. This consolidation may reduce demand for new satellite construction as operators may need fewer
satellites in orbit to provide back-up coverage or to rationalize the amount of capacity available in certain geographic regions. It
may also result in concentrating additional bargaining power in the hands of large customers, which could increase pressure on
pricing and other contractual terms.
We do not control satellite procurement decisions at Telesat, and there can be no assurance that Telesat will purchase
additional satellites from SS/L. Moreover, any decision relating to the enforcement of existing or future satellite contracts
between Telesat and SS/L will be made on arms length terms and, in certain cases, subject to approval by the disinterested
directors of Telesat.
The availability of facility space and qualified personnel may affect SS/L’s ability to perform its contracts in a timely and
efficient manner.
SS/L has won a number of satellite construction awards over the last few years and, as a result, its backlog has expanded
significantly. In order to complete construction of all the satellites in backlog and to enable future growth, SS/L has modified and
expanded its manufacturing facilities. SS/L can now accommodate as many as nine to 13 satellite awards per year, depending on
the complexity and timing of the specific satellites, and can accommodate the integration and test of 13 to 14 satellites at any
given time in its Palo Alto facility. Nevertheless, due to scheduling requirements, SS/L is reliant on availability of outside
suppliers for certain production and testing activities, and there can be no assurance that such outside suppliers will be able to
accommodate SS/L’s schedule requirements. Further, there can be no assurance that SS/L will be able to hire or retain enough
employees with the requisite skills and training and, accordingly, SS/L may not be able to perform its contracts as efficiently as
planned or grow its business to the planned level.
Our ability to obtain certain satellite contract awards depends, in part, on our ability to provide the customer with
financing.
During its history, SS/L has provided financing to customers to enable it to win certain contracts. The financing has
typically been in the form of orbital receivables, vendor financing, loans and direct investments in the customer. The SS/L Credit
Agreement limits SS/L’s ability to provide customers with financing. If SS/L is unable to provide financing to a customer, it
could lose the construction contract to a competitor that could provide financing.
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SS/L relies on certain key suppliers whose failure or delayed performance would adversely affect us.
To build its satellites, SS/L relies on suppliers, some of whom are competitors of SS/L, to provide it with certain component
parts. The number of suppliers capable of providing these components is limited, and in some cases, the supplier is in a sole
source position based upon the unique nature of its product or customer requirement to procure components with proven flight
heritage whenever possible. These suppliers are not all large, well-capitalized companies, and to the extent they were to
experience financial difficulties, their ability to timely deliver to SS/L components that satisfy SS/L’s customer’s contractual
specifications could be impaired. In the past, SS/L’s performance under its construction contracts with its customers has been
adversely affected because of a supplier’s failure or delayed performance. As discussed above under “— SS/L’s contracts are
subject to adjustments, cost overruns and termination,” a failure by SS/L to meet its contractual delivery requirements could well
give rise to liquidated damage payments by SS/L and/or a customer’s termination of its construction contract with SS/L for
default.
We face risks in conducting business internationally.
For the year ended December 31, 2009, approximately 46% of SS/L’s revenue was generated from customers outside of the
United States. SS/L could be harmed financially and operationally by changes in foreign regulations and telecommunications
standards, tariffs or taxes and other trade barriers that may be imposed on its services or by political and economic instability in
the countries in which it conducts business. Almost all of SS/L’s contracts with foreign customers require payment in
U.S. dollars, and customers in developing countries could have difficulty obtaining U.S. dollars to pay SS/L due to currency
exchange controls and other factors. Exchange rate fluctuations may adversely affect the ability of SS/L customers to pay in
U.S. dollars. If SS/L needs to pursue legal remedies against its foreign business partners or customers, it may have to sue them
abroad where it could be difficult for SS/L to enforce its rights.
We rely on patents, trade secrets and know-how; infringement by SS/L of third party patents would increase our costs,
and third parties may challenge our patents.
SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position. It holds 170
patents in the United States and has applications for nine patents pending in the United States. SS/L patents include those relating
to communications, station keeping, power control systems, antennae, filters and oscillators, phased arrays and thermal control as
well as assembly and inspection technology. The SS/L patents that are currently in force expire between 2010 and 2025. There
can be no assurance that infringement of existing third party patents has not occurred or will not occur. In the event of
infringement, we could be required to pay royalties to obtain a license from the patent holder, refund money to customers for
components that are not useable or redesign our products to avoid infringement, all of which would increase our costs. We may
also be required under the terms of our customer contracts to indemnify our customers for damages. Further, there is a risk that
competitors could challenge or infringe SS/L’s patents.
•
Risk Factors Associated With Satellite Services
A substantial amount of Telesat revenues are derived from only a few of its customers. A loss of one or more of these
major customers, or a material adverse change in any such customer’s business or financial condition, could materially
reduce Telesat future revenues and contracted backlog.
For the year ended December 31, 2009, Telesat’s top five customers together accounted for approximately 47% of its
revenues. At December 31, 2009, Telesat’s top five backlog customers together accounted for approximately 88% of its backlog.
If any of Telesat’s major customers chose to not renew their contracts at the expiration of the existing terms or sought to
negotiate concessions, particularly on price, that could have a material adverse effect on Telesat’s results of operations, business
prospects and financial condition. Telesat’s customers could experience a downturn in their business or find themselves in
financial difficulties, which could result in their ceasing or reducing their use of Telesat’s services (or becoming unable to pay
for services they had contracted to buy). In addition, the industries in which some of Telesat’s customers operate are undergoing
significant consolidation, and Telesat’s customers may be acquired by other companies, including by its competitors. Such
acquisitions could adversely affect Telesat’s ability to sell services to such customers and to any end-users whom they serve.
Additionally, Telesat’s largest customer, Bell TV, is part of BCE. Since the Telesat transaction, Telesat is no longer a
subsidiary of BCE or an affiliate of Bell TV and may have lost certain competitive advantages with respect to Bell TV. There is
no guarantee that Bell TV will continue using Telesat’s services after the expiration of its current contracts.
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Launch delays or failures may result in delays in operations.
Delays in launching satellites are not uncommon and result from construction delays, the unavailability of appropriate
launch vehicles, launch failures and other factors. Delays in satellite launches would result in delays in Telesat’s revenues, could
affect plans to replace an in-orbit satellite prior to the end of its useful life, could result in the expiration or cancellation of launch
insurance, could result in the loss of orbital slot rights, termination of contracts by affected customers and a reduction in
contracted backlog. Upon termination of a customer contract, Telesat would be required to refund any prepayments made to it by
its terminating customer, which in the case of a major customer, may be substantial.
Satellite launches are risky, and some launch attempts have ended in complete or partial failure. A significant delay or
launch failure of a Telesat satellite may have a material adverse effect on Telesat’s results of operations, business prospects and
financial condition, which in turn would have a material adverse effect on our results and condition.
For example, the March 15, 2008 failure of a Proton rocket to lift its satellite payload to the appropriate orbit caused a delay
in the planned launch of the Nimiq 4 satellite, originally scheduled to be launched on a Proton rocket in mid-2008. Although
Nimiq 4 successfully launched in September 2008, the launch delay caused a delay in receipt of revenues from that satellite in
2008 and deferred the backlog run-off previously anticipated for Nimiq 4 in 2008. The launch of Telstar 14R, which is planned
for mid-2011, may likewise also be delayed if the launch vehicle on which it is scheduled to be launched suffers a failure prior to
the launch of Telstar 14R.
After launch, satellites remain vulnerable to in-orbit failures which may result in reduced revenues and profits and other
financial consequences.
Satellites utilize highly complex technology and operate in the harsh environment of space and therefore are subject to
significant operational risks while in orbit. In-orbit damage to or loss of a satellite before the end of its expected life results from
various causes, some random, including component failure, degradation of solar panels, loss of power or fuel, inability to
maintain the satellite’s position, solar and other astronomical events and space debris.
Some of Telesat’s satellites have had malfunctions and other anomalies, and in certain cases are currently operating using
back-up components because of the failure of their primary components. If the back-up components fail, however, and Telesat is
unable to restore capability through redundancy or other means, these satellites could lose capacity or be total losses. Any single
anomaly or series of anomalies or other failure could cause Telesat’s revenues, cash flows and backlog to decline materially,
could require it to recognize an impairment loss and could require Telesat to expedite its satellite replacement program, affecting
its profitability and increasing its financing needs. It could also require Telesat to repay prepayments made by customers of the
affected satellite. It could also result in a customer terminating its contract for service on the affected satellite. If the affected
satellite involves one of Telesat’s major customers, there could be a material adverse effect on Telesat’s operations, prospects,
results and financial condition, which in turn would adversely affect us.
It may be difficult to obtain full insurance coverage for satellites that have, or are part of a family of satellites that has,
experienced problems in the past; moreover, not all satellite-related losses will be covered by insurance.
Telesat’s satellite insurance does not protect it against all satellite-related losses. For example, satellite insurance will not
protect it against business interruption, lost revenues or delay of revenues. Telesat also does not have in-orbit insurance coverage
for all of the satellites in its fleet. Telesat’s existing launch and in-orbit insurance policies include, and future policies are
expected to include, specified exclusions, deductibles and material change limitations. Typically, these insurance policies
exclude coverage for damage arising from acts of war and other exclusions then customary in the industry. In addition, they
typically exclude coverage for health-related problems affecting satellites that are known at the time the policy is written. To the
extent Telesat experiences a launch or in-orbit failure that is not fully insured, or for which insurance proceeds are delayed or
disputed, it may not have sufficient resources to replace the affected satellite.
Launch and in-orbit policies on satellites may not continue to be available on commercially reasonable terms or at all. The
loss of a satellite may have a material adverse effect on Telesat’s results of operations, business prospects and financial
condition, which may not be adequately mitigated by insurance coverage.
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Telesat competes for market share, customers and orbital slots.
A trend toward consolidation of major FSS providers has resulted in the creation of global competitors which are
substantially larger than Telesat in terms of both the number of satellites they have in orbit as well as in terms of their revenues.
Due to their larger sizes, these operators are able to take advantage of greater economies of scale, may be more attractive to
customers, and may have greater flexibility to restore service to their customers in the event of a partial or total satellite failure.
Telesat also faces competition from regional operators, which may enjoy competitive advantages in their local markets. Telesat’s
affiliation with us may also adversely affect its ability to compete for certain contracts, especially in its consulting services
business. In addition, Telesat competes for local regulatory approval in places where more than one provider may want to
operate and for scarce frequency assignments and a limited supply of orbital locations.
Telesat’s business is also subject to competition from ground based forms of communications technology. For many point-
to-point and other services, the offerings provided by terrestrial companies can be more competitive than the services offered via
satellite. New technology could also render satellite-based services less competitive by satisfying consumer demand in other
ways. Telesat’s failure to compete effectively would result in, among other things, a loss of revenue and a decline in profitability,
and a decrease in the value of its business.
Changes in the Canadian competitive environment could adversely affect Telesat.
A substantial portion of Telesat’s business is expected to continue in the Canadian domestic market. This market is
characterized by increasing competition and rapid technological development among satellite providers. The Canadian regulatory
framework has always required the use of Canadian-licensed satellites for the delivery of direct-to-home (“DTH”) programming
in Canada. It is possible that this framework could change and allow non-Canadian satellite operators to compete for future
business from DTH customers, which constitute some of Telesat’s major customers.
Industry Canada, the Canadian telecommunications authority, has authorized Telesat to operate at a number of orbital
locations. Industry Canada has also awarded a number of licenses to a new Canadian satellite provider, Ciel Satellite Group,
including licenses to spectrum suitable for providing a variety of satellite services to Canadian customers. Increased competition
in Canada may adversely affect Telesat’s access rights to certain Canadian orbital locations, which in turn could adversely affect
Telesat’s results of operations, business prospects and financial condition.
Telesat operates in a highly regulated industry and government regulations may adversely affect its business.
Telesat is subject to the laws of Canada and the United States and the telecommunications regulatory authorities of the
Canadian government, primarily the Canadian Radio-Television and Telecommunications Commission, or CRTC, and Industry
Canada, as well as those of the United States government, primarily the Federal Communications Commission, or FCC, the
International Telecommunications Union, or the ITU, the European Union, Brazil and Isle of Man. It is also subject to the laws
and regulations of other countries to, from or within which it provides services. Regulatory authorities can modify, withdraw or
impose charges or conditions upon, or deny or delay action on applications for, the licenses Telesat needs for its business,
including its access rights to orbital positions. Countries or regulatory authorities may adopt new laws, policies or regulations,
change their interpretation of existing laws, policies or regulations or otherwise take actions in a manner that could adversely
affect Telesat’s operations or revenues.
To prevent frequency interference, the regulatory process requires potentially lengthy and costly negotiations with third
parties who operate or intend to operate satellites at or near the locations of Telesat satellites. These negotiations have resulted in
financial concessions in the past and there can be no assurance that such concessions may not be required in the future. The
failure to reach an appropriate arrangement with a third party having priority rights at or near one of Telesat’s orbital slots may
result in substantial restrictions on the use and operation of its satellite at that location. For example, the Russian Satellite
Communications Company (“RSCC”) has announced that it intends to launch a satellite to be operated at 14° WL, adjacent to
the location of Telesat’s Telstar 12 satellite at 15° WL. RSCC’s ITU rights over certain frequencies at 14° WL have priority over
Telesat’s use of these same frequencies in its operation of Telstar 12. Telesat is currently in frequency coordination discussions
with RSCC. If Telesat fails to reach an appropriate arrangement with RSCC, it may result in restrictions on the use and operation
of Telstar 12 which could materially restrict Telesat’s ability to earn revenue from Telstar 12 and any replacement satellite or
may make a replacement satellite not economically viable.
In addition, while the ITU rules require later-in-time systems to coordinate with it, there can be no assurance that other
operators will conduct their operations so as to avoid transmitting any signals that would cause harmful interference to the
operation of Telesat’s satellites.
Failure to successfully coordinate Telesat’s satellites’ frequencies or to resolve other required regulatory approvals could
have an adverse effect on its financial condition, as well as on the value of its business, which would in turn adversely affect us.
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Telesat’s ability to replace one of its satellites is subject to additional risk and cannot be assured.
In addition to the risks with respect to Telesat’s ability to renew its licenses to orbital locations, there is also a specific risk
with respect to Telesat being able to replace Telstar 18. Telesat operates Telstar 18 pursuant to agreements with APT Satellite
Company Limited (“APT”) that has a license to use the orbital location controlled by the government of Tonga. Although
Telesat’s agreement with APT provides Telesat with renewal rights with respect to a replacement satellite at this orbital location,
there can be no assurance that renewal rights will be granted. Should Telesat be unsuccessful in obtaining renewal rights for the
orbital location because of the control of the orbital location exercised by Tonga, or should Telesat otherwise fail to enter into
agreements with APT with respect to such replacement satellite, all revenue obtained from Telstar 18 would cease and such loss
of revenue could have a material adverse effect on Telesat’s results of operations and financial condition, which would in turn
adversely affect us.
III. Other Risks
Third parties have significant rights with respect to our affiliates.
Third parties have significant rights with respect to, and we do not have control over management of, our affiliates. For
example, Hisdesat enjoys substantial approval rights in regard to XTAR, our X-band joint venture. Also, while we own 64% of
the participating shares of Telesat, we own only 33 1 / 3 % of the voting power. The rights of these third parties and fiduciary
duties under applicable law could result in others acting or failing to act in ways that are not in our best interest. While these
entities are or have been customers of SS/L, due to these third party rights and the fiduciary duties of the boards of these entities,
there can be no assurance that these entities will continue to be customers of SS/L, and SS/L does not expect to do business with
these entities on other than fair and competitive terms.
We rely on key personnel.
We need highly qualified personnel. Michael Targoff, our chief executive officer, has an employment contract expiring in
December 2010. We do not maintain “key man” life insurance. The departure of any of our key executives could have an adverse
effect on our business.
MHR may be viewed as our controlling stockholder and may have conflicts of interest with us in the future.
As of December 31, 2009, various funds affiliated with MHR held approximately 39.9% of the outstanding voting common
stock of Loral as well as all issued and outstanding shares of Loral non-voting common stock, which, when taken together,
represent approximately 59.0% of the common equity of Loral as of December 31, 2009. As of March 12, 2010, representatives
of MHR occupy three of the nine seats on our board of directors (seven of which are currently occupied). In addition, one of our
other directors was selected by the creditors’ committee in our predecessor’s chapter 11 cases, in which MHR served as the
chairman. Conflicts of interests may arise in the future between us and MHR. For example, MHR and its affiliated funds are in
the business of making investments in companies and may acquire and hold interests in businesses that compete directly or
indirectly with us. Under our agreement with PSP, subject to certain exceptions, in the event that either (i) ownership or control,
directly or indirectly, by Dr. Mark H. Rachesky, President of MHR, of our voting stock falls below certain levels or (ii) there is a
change in the composition of a majority of the members of the Loral board of directors over a consecutive two-year period, we
will lose our veto rights relating to certain actions by Telesat. In addition, after either of these events, PSP will have certain rights
to enable it to exit from its investment in Telesat, including a right to cause Telesat to conduct an initial public offering in which
PSP’s shares would be the first shares offered or, if no such offering has occurred within one year due to a lack of cooperation
from Loral or Telesat, to cause the sale of Telesat and to drag along the other shareholders in such sale, subject to our right to
call PSP’s shares at fair market value.
The future use of tax attributes is limited.
As of December 31, 2009, we had federal net operating loss carryforwards, or NOLs of approximately $478 million and
state NOLs of various amounts that are available to offset future taxable income (see Notes 2 and 9 to the Loral consolidated
financial statements for a description of the accounting treatment of such NOLs). As our reorganization on November 21, 2005
constituted an “ownership change” under Section 382 of the Internal Revenue Code, our ability to use these NOLs, as well as
certain other tax attributes existing at such effective date, is subject to an annual limitation of approximately $32.6 million,
subject to increase or decrease based on certain factors. If Loral experiences an additional “ownership change” during any three-
year period after November 21, 2005, future use of these tax attributes may become further limited. An ownership change may
be triggered by sales or acquisitions of Loral equity interests in excess of 50% by shareholders owning five percent or more of
our total equity value, i.e., the total market value of our equity interests (whether common or preferred), as determined on any
applicable testing date. We would be adversely affected by an additional “ownership change” if at the time of such change, our
total equity value multiplied by the federal applicable long-term tax exempt rate which at December 31, 2009 was 4.16%, was
less than $32.6 million. As of December 31, 2009, since our total equity value multiplied by the federal applicable long-term tax
exempt rate was approximately $39.3 million an “ownership change” as of that date would have no adverse effect.
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There is a thin trading market for our common stock.
Trading activity in our stock, which is listed on the NASDAQ National Market, has generally been light, averaging
approximately 53,000 shares per day for the year ended December 31, 2009. Moreover, over 50% of our common stock is
effectively held by MHR and several other stockholders. If any of our significant stockholders should sell some or all of their
holdings, it will likely have an adverse effect on our share price. Although the funds affiliated with MHR have restrictions on
their ability to sell our shares under U.S. securities laws, we have filed a shelf registration statement in respect of the common
stock and non-voting common stock they hold in Loral that eliminates such restrictions. Such funds also have other demand and
piggyback registration rights in respect of their Loral common stock and non-voting common stock that would also, if exercised,
eliminate such restrictions.
The market for our stock could be adversely affected by future issuance of significant amounts of our common stock.
As of December 31, 2009, 20,390,752 shares of our voting common stock and 9,505,673 shares of our non-voting common
stock were outstanding. On that date, there were outstanding options to purchase 1,786,077 shares of our common stock, of
which 1,692,327 were vested and exercisable and of which 93,750 will become vested and exercisable over the next three years.
There were also 223,250 non-vested restricted stock units outstanding as of December 31, 2009. These restricted stock units,
which may be settled either in cash or Loral stock at the Company’s option, vest over the next 2.5 years. As of December 31,
2009, 572,373 shares of our common stock were available for future grants under our stock incentive plan. The number of shares
available for grant would be reduced if SS/L phantom stock appreciation rights are settled in Loral common stock. Moreover, we
may further amend our stock incentive plan in the future to provide for additional increases in the number of shares available for
grant thereunder.
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.
Litigation and Disputes
We are involved in a number of ongoing lawsuits.
We are involved in a number of lawsuits, details of which can be found in Note 14 to the Loral consolidated financial
statements. In addition, we are involved in a number of disputes which might result in litigation. A decision against us in any of
these lawsuits or disputes could have a material adverse affect on our financial condition and our results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Corporate
We lease approximately 16,000 square feet of space for our corporate offices in New York.
Satellite Manufacturing
SS/L’s research, production and testing are conducted in SS/L-owned facilities covering approximately 564,000 square feet
on 28 acres in Palo Alto, California. In addition, SS/L leases approximately 596,000 square feet of space on 38 acres from
various third parties primarily in Palo Alto, Menlo Park and Mountain View, California. Management believes that the facilities
for satellite manufacturing are sufficient for current operations.
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Satellite Services
Telesat’s primary satellite control center is located at its headquarters building in Ottawa, Ontario which consists of
approximately 212,000 rentable square feet on 10 acres. The headquarters building is co-owned by Telesat and a pension fund,
each having a fifty percent interest as tenants-in-common. Telesat has an area in the headquarters building of approximately
112,000 rentable square feet pursuant to a lease which provides for a fifteen year term (terminable by Telesat at anytime after ten
years upon two years notice), commencing February 1, 2009. The balance of the area in the headquarters building is occupied by
third parties.
The Allan Park earth station, located northeast of Toronto, Ontario on 65 acres of land, houses a customer support center
and a technical control center. This facility is also the back-up satellite control center and the main earth station complex. Allan
Park’s role in Telesat’s operations has expanded as a result of the closure and subsequent sale in 2008 of Loral Skynet’s satellite
control center in Hawley, Pennsylvania and the closure of its VSAT and Internet services management center in Rockville,
Maryland.
In addition to these facilities, Telesat leases approximately 110,000 square feet of office space for teleport facilities, satellite
control operations and for administrative and sales offices.
Item 3. Legal Proceedings
We discuss certain legal proceedings pending against the Company in the notes to the Loral consolidated financial
statements and refer you to that discussion for important information concerning those legal proceedings, including the basis for
such actions and relief sought. See Note 14 to the Loral consolidated financial statements for this discussion.
Item 4. (Removed and Reserved)
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Price and Dividend Information
Loral’s amended and restated certificate of incorporation provides that the total authorized capital stock of the Company is
eighty million (80,000,000) shares consisting of two classes: (i) seventy million (70,000,000) shares of common stock, $0.01 par
value per share (“Common Stock”), divided into two series, of which 50,000,000 shares are voting common stock (“Voting
Common Stock”) and 20,000,000 shares are non-voting common stock (“Non-Voting Common Stock”) and (ii) ten million
(10,000,000) shares of preferred stock, $0.01 par value per share. Each share of Voting Common Stock and each share of Non-
Voting Common Stock are identical and are treated equally in all respects, except that the Non-Voting Common Stock does not
have voting rights except as set forth in Article IV(a)(iv) of the amended and restated certificate of incorporation and as
otherwise provided by law. Article IV(a)(iv) of Loral’s amended and restated certificate of incorporation provides that Article IV
(a) of the amended and restated certificate of incorporation, which provides for, among other things, the equal treatment of the
Non-Voting Common Stock with the Voting Common Stock, may not be amended, altered or repealed without the affirmative
vote of holders of a majority of the outstanding shares of the Non-Voting Common Stock, voting as a separate class. Except as
otherwise provided in the amended and restated certificate of incorporation or bylaws of Loral, each holder of Loral Voting
Common Stock is entitled to one vote in respect of each share of Loral Voting Common Stock held of record on all matters
submitted to a vote of stockholders.
Holders of shares of Loral Common Stock are entitled to share equally, share for share in dividends when and as declared
by the Board of Directors out of funds legally available for such dividends. Upon a liquidation, dissolution or winding up of
Loral, the assets of Loral available to stockholders will be distributed equally per share to the holders of Loral Common Stock.
The holders of Loral Common Stock do not have any cumulative voting rights. Loral Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to Loral Common
Stock. All outstanding shares of Loral Common Stock are fully paid and non-assessable.
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Our Voting Common Stock trades on the NASDAQ National Market under the ticker symbol “LORL.” The table below
sets forth the high and low sales prices of Loral Voting Common Stock as reported on the NASDAQ National Market from
January 1, 2008 through December 31, 2009.
Year ended December 31, 2009
Quarter ended December 31, 2009
Quarter ended September 30, 2009
Quarter ended June 30, 2009
Quarter ended March 31, 2009
Year ended December 31, 2008
Quarter ended December 31, 2008
Quarter ended September 30, 2008
Quarter ended June 30, 2008
Quarter ended March 31, 2008
High
Low
$
$
$
$
34.89
29.06
34.83
22.90
15.86
18.81
25.42
34.20
24.74
19.27
19.75
8.90
6.04
13.29
15.02
21.78
There is no established trading market for the Company’s Non-Voting Common Stock. See Note 10 to the Loral
consolidated financial statements for a discussion of the preferred stock sold by Loral in February 2007.
(b) Approximate Number of Holders of Common Stock
At March 1, 2010, there were 501 holders of record of our voting common stock and five holders of record of our non-
voting common stock.
(c) Dividends
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, Loral has not paid any dividends on its
common stock.
(d) Securities Authorized for Issuance under Equity Compensation Plans
See Note 10 to the Loral consolidated financial statements for information regarding the Company’s stock compensation
plan. Compensation information required by Item 11 will be presented in the Company’s 2010 definitive proxy statement which
is incorporated herein by reference.
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(e) Comparison of Cumulative Total Returns
Set forth below is a graph comparing the cumulative performance of our common stock with the NASDAQ Composite
Index, and the NASDAQ Telecommunications Index from November 21, 2005, the initial issue date of our common stock upon
emergence from bankruptcy, to December 31, 2009. The graph assumes that $100 was invested on November 21, 2005 in each
of our common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index and that all dividends were
reinvested. The NASDAQ Telecommunications Index is a capitalization weighted index designed to measure the performance of
all NASDAQ-traded stocks in the telecommunications sector, including satellite technology companies.
Item 6. Selected Financial Data
The following table sets forth our selected historical financial and operating data for the years ended December 31, 2009,
2008, 2007 and 2006, the period October 2, 2005 to December 31, 2005 and the period January 1, 2005 to October 1, 2005.
Loral was formed on June 24, 2005, to succeed to the business conducted by its predecessor registrant, Old Loral, which
emerged from chapter 11 of the federal bankruptcy laws on the Effective Date pursuant to the Plan of Reorganization. We
adopted fresh-start accounting as of October 1, 2005.
The terms “Loral,” the “Company,” “we,” “our” and “us” when used with respect to the period prior to the Effective Date,
are references to Old Loral, and when used with respect to the period commencing on and after the Effective Date, are references
to Loral. These references include the subsidiaries of Old Loral or Loral, as the case may be, unless otherwise indicated or the
context otherwise requires. The term “Parent Company” is a reference to Loral Space & Communications Inc., excluding its
subsidiaries.
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Upon emergence, our reorganization enterprise value as determined by the bankruptcy court was approximately
$970 million, which after reduction for the fair value of Loral Skynet’s 14% senior secured notes and the Loral Skynet preferred
stock, resulted in a reorganization equity value of approximately $642 million. This reorganization equity value was allocated to
our assets and liabilities, which were stated at fair value. In addition, our accumulated deficit was eliminated, and our new debt
and equity were recorded in accordance with distributions pursuant to the Plan of Reorganization. Our consolidated financial
statements as of October 1, 2005 and for dates subsequent are not comparable in certain material respects to the historical
consolidated financial statements for periods prior to that date.
References to the Predecessor Registrant refer to the period prior to October 2, 2005. References to the Successor
Registrant refer to the period on and after October 2, 2005, after giving effect to the adoption of fresh-start accounting.
In connection with the Telesat transaction, Loral, on October 31, 2007, transferred substantially all of the assets and related
liabilities of Loral Skynet to Telesat. Therefore, Loral Skynet has been excluded from the selected financial data subsequent to
October 31, 2007.
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.
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LORAL SPACE & COMMUNICATIONS INC.
(In thousands, except per share data)
Successor Registrant
Year Ended December 31,
2009
2008
2007
2006
For the Period
October 2,
2005 to
December 31,
2005
Predecessor Registrant
For the Period
January 1,
2005 to
October 1,
2005
Statement of operations data:
Revenues:
Satellite Manufacturing
Satellite Services
Total Revenues
$ 993,400 $ 869,398 $ 761,363 $ 636,632 $
— 121,091 160,701
993,400 869,398 882,454 797,333
—
161,069 $
36,096
197,165
Operating income (loss) from continuing
operations (1)
20,211 (193,977 ) 45,256 29,818
(4,945 )
318,587
110,596
429,183
(67,095 )
Gain on discharge of pre-petition
obligations and fresh-start
adjustments (2)
Income (loss) from continuing
—
—
—
—
—
1,101,453
operations before income taxes and
equity in net income (losses) of
affiliates (3)(4)
Income tax (provision) benefit
Income (loss) from continuing
operations before equity in net
income (losses) of affiliates
Equity in net income (losses) of
affiliates (5)
Income (loss) from continuing
operations
Gain on sale of discontinued operations,
net of taxes (6)
Net income (loss)
Net (income) loss attributable to
noncontrolling interest
Net income (loss) attributable to Loral
Space & Communications Inc.
Preferred dividends
Beneficial conversion feature related to
the issuance of Loral Series A-1
Preferred Stock (7)
Net income (loss) applicable to Loral
Space & Communications Inc.
common shareholders
Basic earnings (loss) per share:
Continuing operations
Discontinued operations
Earnings (loss) per share
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Earnings (loss) per share
Cash flow data:
Provided by (used in) operating
26,975 (151,523 ) 157,786 30,117
(5,571 ) (45,744 ) (83,457 ) (20,880 )
(5,395 )
(1,752 )
1,022,651
10,901
21,404 (197,267 ) 74,329
9,237
(7,147 )
1,033,552
210,298 (495,649 ) (21,430 )
(7,163 )
(5,447 )
(2,796 )
231,702 (692,916 ) 52,899
2,074
(12,594 )
1,030,756
—
—
231,702 (692,916 ) 52,899
—
—
2,074
—
(12,594 )
13,967
1,044,723
—
— (23,240 ) (24,794 )
(2,667 )
126
231,702 (692,916 ) 29,659 (22,720 )
—
— (24,067 ) (19,379 )
(15,261 )
—
1,044,849
—
—
— (25,685 )
—
—
—
231,702 (716,983 ) (15,405 ) (22,720 )
(15,261 )
1,044,849
$
$
$
$
7.79 $
—
7.79 $
(35.13 ) $
—
(35.13 ) $
(0.77 ) $
—
(0.77 ) $
(1.14 ) $
—
(1.14 ) $
7.73 $
—
7.73 $
(35.13 ) $
—
(35.13 ) $
(0.77 ) $
—
(0.77 ) $
(1.14 ) $
—
(1.14 ) $
(0.76 ) $
—
(0.76 ) $
(0.76 ) $
—
(0.76 ) $
23.37
0.32
23.69
23.37
0.32
23.69
activities
154,562 (202,210 ) 27,123 88,002
(38,531 )
(143,827 )
(Used in) provided by investing
activities (8)
(Used in) provided by financing
activities
(48,750 ) (47,308 ) 61,519 (175,978 )
(5,089 )
194,707
(55,155 ) 52,372 39,510
(1,278 )
120,763
—
30
Table of Contents
Balance sheet data:
Cash and cash equivalents
Short-term investments
Total assets
Debt, including current portion
Non-current liabilities
Equity
Loral Space & Communications
Inc. shareholders’ equity
Noncontrolling interest
Total equity
2009
2008
Successor Registrant
December 31,
2007
2006
2005
$
$
168,205
—
1,253,452
—
380,143
117,548
—
995,867
55,000
381,836
$
314,694
—
1,702,939
—
289,602
$
186,542
106,588
1,729,911
128,084
321,015
$
275,796
—
1,678,977
128,191
403,374
$
$
431,991
—
431,991
$
$
209,657
—
209,657
$
$
973,558
—
973,558
$
$
647,002
214,256
861,258
$
$
627,164
200,000
827,164
(1)
(2)
(3)
(4)
(5)
(6)
(7)
During 2008, we recorded a goodwill impairment charge of $187.9 million. In connection with the Telesat transaction,
which closed on October 31, 2007, we recognized a gain of $104.9 million in 2007 on the contribution of substantially all
of the assets and related liabilities of Loral Skynet to Telesat. See Note 6 to the Loral consolidated financial statements.
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.
In connection with the Telesat transaction during 2007, we recognized a gain on foreign exchange contracts of
$89.4 million (see Note 13 to the Loral consolidated financial statements).
During 2008, we recorded income of $58.3 million related to a gain on litigation recovery from Rainbow DBS and a loss of
$19.5 million related to the award of attorneys’ fees and expenses to the plaintiffs for shareholder litigation concluded
during 2008.
Beginning October 31, 2007, our principal affiliate is Telesat. Loral also has investments in XTAR and joint ventures
providing Globalstar service, which are accounted for under the equity method. On December 21, 2007 Loral agreed to sell
its interest in Globalstar do Brasil S.A. which resulted in Loral recording a charge of $11.3 million in 2007 (see Note 6 to
the Loral consolidated financial statements).
During the period January 1, 2005 to October 1, 2005, we recorded a gain from the sale on March 17, 2004 of our North
American satellites and related assets.
As of December 23, 2008, in accordance with a court ordered restated certificate of incorporation, the previously issued
Loral Series-1 Preferred stock was cancelled. As the fair value of Loral’s common stock from January 1 to December 23,
2008 was less than the conversion price ($30.1504), we did not record any beneficial conversion feature during 2008 (see
Note 10 to the Loral consolidated financial statements).
(8)
Cash flow (used in) provided by investing activities includes cash flow provided by (used in) investing activities of
discontinued operations for the period January 1, 2005 to October 1, 2005.
31
Table of Contents
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., a Delaware corporation, together with its subsidiaries is a leading satellite
in satellite-based
in satellite manufacturing and
investments
communications company with substantial activities
communications services.
On October 31, 2007, Loral and its Canadian Partner, Public Sector Pension Investment Board (“PSP”), through Telesat
Holdings, Inc. (“Telesat Holdco”), a newly-formed joint venture, completed the acquisition of Telesat Canada (“Telesat”) from
BCE Inc. (“BCE”). In connection with this acquisition, Loral transferred on that same date substantially all of the assets and
related liabilities of Loral Skynet Corporation (“Loral Skynet”) to Telesat. Loral holds a 64% economic interest and 33 1 / 3 %
voting interest in Telesat Holdco. Loral accounts for this investment using the equity method of accounting.
We refer to the acquisition of Telesat and the related transfer of Loral Skynet to Telesat as the Telesat transaction.
References to Telesat with respect to periods prior to the closing of this transaction are references to the subsidiary of BCE and
with respect to the period after the closing of this transaction are references to Telesat Holdco and/or its subsidiaries as
appropriate. Similarly, unless otherwise indicated, references to Loral Skynet with respect to periods prior to the closing of this
transaction are references to the operations of Loral’s satellite services segment conducted through Loral Skynet and with respect
to the period commencing on and after the closing of this transaction are, if related to the fixed satellite services business,
references to the Loral Skynet operations within Telesat.
Disclosure Regarding Forward-Looking Statements
Except for the historical information contained in the following discussion and analysis, the matters discussed below are
not historical facts, but are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act
of 1995. In addition, we or our representatives have made and may continue to make forward-looking statements, orally or in
writing, in other contexts. These forward-looking statements can be identified by the use of words such as “believes,” “expects,”
“plans,” “may,” “will,” “would,” “could,” “should,” “anticipates,” “estimates,” “project,” “intend,” or “outlook” or other
variations of these words. These statements, including without limitation those relating to Telesat, 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 has two segments, satellite manufacturing and satellite services. Loral participates in satellite services operations
principally through its investment in Telesat.
Satellite Manufacturing
Space Systems/Loral, Inc. (“SS/L”) designs and manufactures satellites, space systems and space system components for
commercial and government customers whose applications include fixed satellite services (“FSS”), direct-to-home (“DTH”)
broadcasting, mobile satellite services (“MSS”), broadband data distribution, wireless telephony, digital radio, digital mobile
broadcasting, military communications, weather monitoring and air traffic management.
Satellite manufacturers have high fixed costs relating primarily to labor and overhead. Based on its current cost structure,
we estimate that SS/L covers its fixed costs, including depreciation and amortization, with an average of four to five satellite
awards a year depending on the size, power, pricing and complexity of the satellite. Cash flow in the satellite manufacturing
business tends to be uneven. It takes two to three years to complete a satellite project and numerous assumptions are built into
the estimated costs. SS/L’s cash receipts are tied to the achievement of contract milestones that depend in part on the ability of its
subcontractors to deliver on time. In addition, the timing of satellite awards is difficult to predict, contributing to the unevenness
of revenue and making it more challenging to align the workforce to the workflow.
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Table of Contents
While its requirement for ongoing capital investment to maintain its current capacity is relatively low, over the past several
years SS/L has modified and expanded its manufacturing facilities to accommodate an expanded backlog. SS/L can now
accommodate as many as nine to 13 satellite awards per year, depending on the complexity and timing of the specific satellites,
and can accommodate the integration and test of 13 to 14 satellites at any given time in its Palo Alto facility. The expansion has
also reduced the company’s reliance on outside suppliers for certain RF components and sub-assemblies.
The satellite manufacturing industry is a knowledge-intensive business, the success of which relies heavily on its
technological heritage and the skills of its workforce. The breadth and depth of talent and experience resident in SS/L’s
workforce of approximately 2,550 personnel is one of our key competitive resources.
Satellites are extraordinarily complex devices designed to operate in the very hostile environment of space. This complexity
may lead to unanticipated costs during the design, manufacture and testing of a satellite. SS/L establishes provisions for costs
based on historical experience and program complexity to cover anticipated costs. As most of SS/L’s contracts are fixed price,
cost increases in excess of these provisions reduce profitability and may result in losses to SS/L, which may be material. Because
the satellite manufacturing industry is highly competitive, buyers have the advantage over suppliers in negotiating prices, terms
and conditions resulting in reduced margins and increased assumptions of risk by manufacturers such as SS/L.
Satellite Services
The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and
investment. Once these investments are made, however, the costs to maintain and operate the fleet are relatively low with the
exception of in-orbit insurance. Upfront investments are earned back through the leasing of transponders to customers over the
life of the satellite. After approximately 40 years of operation, Telesat has established collaborative relationships with its
customers so revenue from the satellite services business is fairly predictable with long term contracts and high contract renewal
rates.
Competition in the satellite services market has been intense in recent years due to a number of factors, including
transponder over-capacity in certain geographic regions and increased competition from terrestrial-based communications
networks.
At December 31, 2009, Telesat had 12 in-orbit satellites. These 12 satellites had an average of approximately 58% of
service life remaining, with an average service life remaining of approximately 8.4 years. Telesat currently has two satellites
under construction, both by SS/L: Telstar 14R/Estrela do Sul 2, which Telesat anticipates will be launched in mid-2011, and
Nimiq 6 for which Telesat recently started construction and anticipates a launch date in mid-2012.
Until the closing of the Telesat transaction on October 30, 2007, Loral Skynet operated a global fixed satellite services
business. As part of this business, Loral Skynet leased transponder capacity to commercial and government customers for video
distribution and broadcasting, high-speed data distribution, Internet access and communications, and also provided managed
network services to customers using a hybrid satellite and ground-based system. It also provided professional services to other
satellite operators such as fleet operating services.
Future Outlook
Satellite Manufacturing
Critical success factors for SS/L include maintaining its reputation for reliability, quality and superior customer service.
These factors are vital to securing new customers and retaining current ones. At the same time, we must continue to contain costs
and maximize efficiencies. SS/L is focused on increasing bookings and backlog, while maintaining the cost efficiencies and
process improvements realized over the past several years. SS/L must continue to align its direct labor workforce with the level
of awards. Additionally, long-term growth at SS/L generates working capital requirements, primarily for the orbital component
of the satellite contract which is payable to SS/L over the life of the satellite.
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Table of Contents
SS/L booked seven satellite awards for 2009 in addition to the seven satellites booked in 2008. While we expect the
replacement market to be reliable over the next year, given the current condition of the credit markets, potential customers that
are highly leveraged or in the development stage may not be able to obtain the financing necessary to purchase satellites. If
SS/L’s satellite awards fall below, on average, four to five awards per year, we expect that we will reduce costs to accommodate
this lower level of business. The timing of any reduced demand for satellites is difficult to predict. It is therefore also difficult to
anticipate when to reduce costs to match any slowdown in business, especially when SS/L has significant backlog business to
perform. A delay in matching the timing of a reduction in business with a reduction in expenditures would adversely affect our
results of operations and liquidity. In addition, in order to maintain its ability to compete as one of the leading prime contractors
for technologically advanced space satellites, SS/L must continuously retain the services of a core group of specialists in a wide
variety of disciplines for each phase of the design, development, manufacture and testing of its products, thus reducing SS/L’s
flexibility to take action to reduce workforce costs in the event of a slowdown or downturn in its business.
Satellite Services
Loral holds a 64% economic interest and a 33 1 / 3 % voting interest in Telesat, the world’s fourth largest satellite operator
with approximately $5.2 billion of backlog as of December 31, 2009.
Telesat is committed to continuing to provide the strong customer service and focus on innovation and technical expertise
that has allowed it to successfully build its business to date. Building on backlog and significant contracted growth, Telesat’s
focus is on taking disciplined steps to grow the core business and sell newly launched and existing in-orbit satellite capacity, and,
in a disciplined manner, use the cash flow generated by existing business, contracted expansion satellites and cost savings to
strengthen the business.
Telesat believes its existing satellite fleet supports a strong combination of existing backlog and revenue growth. The
growth is expected to come from the Nimiq 5 satellite, which entered commercial service in October 2009, Telstar 14R, to be
launched in mid-2011, and the Nimiq 6 satellite, which is expected to be launched in mid-2012, as well as the utilization of
additional capacity on the existing satellites. Telesat believes this fleet of satellites provides a solid foundation upon which it will
seek to grow its revenues and cash flows.
Telesat believes that it is well-positioned to serve its customers and the markets in which it participates. Telesat actively
pursues opportunities to develop new satellites, particularly in conjunction with current or prospective customers, who will
commit to a substantial amount of capacity at the time the satellite construction contract is signed. Although Telesat regularly
pursues opportunities to develop new satellites, it does not procure additional or replacement satellites unless it believes there is a
demonstrated need and a sound business plan for such capacity.
The satellite industry is characterized by a relatively fixed cost base that allows significant revenue growth with relatively
minimal increases in operating costs, particularly for sales of satellite capacity. Thus, Telesat anticipates that it can increase its
revenue without proportional increases in operating expenses, allowing for margin expansion. The fixed cost nature of the
business, combined with contracted revenue growth and other growth opportunities, is expected to produce growth in operating
income and cash flow.
For 2010, Telesat continues to focus on the execution of its business plan to serve its customers and the market in which it
participates, the sale of capacity on its existing satellites and the continuing efforts to achieve operating efficiencies. Telesat will
also continue to pursue the expansion of its fleet with the on-going construction of Nimiq 6 as well as the replacement of Telstar
14.
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions
are made in currencies other than Canadian dollars. Approximately 45% of Telesat’s revenues received in Canada for the year
ended December 31, 2009, certain of its expenses and a substantial portion of its indebtedness and capital expenditures were
denominated in U.S. dollars. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated
debt financing. A five percent change in the value of the Canadian dollar against the U.S. dollar at December 31, 2009 would
have increased or decreased Telesat’s net income for the year ended December 31, 2009 by approximately $139 million. During
the period from October 31, 2007 to December 31, 2009, Telesat’s U.S. Term Loan Facility, Senior Notes and Senior
Subordinated Notes have increased by approximately $266 million due to the stronger U.S. dollar. However during that same
time period, the liability created by the fair value of the currency basis swap, which synthetically converts $1.054 billion of the
U.S. Term Loan Facility debt into CAD 1.224 billion of debt, decreased by approximately $171 million.
In connection with the introduction of its budget for 2010, the government of Canada is proposing to remove the existing
restrictions on foreign ownership of Canadian satellites. Telesat has indicated its support for the government’s decision and
believes that removing such restrictions could result in Telesat being a more effective global competitor and being able to invest
in new and advanced technologies for the benefit of all Canadians. Legislation to implement the government’s proposal has not
yet been introduced, and, if introduced, there is no assurance as to exactly what changes will be proposed, whether in fact such
legislation will be adopted and, if adopted, how current regulations governing the foreign ownership and control of satellites may
be changed.
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General
We regularly explore and evaluate possible strategic transactions and alliances. We also periodically engage in discussions
with satellite service providers, satellite manufacturers and others regarding such matters, which may include joint ventures and
strategic relationships as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of
these opportunities, we will require additional funds. There can be no assurance that we will enter into additional strategic
transactions or alliances, nor do we know if we will be able to obtain the necessary financing for these transactions on favorable
terms, if at all.
We are investing in the Canadian coverage portion of the ViaSat-1 satellite which is being constructed by SS/L. On
December 31, 2009, we entered into an agreement to lease a portion of the Canadian coverage portion of the satellite and provide
gateway services to an internet broadband service provider for between CAD 133 million and CAD 262 million over the 15-year
life of the satellite. Loral expects to have invested approximately $70 million, excluding customer prepayments of between CAD
2.5 million and CAD 13.0 million, by the time service is initiated. Approximately $30 million has been invested through
December 31, 2009, with the remaining $40 million to be invested in 2010 and 2011.
In connection with the Telesat transaction, Loral has agreed that, subject to certain exceptions described in Telesat’s
shareholders agreement, for so long as Loral has an interest in Telesat, it will not compete in the business of leasing, selling or
otherwise furnishing fixed satellite service, broadcast satellite service or audio and video broadcast direct to home service using
transponder capacity in the C-band, Ku-band and Ka-band (including in each case extended band) frequencies and the business
of providing end-to-end data solutions on networks comprised of earth terminals, space segment, and, where appropriate,
networking hubs.
Consolidated Operating Results
Please refer to Critical Accounting Matters set forth below in this section.
The following discussion of revenues and Adjusted EBITDA (see Note 15 to the financial statements) reflects the results of
our business segments for 2009, 2008 and 2007. The balance of the discussion relates to our consolidated results unless
otherwise noted.
The common definition of EBITDA is “Earnings Before Interest, Taxes, Depreciation and Amortization.” In evaluating
financial performance, we use revenues and operating income (loss) before depreciation, amortization and stock-based
compensation (including stock-based compensation from SS/L phantom stock appreciation rights expected to be settled in Loral
common stock) (“Adjusted EBITDA”) as the measure of a segment’s profit or loss. Adjusted EBITDA is equivalent to the
common definition of EBITDA before: goodwill and other impairment charges; gain (loss) on foreign exchange contracts; gains
or losses on litigation not related to our operations; impairment of available for sale securities; loss on extinguishment of debt;
other income (expense); and equity in net income (losses) of affiliates.
Adjusted EBITDA allows us and investors to compare our operating results with that of competitors exclusive of
depreciation and amortization, interest and investment income, interest expense, goodwill and other impairment charges, gains or
(losses) on foreign exchange contracts, gains or losses on litigation not related to our operations, impairments of available for
sale securities, other income (expense) and equity in net income (losses) of affiliates. Financial results of competitors in our
industry have significant variations that can result from timing of capital expenditures, the amount of intangible assets recorded,
the differences in assets’ lives, the timing and amount of investments, the effects of other income (expense), which are typically
for non-recurring transactions not related to the on-going business, and effects of investments not directly managed. The use of
Adjusted EBITDA allows us and investors to compare operating results exclusive of these items. Competitors in our industry
have significantly different capital structures. The use of Adjusted EBITDA maintains comparability of performance by
excluding interest expense.
We believe the use of Adjusted EBITDA along with U.S. GAAP financial measures enhances the understanding of our
operating results and is useful to us and investors in comparing performance with competitors, estimating enterprise value and
making investment decisions. Adjusted EBITDA as used here may not be comparable to similarly titled measures reported by
competitors. We also use Adjusted EBITDA to evaluate operating performance of our segments, to allocate resources and capital
to such segments, to measure performance for incentive compensation programs and to evaluate future growth opportunities.
Adjusted EBITDA should be used in conjunction with U.S. GAAP financial measures and is not presented as an alternative to
cash flow from operations as a measure of our liquidity or as an alternative to net income as an indicator of our operating
performance.
35
Table of Contents
Loral has two segments: Satellite Manufacturing and Satellite Services. Our segment reporting data includes unconsolidated
affiliates that meet the reportable segment criteria. The satellite services segment includes 100% of the results reported by
Telesat for the years ended December 31, 2009 and 2008 and for the period from October 31, 2007 to December 31, 2007.
Although we analyze Telesat’s revenue and expenses under the satellite services segment, we eliminate its results in our
consolidated financial statements, where we report our 64% share of Telesat’s results under the equity method of accounting.
The following reconciles Revenues and Adjusted EBITDA on a segment basis to the information as reported in our
financial statements (in millions):
Revenues:
Satellite Manufacturing
Satellite Services
Segment revenues
Eliminations (1)
Affiliate eliminations (2)
Revenues as reported (3)
$
$
2009
Year Ended December 31,
2008
(In millions)
$
$
1,008.7
691.6
1,700.3
(15.3 )
(691.6 )
993.4
881.4
685.2
1,566.6
(12.0 )
(685.2 )
869.4
$
$
2007
814.3
241.2
1,055.5
(55.2 )
(117.8 )
882.5
See explanations below for Notes 1, 2 and 3.
Satellite Manufacturing segment revenue increased $127 million for 2009 compared to 2008, primarily as a result of an
increase in the number, size and complexity of satellites ordered. Revenue in 2009 was primarily driven by $3.22 billion of
orders placed for 18 satellites in 2007, 2008 and 2009. Revenue in 2008 was primarily driven by $2.96 billion of orders placed
for 17 satellites in 2006, 2007 and 2008. Satellite Services segment revenue increased by $6 million in 2009 from 2008 primarily
due to the launches of Nimiq 4 which began service in late 2008, Telstar 11N which began service in early 2009 and Nimiq 5
which began service in late 2009, substantially offset by the U.S. dollar/Canadian dollar exchange rate changes on Canadian
dollar denominated revenues, the cancellation of Telesat’s lease on Telstar 10 in July 2009, the removal from service of Nimiq 4i
and Nimiq 3 in the first half of 2009 and the scheduled turndown of certain transponders on Nimiq 2. Satellite Services segment
revenue would have increased by approximately $54 million for the year ended December 31, 2009 as compared with the year
ended December 31, 2008 if the U.S. dollar/Canadian dollar exchange rate had remained unchanged between the two periods.
Satellite Manufacturing segment revenue increased $67 million for 2008 compared to 2007, primarily as a result of an
increase in the number of satellites ordered. Revenue in 2008 was primarily driven by $2.96 billion of orders placed for 17
satellites in 2006, 2007 and 2008. Revenue in 2007 was primarily driven by $2.54 billion of orders placed for 14 satellites in
2005, 2006 and 2007. Satellite Services segment revenue increased by $444 million in 2008 from 2007 primarily due to the
inclusion of Telesat’s revenue for the full year in 2008 compared to the period October 31, 2007 to December 31, 2007.
Adjusted EBITDA:
Satellite Manufacturing
Satellite Services
Corporate expenses
Segment Adjusted EBITDA before eliminations
Eliminations (1)
Affiliate eliminations (2)
Adjusted EBITDA
$
$
36
2009
Year Ended December 31,
2008
(In millions)
$
$
90.6
488.1
(21.4 )
557.3
(1.7 )
(488.1 )
67.5
45.1
436.5
(14.9 )
466.7
(1.6 )
(427.2 )
37.9
$
$
2007
34.5
118.4
(37.9 )
115.0
(6.1 )
(65.3 )
43.6
Table of Contents
See explanations below for Notes 1 and 2.
Satellite Manufacturing segment Adjusted EBITDA increased $46 million for the year ended December 31, 2009 compared
with the year ended December 31, 2008 primarily due to an improvement in margins of $46 million resulting primarily from
scope increases and improved performance on certain satellite construction contracts and higher sales volume, a reduction in
research and development expense of $12 million as a result of completion of a significant project that was being performed in
2008, a decrease of $4 million in losses on foreign exchange forward contracts and a $3 million reduction in new business
acquisition costs, partially offset by a $12 million increase in pension costs, a $2 million increase in deferred compensation
expense and a $2 million increase in the allowance for billed receivables. Satellite Services segment Adjusted EBITDA increased
by $52 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008 primarily due to the
revenue increase described above, expense reductions in 2009 and the impact of U.S. dollar/Canadian dollar exchange rate
changes on Canadian dollar denominated expenses, partially offset by a $9 million gain on recovery from a customer bankruptcy
recorded in 2008. Satellite Services segment Adjusted EBITDA would have increased by approximately $85 million for the year
ended December 31, 2009 as compared with the year ended December 31, 2008 if the U.S. dollar / Canadian dollar exchange
rate had been unchanged between the two periods. Corporate expenses increased by $6 million for the year ended December 31,
2009 as compared to the year ended December 31, 2008, primarily due to a $7 million increase in charges accrued for deferred
compensation arrangements entered into in 2005 resulting from an increase in the fair value of our common stock and a
$2 million increase in pension and other benefits costs, partially offset by a $3 million decrease in litigation and other
professional services expenses.
Satellite Manufacturing segment Adjusted EBITDA increased $11 million in 2008 from 2007 primarily as a result of
improved margins of $20 million on higher sales volume in 2008, partially offset by $6 million of increased warranty expenses
resulting from five launches in 2008 and a $3 million loss on foreign exchange forward contracts in 2008. Satellite Services
segment Adjusted EBITDA increased by $318 million in 2008 from 2007 primarily due to the inclusion of Telesat’s operating
results for the full year in 2008 as compared to the period October 31, 2007 to December 31, 2007 and a gain of $9 million
related to distributions from a bankruptcy claim against a former customer of Loral Skynet. Corporate expenses decreased
$23 million in 2008 from 2007 primarily due to reductions of $7 million for deferred compensation due to the decline in the
market price of our common stock, $6 million of legal costs resulting from the conclusion of certain shareholder and noteholder
lawsuits, $6 million of severance costs recorded in 2007 due to staff reductions and $5 million of lower compensation costs
resulting from staff reductions. Increased management fees earned by Corporate for consulting services provided to affiliates
(see Note 16 to the financial statements) were offset by decreased cost allocations to the Satellite Manufacturing and Satellite
Services segments.
Reconciliation of Adjusted EBITDA to Net Income (Loss):
Adjusted EBITDA
Depreciation, amortization and stock-based compensation (4)
Impairment of goodwill (5)
Gain on contribution of Loral Skynet (6)
Operating income (loss)
Interest and investment income
Interest expense (7)
Gain on foreign exchange contracts
Gain on litigation, net
Impairment of available for sale securities
Loss on extinguishment of debt
Other (expense) income
Income tax provision
Equity in net income (losses) of affiliates
Net income (loss)
$
$
67.5
(47.3 )
—
—
20.2
8.3
(1.4 )
—
—
—
—
(0.1 )
(5.6 )
210.3
231.7
2009
Year Ended December 31,
2008
(In millions)
$
$
2007
43.6
(103.3 )
—
104.9
45.2
39.3
(2.3 )
89.4
—
—
(16.2 )
2.4
(83.5 )
(21.4 )
52.9
37.9
(44.0 )
(187.9 )
—
(194.0 )
11.9
(2.3 )
—
38.8
(5.8 )
—
(0.1 )
(45.7 )
(495.7 )
(692.9 )
$
$
(1)
Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under
construction by SS/L for Loral and its wholly owned subsidiaries and for Satellite Services leasing transponder capacity to
SS/L.
(2)
Represents the elimination of amounts attributed to Telesat whose results are reported in our consolidated statements of
operations as equity in net income (losses) of affiliates.
37
Table of Contents
(3)
(4)
(5)
(6)
(7)
Includes revenues from affiliates of $92.1 million, $84.0 million and $22.0 million for the years ended December 31, 2009,
2008 and 2007, respectively.
Includes non-cash stock-based compensation of $7.5 million, $7.6 million and $26.3 million for the years ended
December 31, 2009, 2008 and 2007, respectively (see Note 10 to the financial statements).
During the fourth quarter of 2008, we determined that the implied fair value of SS/L goodwill had dropped below its
carrying value, and we recorded this impairment charge.
In connection with the Telesat transaction, which closed on October 31, 2007, we recognized a gain on the contribution of
substantially all of the assets and related liabilities of Loral Skynet to Telesat (see Note 6 to the financial statements).
Interest expense for the year ended December 31, 2007 includes a reduction of $9 million resulting from the reduction of
warranty liability.
2009 Compared with 2008 and 2008 Compared with 2007
The following compares our consolidated results for 2009, 2008 and 2007 as presented in our financial statements:
Revenue from Satellite Manufacturing
Year Ended
December 31,
2008
2009
1,008
(15 )
$
881
(12 )
2007
(In millions)
814
$
(53 )
993
$
869
$
761
% Increase
(Decrease)
2009
vs.
2008
2008
vs.
2007
14 %
25 %
14 %
8 %
(77 )%
14 %
Revenue from Satellite Manufacturing
Eliminations
Revenue from Satellite Manufacturing
as reported
$
$
Revenue from Satellite Manufacturing before eliminations increased $127 million for 2009 compared to 2008, primarily as
a result of an increase in the number, size and complexity of satellites ordered. Revenue in 2009 was primarily driven by
$3.22 billion of orders placed for 18 satellites in 2007, 2008 and 2009. Revenue in 2008 was primarily driven by $2.96 billion of
orders placed for 17 satellites in 2006, 2007 and 2008. Eliminations for 2009 and 2008 consist primarily of revenue applicable to
Loral’s interest in a portion of the payload of the ViaSat-1 satellite which is being constructed by SS/L (see Note 16 to the
financial statements). As a result, revenue from Satellite Manufacturing as reported increased $124 million for 2009 as compared
to 2008.
Revenue from Satellite Manufacturing before eliminations increased $67 million for 2008 compared to 2007, primarily as a
result of an increase in the number of satellites ordered. Revenue in 2008 was primarily driven by $2.96 billion of orders placed
for 17 satellites in 2006, 2007 and 2008. Revenue in 2007 was primarily driven by $2.54 billion of orders placed for 14 satellites
in 2005, 2006 and 2007. Eliminations for 2008 consist primarily of revenue applicable to Loral’s interest in a portion of the
payload of the ViaSat-1 satellite which is being constructed by SS/L (see Note 16 to the financial statements). Eliminations for
2007 consisted primarily of revenue recorded until October 31, 2007 for the construction of Telstar 11N, a satellite then being
manufactured by SS/L for Loral Skynet. As a result, revenue from Satellite Manufacturing as reported increased $108 million for
2008 as compared to 2007.
Revenue from Satellite Services
Revenue from Satellite Services
Eliminations
Revenue from Satellite Services as reported
2009
$
$
38
Year Ended December 31,
2008
(In millions)
$
$
—
—
—
$
—
—
—
$
2007
123
(2 )
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There was no revenue from Satellite Services during 2009 and 2008 as a result of the contribution of substantially all of the
assets and related liabilities of Loral Skynet to Telesat on October 31, 2007.
Cost of Satellite Manufacturing
2009
Year Ended December 31,
2008
2007
(In millions)
% Increase
(Decrease)
2009
vs.
2008
2008
vs.
2007
Cost of Satellite Manufacturing
includes:
Cost of Satellite Manufacturing
before specific identified
charges
Depreciation, amortization and
stock-based compensation
Cost of Satellite Manufacturing
Cost of Satellite Manufacturing as
a % of Satellite Manufacturing
revenues as reported
$
836 $
749 $
653
44
39
$
880 $
788 $
36
689
12 %
13 %
12 %
15 %
8 %
14 %
89 %
91 %
91 %
Cost of Satellite Manufacturing as reported increased $92 million for the year ended December 31, 2009 as compared to the
year ended December 31, 2008. Cost of Satellite Manufacturing before specific identified charges shown above increased
$87 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. Margins improved by
$43 million primarily from scope increases, improved performance on certain satellite construction contracts and higher sales
volume, partially offsetting $114 million of increased costs from higher sales volume and a $12 million increase in pension costs.
Depreciation, amortization and stock-based compensation increased by $5 million for the year ended December 31, 2009 as
compared to the year ended December 31, 2008 primarily due to increases of $2 million in stock-based compensation, $2 million
in amortization of fair value adjustments and $1 million in depreciation.
Cost of Satellite Manufacturing as reported for 2008 increased by $99 million over 2007. Cost of Satellite Manufacturing
before specific charges increased by $96 million. This increase is primarily due to $67 million of increased costs resulting from
additional revenue during 2008, costs of $23 million for Telstar 11N which prior to the Telesat transaction were eliminated and a
$6 million increase in accrued warranty obligations. Depreciation, amortization and stock-based compensation expense increased
$3 million, primarily as a result of $1 million of compensation expense related to restricted stock units awarded in 2007 and
$2 million of depreciation due to increased capital expenditures related to facility expansion. Warranty expenses increased
$6 million as a result of five satellite launches in 2008.
Cost of Satellite Services
Cost of Satellite Services includes:
Cost of Satellite Services before specific identified charges
Depreciation and amortization
Cost of Satellite Services
Cost of Satellite Services as a% of Satellite Services revenues as
reported
2009
Year Ended
December 31,
2008
(In millions)
2007
$
$
—
—
—
$
$
—
—
—
$
$
42
44
86
71 %
There was no Cost of Satellite Services in 2009 and 2008 as a result of the contribution of substantially all of the assets and
related liabilities of Loral Skynet to Telesat on October 31, 2007.
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Table of Contents
Selling, General and Administrative Expenses
2009
Year Ended December 31,
2008
2007
(In millions)
% Increase
(Decrease)
2009
vs.
2008
2008
vs.
2007
Selling, general and administrative
expenses includes:
Selling, general and administrative
expenses before specific charges $
85 $
Litigation costs
Stock based compensation
Selling, general and administrative
expenses as reported
% of revenues as reported
3
5
93 $
9 %
87 $
5
5
97 $
11 %
133
11
23
167
19 %
(2 %)
(40 %)
—
(4 %)
(35 )%
(58 )%
(77 )%
(42 )%
Selling, general and administrative expenses as reported were $93 million and $97 million for the years ended
December 31, 2009 and 2008, respectively. Selling, general and administrative expenses before specific identified charges
decreased by $2 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. This was due
primarily to a reduction in research and development expenses of $12 million, a decrease of $3 million in new business
acquisition costs and a $1 million decrease in professional services expenses, partially offset by a $9 million increase in deferred
compensation expense, a $2 million increase in pension and other benefits costs and a $2 million increase in the allowance for
billed receivables. The deferred compensation expense increase in 2009 was due to an increase in the fair value of our common
stock during 2009.
Selling, general and administrative expenses as reported were $97 million and $167 million for the years ended
December 31, 2008 and 2007, respectively. Selling, general and administrative expenses before specific charges decreased by
$46 million in 2008 as compared to 2007, due primarily to a reduction of $28 million as a result of the contribution of Loral
Skynet to Telesat on October 31, 2007 and lower corporate expenses of $17 million including reductions of $7 million for
deferred compensation due to the decline in the market price of our common stock during 2008, $6 million of severance costs
recorded in 2007 due to staff reductions (see Note 14 to the financial statements) and $5 million due to reduced compensation
from the staff reductions. Litigation costs were $6 million lower in 2008 due to the conclusion of certain shareholder and
noteholder lawsuits. The stock-based compensation expense reduction of $18 million resulted primarily from the 2007 charges of
$6 million attributable to acceleration of options in connection with the Telesat transaction and $8 million from the approval of
stock option plan amendments at the stockholders meeting on May 22, 2007 (see Note 10 to the financial statements).
Gain on Recovery from Customer Bankruptcy
During 2008, we recorded a gain of $9 million related to distributions from a bankruptcy claim against a former customer of
Loral Skynet. The receivables underlying the claim had been previously written-off or not recognized due to the customer’s
bankruptcy.
Impairment of Goodwill
During 2008, we determined that the implied fair value of SS/L goodwill, which was established in connection with our
adoption of fresh-start accounting, had decreased below its carrying value. We recorded a charge to expense in the fourth quarter
of 2008 of $187.9 million to reflect this impairment.
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Table of Contents
Gain on Contribution of Loral Skynet to Telesat
Represents the gain in 2007 on the contribution of substantially all of the assets and related liabilities of Loral Skynet to
Telesat on October 31, 2007, in connection with the Telesat transaction, as follows (in millions):
Consideration received for the contribution of Loral Skynet to Telesat Holdco:
Cash and marketable securities
Fair value of equity in Telesat Holdco
Total consideration
Book value of contributed net assets of Loral Skynet
Consideration in excess of book value
Gain recognized
$
$
$
61.5
670.5
732.0
440.5
291.5
104.9
The consideration we received for the contribution of substantially all of Loral Skynet’s assets and liabilities was
$292 million greater than the carrying value of those assets and liabilities. We recognized a gain of $105 million, representing
the gain attributable to PSP’s economic interest in the contributed assets and liabilities of Loral Skynet through its 36%
ownership interest in Telesat. The gain attributable to Loral’s economic interest in the contributed assets and liabilities of Loral
Skynet through its 64% ownership in Telesat was not recognized, as Loral has a significant continuing interest in Telesat.
Interest and Investment Income
Interest and investment income
2009
$
8
Year Ended
December 31,
2008
(In millions)
$
12
2007
$
39
Interest and investment income decreased $4 million for the year ended December 31, 2009 as compared to the year ended
December 31, 2008. This decrease includes $5 million due primarily to reduced returns on investments. In addition, average
investment balances declined by $40 million in 2009 to $120 million. Other interest income increased by $1 million as a result of
a $2 million increase in interest and investment income from non-qualified pension plan assets and increased interest income of
$1 million from orbital incentives due to additional satellite launches, partially offset by a $2 million decrease from accelerated
amortization of fair value adjustments resulting from the early payment of orbital incentives in 2008.
Interest and investment income decreased $27 million for 2008 as compared to 2007. This decrease includes $12 million
due to a $230 million reduction in average investment balances to $160 million in 2008 from $390 million in 2007, as a result of
the closing of the Telesat transaction on October 31, 2007 and the significant use of cash during 2008, $11 million from the
decreased sales of Globalstar Inc. common stock in 2008 compared with 2007 and $4 million from reduced interest rates on
investments. As a result of the fall in interest rates and our move to safer investments during the financial crisis, our investment
returns decreased to approximately 3.00% in 2008 from approximately 5.25% in 2007.
Interest Expense
Interest cost before capitalized interest
Capitalized interest
Interest expense
2009
$
$
1
—
1
Year Ended
December 31,
2008
(In millions)
$
$
2007
$
$
12
(10 )
2
3
(1 )
2
Interest expense for the year ended December 31, 2009 is associated with commitment and letter of credit fees on the SS/L
credit facility that commenced in October 2008. Interest expense for the year ended December 31, 2008 related to interest on
vendor financing which is no longer outstanding in 2009.
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Table of Contents
Interest cost before capitalized interest decreased by $9 million for the year ended December 31, 2008 as compared to 2007.
This reduction included $16 million due to the extinguishment of Loral Skynet debt as a result of the Telesat transaction,
partially offset by reduced interest expense of $6 million in 2007 relating to warranty liabilities. Capitalized interest decreased by
$9 million in 2008 due to the sale to Telesat on October 31, 2007 of the Telstar 11N satellite under construction.
Gain on Foreign Exchange Contracts
For the year ended December 31, 2007, we recorded a net gain of $89 million reflecting the change in the fair value of the
forward contracts and currency basis swap entered into by Loral Skynet relating to the Telesat transaction. The net gain on these
transactions, which was realized when the instruments were contributed to Telesat Holdco on October 23, 2007, has been
recognized in the statement of operations and avoided a corresponding increase in the U.S. dollar purchase price equivalent that
would have been paid to BCE for Telesat.
Gain on Litigation, Net
During 2008, we recorded income of $58 million related to a gain on litigation recovery from Rainbow DBS and expense of
$19.5 million related to the award of attorneys’ fees and expenses to the plaintiffs for shareholder litigation arising from the
issuance of our Series-1 Preferred Stock which was concluded during 2008 (see Note 14 to the financial statements).
Impairment of Available for Sale Securities
During 2008, we recorded impairment charges of $5.8 million to reflect other-than-temporary declines in the value of our
investment in Globalstar Inc. common stock (see Note 6 to the financial statements).
Loss on Extinguishment of Debt
For the year ended December 31, 2007, we recorded a charge for the early extinguishment of the Loral Skynet 14% senior
secured notes, which is comprised of a $13 million redemption premium and a $4 million write-off of deferred financing costs.
Other (Expense) Income
Other income in 2007, represents the recognition of a $4 million deferred gain realized in 2007 in connection with the sale
of an orbital slot in 2006, partially offset by losses on foreign currency transactions (other than the foreign exchange contracts
related to the Telesat transaction).
Income Tax Provision
During 2009, 2008 and 2007, we continued to maintain a 100% valuation allowance against our net deferred tax assets,
with the exception of our deferred tax asset relating to AMT credit carryforwards. As of December 31, 2009, our valuation
allowances totaled $414.0 million. For periods prior to January 1, 2009, any reduction to the balance of the valuation allowance
as of October 1, 2005 first reduced goodwill, then other intangible assets with any excess treated as an increase to paid-in-capital.
During 2008 and 2007, goodwill was reduced by $38.6 million and $35.1 million, respectively, for the reversal of an excess
valuation allowance. Effective January 1, 2009, all reversals of the valuation allowance balance as of October 1, 2005 are
required to be recorded as a reduction to the income tax provision. We will continue to maintain the valuation allowance until
sufficient positive evidence exists to support its full or partial reversal.
Our income tax provision is summarized as follows: (i) for 2009, we recorded a current tax provision of $5.8 million, which
included a provision of $2.3 million to increase our liability for uncertain tax positions, and a deferred tax benefit of $0.2 million,
resulting in a total provision of $5.6 million on pre-tax income of $27.0 million. (ii) for 2008, we recorded a current tax provision
of $16.3 million, which included a provision of $41.6 million to increase our liability for uncertain tax positions and a current tax
benefit of $25.4 million derived from tax strategies, and a deferred tax provision of $29.4 million, resulting in a total provision of
$45.7 million on a pre-tax loss of $151.5 million; (iii) for 2007, we recorded a current tax provision of $51.3 million, which
included a provision of $17.1 million to increase our liability for uncertain tax positions, and a deferred tax provision of
$32.2 million, resulting in a total provision of $83.5 million on pre-tax income of $157.8 million.
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Table of Contents
The deferred income tax provision for 2008 of $29.4 million related primarily to (i) a provision of $38.6 million recorded as
a result of having utilized deferred tax benefits from Old Loral and tax strategies to reduce our tax liability (where the excess
valuation allowance was recorded as a reduction to goodwill) offset by (ii) a benefit of $9.2 million for the increase to our
deferred tax asset for federal and state AMT credits.
The deferred income tax provision for 2007 of $32.2 million related primarily to (i) a provision of $35.1 million recorded as
a result of having utilized deferred tax benefits from Old Loral to reduce our tax liability (where the excess valuation allowance
was recorded as a reduction to goodwill), (ii) a provision of $2.2 million for the decrease to our deferred tax asset for federal and
state AMT credits (which excludes an increase to AMT credits of $2.2 million upon adoption of the FASB’s guidance regarding
uncertain tax positions on January 1, 2007), (iii) an additional valuation allowance of $3.0 million required against a net deferred
tax asset created when we reduced the deferred tax credits in accumulated other comprehensive income by $3.0 million, offset by
(iv) a benefit of $9.0 million relating to current activity.
See Critical Accounting Matters — Taxation below for discussion of our accounting method for income taxes.
Equity in Net Income (Losses) of Affiliates
Telesat
XTAR
Other
2009
$
$
213.2
(2.7 )
(0.2 )
210.3
Year Ended
December 31,
2008
(In millions)
$
(479.6 )
(16.1 )
—
(495.7 )
$
2007
$
$
(1.8 )
(10.6 )
(9.0 )
(21.4 )
Loral’s equity in net income (loss) of Telesat is based on our proportionate share of Telesat’s results in accordance with
U.S. GAAP and in U.S. dollars. Our equity in net income (loss) of Telesat excludes amortization of the fair value adjustments
applicable to Telesat’s acquisition of the Loral Skynet assets and liabilities. Our equity in net income (loss) of Telesat also
reflects the elimination of our profit, to the extent of our beneficial interest, on satellites we are constructing for Telesat.
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Table of Contents
Summary financial information for Telesat in accordance with U.S. GAAP and in Canadian dollars (“CAD”) and U.S.
dollars (“$”) for the years ended December 31, 2009 and 2008, the period October 31, 2007 to December 31, 2007 and as of
December 31, 2009 and 2008 follows (in millions):
For the period
October 31,
2007
For the period
October 31,
2007
Year Ended December 31 to December 31, Year Ended December 31 to December 31,
2009
2008
(In Canadian dollars)
2007
2009
2008
(In U.S. dollars)
2007
Statement of Operations Data:
Revenues
Operating expenses
Impairment of long-lived and
intangible assets
Depreciation, amortization and
stock-based compensation
Gain on disposition of long-lived
assets
Operating income
Interest expense
Other income (expense)
Income tax (provision) benefit
Net income (loss)
Average exchange rate for
translating Canadian dollars to
U.S. dollars
788.7
(232.0 )
731.1
(275.3 )
114.5
(51.0 )
691.6
(203.4 )
685.2
(258.0 )
—
(485.4 )
—
—
(454.9 )
(262.5 )
(241.1 )
(40.0 )
(230.2 )
(226.0 )
33.4
327.6
(260.0 )
330.1
(2.5 )
395.2
—
(270.7 )
(246.5 )
(430.1 )
149.2
(798.1 )
—
23.4
(40.2 )
(44.3 )
59.8
(1.3 )
29.3
287.3
(228.0 )
289.5
(2.2 )
346.6
—
(253.7 )
(231.1 )
(403.1 )
139.9
(748.0 )
117.8
(52.5 )
—
(41.2 )
—
24.1
(41.3 )
(45.6 )
61.5
(1.3 )
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Long-term debt, including current portion
Total liabilities
Redeemable preferred stock
Shareholders’ equity
Period end exchange rate for tanslating Canadian
dollars to U.S. dollars
1.1405
1.0670
0.9720
As of December 31,
2009
2008
(In Canadian dollars)
As of December 31,
2008
2009
(In U.S. dollars)
265.0
5,260.4
206.3
3,110.4
4,257.0
141.4
862.0
219.1
5,208.1
208.9
3,536.5
4,582.9
141.4
483.8
251.6
4,994.7
195.9
2,953.3
4,041.9
134.3
818.5
179.8
4,273.2
171.4
2,901.6
3,760.2
116.0
397.0
1.0532
1.2188
Gain on disposition of long-lived assets in 2009 results from the transfer of Telesat’s leasehold interests in the Telstar 10
satellite and related contracts to APT Satellite for a total consideration of approximately $69 million. Impairment of long-lived
and intangible assets consists primarily of an impairment charge in 2008 to reduce certain orbital slot assets to fair value. Other
expense, net includes non-cash foreign exchange gains of $439.2 million and non-cash losses on financial instruments of
$149 million in 2009 and non-cash foreign exchange losses of $654.2 million and $121.4 million and non-cash gains on financial
instruments of $254.7 million and $78.1 million in 2008 and 2007, respectively.
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Table of Contents
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions
are made in currencies other than Canadian dollars. Telesat’s main currency exposures as of December 31, 2009, lie in its
U.S. dollar denominated cash and cash equivalents, accounts receivable, accounts payable and debt financing. The most
significant impact of variations in the exchange rate is on the U.S. dollar denominated debt financing. We estimated that, after
considering the impact of hedges, a five percent change in the value of the Canadian dollar against the U.S. dollar at
December 31, 2009 would have increased or decreased Telesat’s net income for the year 2009 by approximately $139 million.
During the period from October 31, 2007 to December 31, 2009, Telesat’s U.S. Term Loan Facility, Senior Notes and Senior
Subordinated Notes have increased by approximately $266 million due to the stronger U.S. dollar. However during that same
time period, the liability created by the fair value of the currency basis swap, which synthetically converts $1.054 billion of the
U.S. Term Loan Facility debt into CAD 1.224 billion of debt, decreased by approximately $171 million.
The equity losses in XTAR, L.L.C. (“XTAR”), our 56% owned joint venture, represent our share of XTAR losses incurred
in connection with its operations. Other equity losses in affiliates for 2007 include $3 million of cash distributions received from
Globalstar de Mexico for which our investment balance has been written down to zero and a loss of $11 million recognized in
connection with an agreement to sell our Globalstar investment partnership in Brazil. This sale was completed in the first quarter
of 2008.
Backlog
Backlog as of December 31, 2009 and 2008 was as follows (in millions):
Satellite Manufacturing
Satellite Services
Total backlog before eliminations
Satellite Manufacturing eliminations
Satellite Services eliminations
Total backlog
2009
2008
1,632
5,230
6,862
(9 )
(5,230 )
1,623
$
$
1,381
4,207
5,588
(25 )
(4,207 )
1,356
$
$
It is expected that approximately 63% of satellite manufacturing backlog as of December 31, 2009 will be recognized as
revenue during 2010.
Telesat backlog at December 31, 2009 was approximately $5.2 billion, of which approximately 11% will be recognized as
revenue during 2010.
As of December 31, 2009, Telesat had received approximately $372 million of customer prepayments, none of which is
related to satellites under construction.
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.
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.
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Billed Receivables and Long-Term Receivables
We are required to estimate the collectibility of our billed receivables which are included in contracts in process on our
consolidated balance sheet and our 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 statements of operations on billed receivables for the years ended
December 31, 2009, 2008 and 2007, were $2.8 million, $0.7 million and $(1.9) million, respectively. At December 31, 2009,
2008 and 2007, billed receivables were net of allowances for doubtful accounts of $3.7 million, $0.9 million and $0.2 million,
respectively. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its
financial obligations due to a deterioration of its financial condition, credit ratings or bankruptcy. The reserve requirements are
based on the best facts available to us and are re-evaluated periodically.
Inventories
Inventories are reviewed for estimated obsolescence or unusable items and, if appropriate, are written down to the net
realizable value based upon assumptions about future demand and market conditions. If actual future demand or market
conditions are less favorable than those we project, additional inventory write-downs may be required. These are considered
permanent adjustments to the cost basis of the inventory. Charges for inventory obsolescence included in the consolidated
statements of operations were $1.0 million for the year ended December 31, 2009 and were insignificant for the years ending
December 31, 2008 and 2007.
Fair Value Measurements
U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer
a liability in the principal or most advantageous market in an orderly transaction between market participants. U.S. GAAP also
establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable
inputs. The three levels of the fair value hierarchy are described below:
Level 1: Inputs represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in
active markets at the measurement date.
Level 2: Inputs represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full
term of the assets or liabilities, and pricing inputs, other than quoted prices in active markets included in Level 1, which are
either directly or indirectly observable as of the reporting date.
Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar techniques.
These provisions are applicable to all of the Company’s assets and liabilities that are measured and recorded at fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2009:
Assets:
Marketable securities
Derivatives, net
Non-qualified pension plan assets
Level 1
Level 2
(In thousands)
Level 3
$
$
$
856
—
2,791
$
$
$
—
3,873
—
$
$
$
—
—
81
The Company does not have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair
value on a recurring basis as of December 31, 2009.
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Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We review the carrying values of our equity method investments when events and circumstances warrant and consider all
available evidence in evaluating when declines in fair value are other than temporary. The fair values of our investments are
determined based on valuation techniques using the best information available, and may include quoted market prices, market
comparables and discounted cash flow projections. An impairment charge would be recorded when the carrying amount of the
investment exceeds its current fair value and is determined to be other than temporary. We had no equity-method investments
measured at fair value at December 31, 2009.
Taxation
Loral is subject to U.S. federal, state and local income taxation on its worldwide income and foreign taxes on certain
income from sources outside the United States. Our foreign subsidiaries are subject to taxation in local jurisdictions. Telesat is
subject to tax in Canada and other jurisdictions and Loral will provide in operating earnings any additional U.S. current or
deferred tax required on distributions received or deemed distributions from Telesat.
We use the liability method in accounting for taxes whereby income taxes are recognized during the year in which
transactions are recorded in the financial statements. Deferred taxes reflect the future tax effect of temporary differences between
the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying anticipated
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. Based upon this analysis, we concluded upon
emergence from bankruptcy in 2005 that, due to insufficient positive evidence substantiating recoverability, we were required to
maintain the 100% valuation allowance previously established against our net deferred tax assets.
For 2009, we continued to maintain the 100% valuation allowance decreasing the balance from December 31, 2008 of
$487.8 million by $73.7 million to $414.0 million. As of December 31, 2009, we had gross deferred tax assets of approximately
$452.3 million, which when offset by our deferred tax liabilities of $25.6 million and our valuation allowance of $414.0 million,
resulted in a net deferred tax asset of $12.7 million on our consolidated balance sheet. For periods prior to January 1, 2009 any
reduction to the balance of the valuation allowance as of October 1, 2005 first reduced goodwill, then other intangible assets with
any excess treated as an increase to paid-in-capital. Effective January 1, 2009, all reversals of the valuation allowance balance as
of October 1, 2005 are recorded as a reduction to the income tax provision. We will maintain the valuation allowance until
sufficient positive evidence exists to support its full or partial reversal.
The tax effects of an uncertain tax position (“UTP”) taken or expected to be taken in income tax returns are recognized only
if it is ‘‘more likely-than-not’’ to be sustained on examination by the taxing authorities, based on its technical merits as of the
reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize estimated
accrued interest and penalties related to UTPs in income tax expense.
We recognize the benefit of a UTP in the period when it is effectively settled. Previously recognized tax positions are
derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon
examination. Evaluating the technical merits of a tax position and determining the benefit to be recognized involves a significant
level of judgment in the assumptions underlying such evaluation. As of December 31, 2009, our unrecognized tax benefits
totaled $120.1 million and if settled favorably, subsequent recognition will reduce our effective tax rate.
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.
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The discount rate is subject to change each year, based on a hypothetical yield curve developed from a portfolio of high
quality, corporate, non-callable bonds with maturities that match our projected benefit payment stream. The resulting discount
rate reflects the matching of the plan liability cash flows to the yield curve. Changes in applicable high-quality long-term
corporate bond indices, such as the Moody’s AA Corporate Bond Index, are also considered. The discount rate determined on
this basis was 6.0% as of December 31, 2009, a decrease of 50 basis points from December 31, 2008.
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. We also engage non-Russell related investment
mangers through Russell, in its role as trustee, to invest pension plan assets. The targeted long-term allocation of our pension
plan assets is 60% in equity investments and 40% in fixed income investments. Based on this target allocation, the twenty five
year historical return of our asset mix has been 9.3%. The expected long-term rate of return on plan assets determined on this
basis was 8.0% for 2009, 8.5% for 2008 and 8.5% for 2007. For 2010, we will use an expected long-term rate of return of 8.0%.
These pension and other employee postretirement benefit costs are expected to decrease to approximately $18.9 million in
2010 from $21.9 million in 2009, primarily due to the increase in the expected return on plan assets and decreased amortization
of actuarial losses. Lowering the discount rate and the expected long-term rate of return each by 0.5% would have increased
these pension and other employee postretirement benefits costs by approximately $2.1 million and $1.1 million, respectively, in
2009.
The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $230.8 million at
December 31, 2009. We are required to recognize the funded status of a benefit plan on our balance sheet. Market conditions and
interest rates significantly affect future assets and liabilities of Loral’s pension and other employee benefits plans.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as
expense over the requisite service period. In addition, share-based payment transactions with nonemployees are measured at the
fair value of the equity instrument issued. We use the Black-Scholes-Merton option-pricing model and other models as
applicable to estimate the fair value of these stock-based awards. These models require us to make significant judgments
regarding the assumptions used within the models, the most significant of which are the stock price volatility assumption, the
expected life of the option award, the risk-free rate of return and dividends during the expected term. Changes in these
assumptions could have a material impact on the amount of stock-based compensation we recognize.
The Company estimates expected forfeitures of stock-based awards at the grant date and recognizes compensation cost only
for those awards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore,
changes in the forfeiture assumptions may impact the timing of the total amount of expense recognized over the vesting period.
Estimated forfeitures are reassessed in each reporting period and may change based on new facts and circumstances. We
emerged from bankruptcy on November 21, 2005, and as a result, we did not have sufficient stock price history upon which to
base our volatility assumption for measuring our stock-based awards. In determining the volatility used in our models, 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. We based our estimate of the average life
of a stock-based award using the midpoint between the vesting and expiration dates. Our risk-free rate of return assumption for
awards was based on term-matching, nominal, monthly U.S. Treasury constant maturity rates as of the date of grant. We
assumed no dividends during the expected term.
SS/L phantom stock appreciation rights that are expected to be settled in cash or that contain an obligation to issue a
variable number of shares based on the financial performance of SS/L are classified as liabilities in our consolidated balance
sheets.
Goodwill and Other Intangible Assets
Goodwill represented 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, as of October 1, 2005, the date we adopted fresh-start
accounting. Our 2008 goodwill impairment test resulted in the recording of an impairment charge in 2008 for the entire goodwill
balance of $187.9 million. The Company’s estimate of the fair value of SS/L employed both a comparable public company
analysis, which considered the valuation multiples of companies deemed comparable, in whole or in part, to the Company and a
discounted cash flow analysis that calculated a present value of the projected future cash flows of SS/L. The Company
considered both quantitative and qualitative factors in assessing the reasonableness of the underlying assumptions used in the
valuation process. Testing goodwill for impairment requires significant subjective judgments by management.
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Contingencies
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the
likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs
relating to litigation, claims and other contingent matters when, in management’s opinion, such liabilities become probable and
reasonably estimable. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate.
Actual amounts paid may differ from amounts estimated, and such differences will be charged to operations in the period in
which the final determination of the liability is made. Management considers the assessment of loss contingencies as a critical
accounting policy because of the significant uncertainty relating to the outcome of any potential legal actions and other claims
and the difficulty of predicting the likelihood and range of the potential liability involved, coupled with the material impact on
our results of operations that could result from legal actions or other claims and assessments.
Accounting Standards Issued and Not Yet Implemented
For discussion of accounting standards issued and not yet implemented, see Note 2 to the financial statements.
Liquidity and Capital Resources
As described above, the Company’s principal assets are 100% of the capital stock of SS/L and a 64% economic interest in
Telesat. In addition, the Company has a 56% economic interest in XTAR and is also investing in the entire Canadian capacity of
the ViaSat-1 satellite which is under construction. SS/L’s operations as well as the Canadian ViaSat-1 operations (insignificant
other than capital expenditures until the satellite is launched) are consolidated in the Company’s financial statements, while the
operations of Telesat and XTAR are not consolidated but presented using the equity method of accounting. The Parent Company
has no debt; SS/L has a $100 million revolving credit facility under which only $5 million of letter of credit capacity is utilized
as of December 31, 2009. Telesat has third party debt with financial institutions, and XTAR has debt to its LLC member,
Hisdesat, Loral’s joint venture partner in XTAR. The Parent Company has provided a guarantee of SS/L’s $100 million credit
facility but has not provided a guarantee for the Telesat or XTAR debt. Cash is maintained at the Parent Company, SS/L, Telesat
and XTAR to support the operating needs of each respective entity. The ability of SS/L and Telesat to pay dividends and
management fees in cash to the Parent Company is governed by applicable covenants relating to the debt at each of those entities
and in the case of Telesat and XTAR by their respective shareholder agreements.
Cash and Available Credit
At December 31, 2009, the Company had $168 million of cash and cash equivalents, $6 million of restricted cash and no
debt outstanding. This represents an improvement of $106 million from our cash position, net of borrowings, at December 31,
2008. Our improved cash position is primarily the result of improved operating results, increased customer advances, reduced
inventory levels and tax refunds. During the first three months of 2009, SS/L repaid the $55 million of loans that were
outstanding at December 31, 2008, and has not borrowed any new funds under its $100 million revolving credit agreement. At
December 31, 2009, SS/L had $5 million of letters of credit outstanding. The restricted cash balance at December 31, 2009 is
substantially unchanged from December 31, 2008.
The SS/L Credit Agreement, which is guaranteed pursuant to a Parent Guarantee Agreement, provides SS/L with a
$100 million revolving credit facility, including a $50 million letter of credit sub-limit. Any borrowings under the SS/L Credit
Agreement mature on October 16, 2011. As of March 12, 2010, SS/L has borrowing availability of approximately $95 million
under the facility after giving effect to approximately $5 million of outstanding letters of credit. SS/L anticipates that over the
next 12 months it will be in compliance with all the covenants of the SS/L Credit Agreement and have full availability of the
facility.
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Cash Management
We have a cash management investment program that seeks a competitive return while maintaining a conservative risk
profile. Our cash management investment policy establishes what we believe to be conservative guidelines relating to the
investment of surplus cash. The policy allows us to invest in commercial paper, money market funds and other similar short term
investments but does not permit us to engage in speculative or leveraged transactions, nor does it permit us to hold or issue
financial instruments for trading purposes. The cash management investment policy was designed to preserve capital and
safeguard principal, to meet all of our liquidity requirements and to provide a competitive rate of return. The policy addresses
dealer qualifications, lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits, defines a
maturity structure, requires all firms to safe keep securities on our behalf, requires certain mandatory reporting activity and
discusses review of the portfolio. We operate the cash management investment program under the guidelines of our investment
policy and continuously monitor the investments to avoid risks.
We currently invest our cash in several liquid Prime AAA money market funds. The dispersion across funds reduces the
exposure of a default at one fund. During 2009, the Company moved its investments from Treasury funds and Government funds
to increase yield given the partial recovery in the credit markets. We do not currently hold any investments in auction rate
securities or enhanced money market funds that had previously been subject to liquidity issues and price declines.
Liquidity
During 2009, the Parent Company funded its portion of the construction, launch and insurance costs of the ViaSat-1
satellite, paid attorneys’ fees associated with the shareholder derivative litigation, made a cash investment in XTAR and funded
Parent Company operating costs. For 2010 and 2011, the Parent Company will continue to fund its portion of the construction,
launch and insurance costs of the ViaSat-1 satellite as well as fund gateway and related costs to prepare for service so as to fulfill
its obligations under the lease agreement for the Canadian coverage portion of the ViaSat-1 satellite entered into on
December 31, 2009. Total ViaSat-1 related expenditures for the Parent Company for 2010 and 2011 are estimated to be
approximately $40 million, some of which will be offset by lessee prepayments of between CAD 2.5 million and CAD 13.0
million in 2010. The Company is obligated to indemnify its directors and officers for expenses incurred by them in connection
with their defense in the Delaware shareholder derivative case relating to the Company’s sale in 2007 of $300 million of
preferred stock to certain funds affiliated with MHR. The Company has directors and officers liability insurance coverage that
provides the Company with coverage of up to $40 million for amounts paid as a result of these indemnification obligations. As of
December 31, 2009, the insurers have advanced approximately $9.8 million in defense costs, and the Company is seeking to
recover from its insurers $19.4 million in fees and expenses previously paid to plaintiffs’ counsel in the litigation and
$1.6 million in defense costs and expenses that have been denied by the insurers. In addition, the Company is seeking to recover
from its insurers any defense costs and expenses that may be determined by a special committee of the Board to be properly
payable to its directors who are affiliated with MHR who have requested indemnification for defense costs and expenses in the
amount, as of November 30, 2008, of approximately $18 million (see Note 14 to the financial statements for a detailed
discussion of these matters). To the extent the Company’s indemnification obligations exceed the $40 million limit of its
insurance coverage, the Company will have to pay this excess from its own cash on hand. Moreover, to the extent that the
Company does not prevail in its litigation with its insurers, the Company will be obligated to pay all indemnification obligations
not already paid from its own cash on hand.
At the Parent Company, we expect that our cash and cash equivalents will be sufficient to fund projected expenditures for
the next 12 months. In addition, we believe that SS/L, Telesat and XTAR have sufficient liquidity to fund their respective
requirements for the next 12 months and, as such, will not require funding from the Parent Company.
In addition to our cash on hand, we believe that given the substantial value of our unleveraged assets, which consist of our
64% economic interest in Telesat, our 56% equity interest in XTAR and the ViaSat-1 Canadian broadband lease, we have the
ability, if appropriate, to access the financial markets for debt or equity at the Parent Company. Given the uncertain financial
environment, however, there can be no assurance that the Company would be able to obtain such financing on acceptable terms.
During 2009, SS/L generated significant positive cash flow while also funding the continued increase in its orbital
receivable asset, capital expenditures and repaying its outstanding debt. For each of 2010 and 2011, SS/L’s capital expenditures
are projected to be $40 to $50 million. This is above our normal level of annual capital expenditures of between $25 million and
$30 million. For 2010 and 2011, we anticipate completing certain building modifications and purchasing additional test and
satellite handling equipment required to meet our contractual obligations as a result of our increased backlog and size and
complexity of the satellites under construction. As demonstrated by SS/L’s actual capital expenditures falling below previously
projected amounts in 2008 and 2009, SS/L maintains the flexibility to defer a portion of its ongoing capital expenditures as
circumstances may require. In addition, in 2010 SS/L expects to fund the growth in its orbital receivable asset by more than
$80 million (see discussion below). Finally, with the termination of the Sirius Credit Agreement in December 2009, there is no
short-term funding requirement associated with the construction of the FM-6 satellite. SS/L believes that, absent unforeseen
circumstances, with its cash on hand and cash flow from operations, it has sufficient liquidity to fulfill its obligations for the next
12 months. The borrowing capacity under the revolving credit facility enhances the liquidity position of SS/L.
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Satellite construction contracts often include provisions for orbital incentives pursuant to which a portion of the contract
value (typically about 10%) is received over the life of the satellite (typically 15 years). Receipt of these orbital incentives is
contingent upon performance of the satellite in accordance with contractual specifications. As of December 31, 2009, SS/L has
orbital receivables of approximately $240 million, net of fair value adjustments of $19 million. Approximately $124 million of
the gross orbital receivables are related to satellites launched as of December 31, 2009, and $135 million are related to satellites
that are under construction as of December 31, 2009. This represents an increase in orbital receivables of approximately
$59 million from the December 31, 2008 level.
Current economic conditions, though improved from December 2008, could affect the ability of customers to make
payments, including orbital incentive payments, under satellite construction contracts with SS/L. Though most of SS/L’s
customers are substantial corporations for which creditworthiness is generally high, SS/L has certain customers which are either
highly leveraged or are in the developmental stage and are not fully funded. Customers that are facing maturities on their existing
debt also have elevated credit risk under current market conditions. There can be no assurance that these customers will not delay
contract payments to, or seek financial relief from, SS/L. If customers fall behind or are unable to meet their payment
obligations, SS/L’s liquidity will be adversely affected.
There can be no assurance that SS/L’s customers will not default on their obligations to SS/L in the future and that such
defaults will not materially and adversely affect SS/L and Loral. In the event of an uncured payment default by a customer
during the pre-launch construction phase of the satellite, SS/L’s construction contracts generally provide SS/L with significant
rights even if its customers (or successors) have paid significant amounts under the contract. These rights typically include the
right to stop work on the satellite and the right to terminate the contract for default. In the latter case, SS/L would generally have
the right to retain, and sell to other customers, the satellite or satellite components that are under construction. The exercise of
such rights, however, could be impeded by the assertion by customers of defenses and counterclaims, including claims of breach
of performance obligations on the part of SS/L, and our recovery could be reduced by the lack of a ready resale market for the
affected satellites or their components. In either case, our liquidity could be adversely affected pending resolution of such
customer disputes.
In the event of an uncured payment default by a customer after satellite delivery and launch when title has passed to the
customer, SS/L’s remedies are more limited. Typically, amounts due post-launch and delivery are final milestone payments and,
in certain cases, orbital incentive payments. To recover such amounts, SS/L generally would have to commence litigation to
enforce its rights. We believe, however, that, as customers generally rely on SS/L to provide orbital anomaly and troubleshooting
support for the life of the satellite, which support is generally perceived to be critical to maximize the life and performance of the
satellite, it is likely that customers (or their successors) will cure any payment defaults and fulfill their payment obligations or
make other satisfactory arrangements to obtain SS/L’s support, and our liquidity would not be adversely affected.
As of December 31, 2009, SS/L had renegotiated payment terms of certain past due receivables and future payment
obligations from DBSD Satellite Services G.P. (formerly known as ICO Satellite Services G.P. and referred to herein as “ICO”),
a customer with an SS/L-built satellite in orbit. ICO, which filed for bankruptcy protection under chapter 11 of the Bankruptcy
Code in May 2009, has agreed to, and the Bankruptcy Court has approved, ICO’s assumption of its contract with SS/L. SS/L will
receive substantially the same net present value from ICO as SS/L was entitled to receive under the original contract. ICO’s plan
of reorganization was confirmed by the Bankruptcy Court in October 2009. The effective date of the plan is subject to, among
other things, regulatory approval of the FCC.
SS/L’s contracts contain detailed and complex technical specifications to which the satellite must be built. SS/L’s contracts
also impose a variety of other contractual obligations on SS/L, including the requirement to deliver the satellite by an agreed
upon date, subject to negotiated allowances. If SS/L is unable to meet its contract obligations, including significant deviations
from technical specifications or delivering the satellite beyond the agreed upon date in a contract, the customer would have the
right to terminate the contract for contractor default. If a contract is terminated for contractor default, SS/L would be required to
refund the payments made to SS/L to date, which could be significant. In such circumstances, SS/L would, however, keep the
satellite under construction and be able to recoup some of its losses through the resale of the satellite or its components to
another customer. It has been SS/L’s experience that, because the satellite is generally critical to the execution of a customer’s
operations and business plan, customers will usually accept a satellite with minor deviations from specifications or renegotiate a
revised delivery date with SS/L as opposed to terminating the contract for contractor default and losing the satellite. Nonetheless,
the obligation to return all funds paid to SS/L in the later stages of a contract, due to termination for contractor default, would
have a material adverse effect on SS/L’s liquidity.
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SS/L currently has a contract-in-process with an estimated delivery date later than the contractually specified date after
which the customer may terminate the contract for default. The customer is an established operator which will utilize the satellite
in the operation of its existing business. SS/L and the customer are continuing to perform their obligations under the contract,
and the customer continues to make milestone payments to SS/L. Although there can be no assurance, the Company believes that
the customer will take delivery of this satellite and will not seek to terminate the contract for default. If the customer should
terminate the contract for default, the customer would be entitled to a full refund of its payments and liquidated damages, which
through December 31, 2009 totaled approximately $106 million, plus re-procurement costs and interest. In the event of a
termination for default, SS/L would own the satellite and would attempt to recoup any losses through resale to another customer.
As of December 31, 2009, SS/L had booked seven satellite awards for the year in addition to the seven satellites booked last
year, resulting in backlog of $1.6 billion. If SS/L’s satellite awards fall below, on average, four to five awards per year, SS/L
would be required to phase in a reduction of costs to accommodate this lower level of activity. The timing of any reduced
demand for satellites, if it were to occur, is difficult to predict. It is, therefore, difficult to anticipate the need to reduce costs to
match any such slowdown in business, especially when SS/L has significant backlog business to perform. A delay in matching
the timing of a reduction in business with a reduction in expenditures could adversely affect our liquidity. We believe that SS/L’s
current backlog, existing liquidity and availability under the SS/L Credit Agreement are sufficient to finance SS/L, even if we
receive fewer than four to five awards over the next 12 months. If SS/L were to experience a shortage of orders below the four to
five awards per year for multiple years, SS/L could require additional financing, the amount and timing of which would depend
on the magnitude of the order shortfall coupled with the timing of a reduction in costs. There can be no assurance that the SS/L
could obtain such financing on favorable terms, if at all.
Telesat
Cash and Available Credit
As of December 31, 2009, Telesat had CAD 154 million of cash and short-term investments as well as approximately CAD
153 million of borrowing availability under its Revolving Facility. Telesat believes that cash and short-term investments as of
December 31, 2009, cash flow from operations, including amounts provided by operating activities, cash flow from customer
prepayments and drawings on the available lines of credit under the Credit Facility (as defined below) will be adequate to meet
its expected cash requirement for the next 12 months for activities in the normal course of business, including interest and
required principal payments on debt as well as planned capital expenditures.
Telesat has adopted what it believes are conservative policies relating to and governing the investment of its surplus cash.
The investment policy does not permit Telesat to engage in speculative or leveraged transactions, nor does it permit Telesat to
hold or issue financial instruments for trading purposes. The investment policy was designed to preserve capital and safeguard
principal, to meet all liquidity requirements of Telesat and to provide a competitive rate of return. The investment policy
addresses dealer qualifications, lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits,
defines a maturity structure, requires all firms to safe keep securities, requires certain mandatory reporting activity and discusses
review of the portfolio. Telesat operates its investment program under the guidelines of its investment policy.
Liquidity
A large portion of Telesat’s annual cash receipts are reasonably predictable because they are primarily derived from an
existing backlog of long-term customer contracts and high contract renewal rates. Telesat believes its cash flow from operations
will be sufficient to provide for its capital requirements and to fund its interest and debt payment obligations for the next
12 months. Cash required for the construction of the Telstar 14R and Nimiq 6 satellites will be funded from some or all of the
following: cash and short-term investments, cash flow from operations, proceeds from the sale of assets, cash flow from
customer prepayments or through borrowings on available lines of credit under the Credit Facility.
Telesat maintains a target of approximately CAD 25 million in cash and cash equivalents within its subsidiary operating
entities for the management of its liquidity. Telesat’s intention is to maintain at least this level of cash and cash equivalents to
assist with the day-to-day management of its cash flows.
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Debt
Telesat has entered into agreements with a syndicate of banks to provide Telesat with a series of term loan facilities
denominated in Canadian dollars and U.S. dollars, and a revolving facility (collectively, the “Senior Secured Credit Facilities”)
as outlined below. In addition, Telesat has issued two tranches of notes.
Maturity
Currency
December 31, December 31,
2008
2009
(In CAD millions)
Senior Secured Credit Facilities:
Revolving facility
Canadian term loan facility
U.S. term loan facility
U.S. term loan II facility
Senior notes
Senior subordinated notes
October 31, 2012
October 31, 2012
October 31, 2014
October 31, 2014
November 1, 2015
November 1, 2017
Current portion
Long term portion
CAD or USD equivalent
CAD
USD
USD
USD
USD
CAD
CAD
CAD
—
185
1,777
152
703
220
3,037
(23 )
3,014
—
195
2,087
179
819
256
3,536
(23 )
3,513
The outstanding debt balances above, with the exception of the revolving credit facility and the Canadian term loan, are
presented net of related debt issuance costs. The debt issuance costs in the amount of CAD 6 million related to the revolving
credit facility and the Canadian term loan are included in other assets and are amortized to interest expense on a straight-line
basis. All other debt issuance costs are amortized to interest expense using the effective interest method.
The Senior Secured Credit Facilities are secured by substantially all of Telesat’s assets. Each tranche of the Senior Secured
Credit Facilities is subject to mandatory principal repayment requirements. Borrowings under the Senior Secured Credit
Facilities bear interest at a base interest rate plus margins of 275 — 300 basis points. The required repayments on the Canadian
term loan facility will be CAD 15 million for the year ended December 31, 2010. For the U.S. term loan facilities, required
repayments in 2010 are 1/4 of 1% of the initial aggregate principal amount which is approximately $5 million per quarter.
Telesat is required to comply with certain covenants which are usual and customary for highly leveraged transactions, including
financial reporting, maintenance of certain financial covenant ratios for leverage and interest coverage, a requirement to maintain
minimum levels of satellite insurance, restrictions on capital expenditures, a restriction on fundamental business changes or the
creation of subsidiaries, restrictions on investments, restrictions on dividend payments, restrictions on the incurrence of
additional debt, restrictions on asset dispositions and restrictions on transactions with affiliates.
The Senior notes bear interest at an annual rate of 11.0% and are due November 1, 2015. The Senior notes include
covenants or terms that restrict Telesat’s ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay
dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with
affiliates, (v) modify or cancel the Company’s satellite insurance, (vi) effect mergers with another entity and (vii) redeem the
Senior notes prior to May 1, 2012, in each case subject to exceptions provided in the Senior notes indenture.
The Senior subordinated notes bear interest at a rate of 12.5% and are due November 1, 2017. The Senior subordinated
notes include covenants or terms that restrict Telesat’s ability to, among other things, (i) incur additional indebtedness, (ii) incur
liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain
transactions with affiliates, (v) modify or cancel the Company’s satellite insurance, (vi) effect mergers with another entity and
(vii) redeem the Senior subordinated notes prior to May 1, 2013, in each case subject to exceptions provided in the Senior
subordinated notes indenture.
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Table of Contents
Interest Expense
An estimate of the interest expense on the Facilities is based upon assumptions of LIBOR and Bankers Acceptance rates
and the applicable margin for the Senior Secured Credit Facilities. Telesat’s estimated interest expense for 2010 is approximately
CAD 256 million.
Derivatives
Telesat has used interest rate and currency derivatives to hedge its exposure to changes in interest rates and changes in
foreign exchange rates.
Telesat uses forward contracts to hedge foreign currency risk on anticipated transactions, mainly related to the construction
of satellites and interest payments. At December 31, 2009, Telesat had CAD 21.5 million of outstanding foreign exchange
contracts which require the Company to pay Canadian dollars to receive $20.0 million for future capital expenditures and interest
payments. At December 31, 2009, the fair value of these derivative contract liabilities was an unrealized loss of CAD
0.4 million, and at December 31, 2008, there was a CAD 10.8 million unrealized gain. This forward contract matured on
January 15, 2010.
Telesat has also entered into a cross currency basis swap to hedge the foreign currency risk on a portion of its U.S. dollar
denominated debt. Telesat uses mostly natural hedges to manage the foreign exchange risk on operating cash flows. At
December 31, 2009, the Company had a cross currency basis swap of CAD 1,199.7 million which requires the Company to pay
Canadian dollars to receive $1,032.9 million. At December 31, 2009, the fair value of this derivative contract was an unrealized
loss of CAD 137.1 million. This non-cash loss will remain unrealized until the contract is settled. This contract is due on
October 31, 2014. At December 31, 2008, there was an unrealized gain of CAD 8.8 million.
Interest rate risk
Telesat is exposed to interest rate risk on its cash and cash equivalents and its long term debt which is primarily variable
rate financing. Changes in the interest rates could impact the amount of interest Telesat is required to pay. Telesat uses interest
rate swaps to hedge the interest rate risk related to variable rate debt financing. At December 31, 2009, the fair value of these
derivative contract liabilities was an unrealized loss of CAD 47.8 million, and at December 31, 2008, there was an unrealized
loss of CAD 82.3 million. This non-cash loss will remain unrealized until the contracts are settled. These contracts are due
between January 29, 2010 and October 31, 2014.
Capital Expenditures
Telesat has entered into contracts with SS/L for the construction of Telstar 14R (targeted for launch in mid-2011) and
Nimiq 6, a direct broadcast satellite to be used by Telesat’s customer, Bell TV. These expenditures will be funded from some or
all of the following: cash and short-term investments, cash flow from operations, proceeds from the sale of assets, cash flow
from customer prepayments or through borrowings on available lines of credit under the Credit Facility.
XTAR
In January 2009, XTAR reached an agreement with Arianespace, S.A. to settle its revenue-based fee that was to be paid
over time. To enable XTAR to be able to make these settlement payments, XTAR issued a capital call to its LLC members for
$8 million in 2009. The capital call required Loral to increase its investment in XTAR by approximately $4.5 million,
representing its 56% share of $8 million. This settlement benefited XTAR by providing a significant reduction to amounts that it
would have been required to pay in the future and satisfied XTAR’s obligations to Arianespace.
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Table of Contents
Contractual Obligations and Other Commercial Commitments
The following tables aggregate our contractual obligations and other commercial commitments as of December 31, 2009 (in
thousands).
Contractual Obligations:
Payments Due by Period
Operating leases (1)
Unconditional purchase obligations (2)
Other long-term obligations (3)
Revolving credit agreement (4)
Total contractual cash obligations (5)
Other Commercial Commitments:
Total
42,202
468,514
44,259
—
554,975
$
$
Less than
1 Year
$
$
10,737
305,623
23,116
—
339,476
1-3 Years
14,167
162,891
18,076
—
195,134
$
$
More than
4-5 Years
7,282
—
494
—
7,776
$
$
5 Years
$
$
10,016
—
2,573
—
12,589
Stand by letter of credit
Total
Amount of Commitment Expiration Per Period
Amounts
Committed
4,291
$
Less than
1 Year
$
4,291
1-3 Years
—
$
4-5 Years
—
$
$
5 Years
—
More than
(1)
(2)
(3)
(4)
(5)
Represents future minimum payments under operating leases with initial or remaining terms of one year or more.
SS/L has entered into various purchase commitments with suppliers due to the long lead times required to produce
purchased parts.
Represents our commitment in connection with an agreement entered into between Loral and ViaSat for the purchase by
Loral of a portion of the ViaSat-1 satellite which is being constructed by SS/L for ViaSat as well as commitments for
related gateway infrastructure and equipment (see Note 16 to the financial statements).
On October 16, 2008, SS/L entered into a Credit Agreement with several banks and other financial institutions. The Credit
Agreement provides for a $100 million senior secured revolving credit facility. The Revolving Facility includes a
$50 million letter of credit sublimit. The Credit Agreement is for a term of three years, maturing on October 16, 2011 (see
Note 8 to the financial statements). No amounts were outstanding under the Credit Agreement at December 31, 2009.
Does not include our liabilities for uncertain tax positions of $111.3 million. Because the timing of future cash outflows
associated with our liabilities for uncertain tax positions is highly uncertain, we are unable to make reasonably reliable
estimates of the period of cash settlement with the respective taxing authorities (see Note 9 to the financial statements).
Does not include obligations for pensions and other postretirement benefits, for which we expect to make employer
contributions of $28.9 million in 2010. We also expect to make significant employer contributions to our plans in future
years.
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities for 2009 was $155 million. This was primarily due to net cash provided from
program related assets (contracts-in-process, inventories, long term receivables and customer advances) of $84 million and net
income adjusted for non-cash items of $67 million. Changes in program related assets resulted mainly from progress on new and
existing satellite programs.
Other significant factors that contributed to the cash change in 2009 were: accounts payable, accrued expenses and other
current liabilities used cash of $15 million and cash was provided by income tax refunds of $18 million.
Net cash used in operating activities for 2008 was $202 million. This was primarily due to an increase in contracts in
process of $216 million and a decrease in customer advances of $20 million, primarily resulting from progress on new satellite
programs, a decrease in taxes payable of $55 million, primarily due to tax payments, net of refunds, of $30 million, a decrease in
pension and post retirement liabilities of $19 million and a decrease in accrued expenses and other current liabilities of
$22 million which includes a Telesat post-closing final adjustment payment to PSP of $9 million, partially offset by an increase
in accounts payable of $24 million, an increase in long term liabilities of $33 million, primarily due to a $41 million liability for
uncertain tax positions and a net loss after adjustment for non-cash items of $69 million.
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Net cash provided by operating activities for 2007 was $27 million. This was primarily due to a decrease in accounts
receivable of $65 million from the collection of vendor financing from a customer and a $22 million increase in cash from net
income adjusted for non-cash items including an increase in income taxes payable attributable to taxes expensed in 2007 and
paid in 2008 related to the gain from the contribution of substantially all of the Loral Skynet assets and related liabilities to
Telesat. These sources of cash were partially offset by an increase in contracts-in-process of $61 million and a reduction in
customer advances of $17 million due to continued progress on the related satellite programs.
Net Cash (Used in) Provided By Investing Activities
Net cash used in investing activities for 2009 was $49 million, primarily resulting from capital expenditures of $44 million
and an additional investment of $4.5 million in XTAR, representing our 56% share of an $8 million capital call.
Net cash used in investing activities for 2008 was $47 million, primarily resulting from capital expenditures of $65 million,
partially offset by a decrease in restricted cash of $19 million as a result of the release of restrictions on $12 million of cash
relating to the Skynet Noteholder Litigation and the release of restrictions on $7 million of cash due to the replacement of SS/L’s
former Letter of Credit Facility.
Net cash provided by investing activities for 2007 was $62 million, primarily resulting from the net effect of cash
management of short-term investments of $118 million and net proceeds received for the contribution of Loral Skynet to Telesat
of $58 million. These changes were partially offset by capital expenditures of $96 million, an increase in restricted cash of
$20 million and a net distribution from an equity investment of $2 million.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for 2009 was $55 million, primarily resulting from the repayment of borrowings under
the SS/L Credit Agreement.
Net cash provided by financing activities for 2008 was $52 million, primarily resulting from the proceeds, net of expenses,
from borrowings under the SS/L Credit Agreement.
Net cash provided by financing activities for 2007 was $40 million, primarily resulting from the proceeds, net of expenses,
from the sale of preferred stock of $284 million, the borrowing of a term loan of $141 million from Valley National to fund
redemption of the Loral Skynet Notes and the proceeds from the exercise of stock options of $2 million, partially offset by the
distribution of proceeds for the redemption of the Loral Skynet Preferred Stock of $238 million, the repayment of the Loral
Skynet Notes of $126 million, the redemption premium of $13 million paid on the extinguishment of the Loral Skynet Notes and
cash dividends paid on the Loral Skynet Preferred Stock of $12 million
Other
During 2009, we contributed approximately $23 million to the qualified pension plan and funded approximately $2 million
for other employee post-retirement benefit plans. During 2008, we contributed approximately $28 million to the qualified
pension plan and funded approximately $3 million for other employee post-retirement benefit plans. During 2007, Loral made no
contributions to the qualified pension plan and funded approximately $3 million for other employee post-retirement benefit
plans. During 2010, based on current estimates, we expect to contribute approximately $25 million to the qualified pension plan
and expect to fund approximately $4 million for other employee post-retirement benefit plans.
Affiliate Matters
Loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity
method of accounting (see Note 6 to the financial statements for further information on affiliate matters).
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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
2009
Year Ended December 31,
2008
(In millions)
$
84.0
$
92.1
(10.1 )
5.7
(5.0 )
2.8
2007
22.0
1.9
(1.1 )
Our business and operations are subject to a number of significant risks, the most significant of which are summarized in
Item 1A — Risk Factors and also in Note 14 to the financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency
Loral
We, in the normal course of business, are subject to the risks associated with fluctuations in foreign currency exchange
rates. To limit this foreign exchange rate exposure, the Company seeks to denominate its contracts in U.S. dollars. If we are
unable to enter into a contract in U.S. dollars, we review our foreign exchange exposure and, where appropriate derivatives are
used to minimize the risk of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative
instruments for trading or speculative purposes.
As of December 31, 2009, SS/L had the following amounts denominated in Japanese Yen and EUROs (which have been
translated into U.S. dollars based on the December 31, 2009 exchange rates) that were unhedged:
Future revenues — Japanese Yen
Future expenditures — Japanese Yen
Contracts-in-process, unbilled receivables — Japanese Yen
Future revenues — EUROs
Future expenditures — EUROs
Derivatives
Foreign Currency
U.S.$
¥
¥
¥
€
€
(In millions)
35.1 $
4,613.7 $
75.4 $
4.4 $
2.4 $
0.4
50.0
0.8
6.3
3.4
On July 9, 2008, SS/L was awarded a satellite contract denominated in EUROs and entered into a series of foreign
exchange forward contracts with maturities through 2011 to hedge the associated foreign currency exchange risk. These foreign
exchange forward contracts have been designated as cash flow hedges of future Euro denominated receivables.
The maturity of foreign currency exchange contracts held as of December 31, 2009 is consistent with the contractual or
expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts. These
foreign exchange contracts mature as follows:
Maturity
2010
2011
Euro
Amount
€
€
19.2
23.5
42.7
57
To Sell
At
Contract
Rate
(In millions)
$
29.4
35.7
65.1
$
At
Market
Rate
$
$
27.5
33.7
61.2
Table of Contents
As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative
contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of
entering into contracts only with carefully selected major financial institutions based upon their credit ratings and other factors.
The aggregate fair value of derivative instruments was a net asset position of $3.9 million as of December 31, 2009. This
amount represents the maximum exposure to loss at December 31, 2009 as a result of the counterparties failing to perform as
contracted.
Telesat
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions
are made in currencies other than Canadian dollars. Approximately 45% of Telesat’s revenues for the year ended December 31,
2009, certain of its expenses and a substantial portion of its indebtedness and capital expenditures were denominated in U.S.
dollars. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated debt financing. A five
percent change in the value of the Canadian dollar against the U.S. dollar at December 31, 2009 would have increased or
decreased Telesat’s net income for the year ended December 31, 2009 by approximately $139 million. During the period from
October 31, 2007 to December 31, 2009, Telesat’s U.S. Term Loan Facility, Senior Notes and Senior Subordinated Notes have
increased by approximately $266 million due to the stronger U.S. dollar. However during that same time period, the liability
created by the fair value of the currency basis swap, which synthetically converts $1.054 billion of the U.S. Term Loan Facility
debt into CAD 1.224 billion of debt, decreased by approximately $171 million.
Interest
The Company had no borrowings outstanding under the SS/L Credit Agreement at December 31, 2009. Borrowings under
this facility are limited to Eurodollar Loans for periods ending in one, two, three or six months or ABR Loans which rate is
adjusted daily based upon changes in the Prime Rate or Federal Funds Rate. Because of the nature of the borrowing under a
revolving credit facility, the borrowing rate adjusts to changes in interest rates over time. For a $100 million credit facility, if it
were fully borrowed, a one percent change in interest rates would effect the Company’s interest expense by $1 million for the
year. The Company had no other long-term debt or other exposure to changes in interest rates with respect thereto.
As of December 31, 2009, the Company held 984,173 shares of Globalstar Inc. common stock and $2.9 million of non-
qualified pension plan assets that were mainly invested in equity and bond funds. During the year, our excess cash was invested
in money market securities; we did not hold any other marketable securities.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedules on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2009, have concluded that our
disclosure controls and procedures were effective and designed to ensure that information relating to Loral and its consolidated
subsidiaries required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities Exchange Commission rules and forms. The term disclosure controls and
procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed
by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that the information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
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Table of Contents
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, 2009.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009
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, 2009 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 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 may 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.
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the internal control over financial reporting of Loral Space & Communications Inc. and subsidiaries (the
“Company”) as of December 31, 2009, 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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A 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, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009,
of the Company and our report dated March 15, 2010 expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2010
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Table of Contents
Item 9B. Other Information
None.
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Registrant
PART III
The following table sets forth information concerning the executive officers of Loral as of March 1, 2010.
Name
Age
Position
Michael B. Targoff
65
Chief Executive Officer since March 1, 2006, President since January 2008 and Vice
Chairman of the Board of Directors since November 2005. Prior to that, founder of
Michael B. Targoff & Co.
Avi Katz
51
Richard P. Mastoloni
45
Senior Vice President, General Counsel and Secretary since January 2008. Vice
President, General Counsel and Secretary from November 2005 to January 2008. Vice
President, General Counsel and Secretary of Old Loral from November 1999 to
November 2005.
Senior Vice President of Finance and Treasurer since January 2008. Vice President and
Treasurer from November 2005 to January 2008. Vice President and Treasurer of Old
Loral from February 2002 to November 2005. Vice President of Old Loral from
September 2001 to February 2002.
Harvey B. Rein
56
Senior Vice President and Chief Financial Officer since January 2008. Vice President
and Controller from November 2005 to January 2008. Vice President and Controller of
Old Loral from April 1996 to November 2005.
John Capogrossi
56
Vice President and Controller since January 2008. Executive Director, Financial
Planning and Analysis, from October 2006 to January 2008. Assistant Controller from
November 2005 to October 2006. Assistant Controller of Old Loral from January 2001
to November 2005.
Messrs. Katz, Mastoloni and Rein were executive officers of Old Loral and certain of its subsidiaries which filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code in July 2003. In addition, Messrs. Katz, Mastoloni and
Rein served as executive officers of Globalstar, L.P. and certain of its subsidiaries, Loral/Qualcomm Satellite Services, L.P.
(“LQSS”), the managing general partner of Globalstar, L.P., Loral/Qualcomm Partnership, L.P. (“LQP”), the general partner of
LQSS, and certain subsidiaries of Old Loral that served as general partners of LQP, all of which filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code in February 2002.
The remaining information required under Item 10 will be presented in the Company’s 2010 definitive proxy statement
which is incorporated herein by reference.
Item 11. Executive Compensation
Information required under Item 11 will be presented in the Company’s 2010 definitive proxy statement which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required under Item 12 will be presented in the Company’s 2010 definitive proxy statement which is
incorporated herein by reference.
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Table of Contents
Item 13. Certain Relationships and Related Transactions
Information required under Item 13 will be presented in the Company’s 2010 definitive proxy statement which is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required under Item 14 will be presented in the Company’s 2010 definitive proxy statement which is
incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
Index to Financial Statements and Financial Statement Schedule
Loral Space & Communications Inc. and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Equity for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedule
Schedule II
Separate Financial Statements of Subsidiaries not consolidated Pursuant to Rule 3-09 of Regulation S-X
Telesat Holdings Inc. and Subsidiaries:
Report of Independent Registered Chartered Accountants
Consolidated Statements of Earnings (Loss) for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2009, 2008
2007
Consolidated Statements of Shareholders’ Equity for the year ended December 31, 2009 with comparative
figures for the periods ended December 31, 2008, December 31, 2007, October 30, 2007
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Cash Flow for the years ended December 31, 2009, 2008 and 2007
Notes to the 2009 Consolidated Financial Statements
62
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-61
F-62
F-63
F-64
F-65
F-66
F-67
F-68
Table of Contents
Exhibit
Number
2.1
2.2
2.3
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)
Letter Agreement among Loral Space & Communications Inc., Loral Skynet Corporation, Public Sector
Pension Investment Board, 4363205 Canada Inc. and 4363213 Canada Inc. dated December 14, 2006(5)
2.4
Share Purchase Agreement among 4363213 Canada Inc., BCE Inc. and Telesat dated December 16, 2006(5)
2.5
2.6
2.7
2.8
Letter Agreement among Loral Space & Communications Inc., Public Sector Pension Investment Board and
BCE Inc. dated December 16, 2006(5)
Asset Transfer Agreement, dated as of August 7, 2007, by and among 4363205 Canada Inc., Loral Skynet
Corporation and Loral Space & Communications Inc.(7)
Amendment No. 1 to Asset Transfer Agreement, dated as of September 24, 2007, by and among 4363205
Canada Inc., Loral Skynet Corporation and Loral Space & Communications Inc.(8)
Asset Purchase Agreement, dated as of August 7, 2007, by and among Loral Skynet Corporation, Skynet
Satellite Corporation and Loral Space & Communications Inc.(7)
3.1
Restated Certificate of Incorporation of Loral Space & Communications Inc. dated May 19, 2009(19)
3.2
Amended and Restated Bylaws of Loral Space & Communications Inc. dated December 23, 2008(15)
3.3
Amendment No. 1 to Bylaws of Loral Space & Communications dated January 12, 2010(23)
10.1
10.2
10.3
10.4
10.5
10.6
Credit Agreement, dated as of October 16, 2008, among Space Systems/Loral, Inc., as Borrower, the several
lenders from time to time party thereto, Bank of America, N.A., as Documentation Agent, ING Bank, N.V.,
as Syndication Agent, and JPMorgan Chase Bank, N.A., as Administrative Agent(14)
Parent Guarantee Agreement, dated as of October 22, 2008, by Loral Space & Communications Inc. in favor
of JPMorgan Chase Bank, N.A., as Administrative Agent.(14)
Ancillary Agreement, dated as of August 7, 2007, by and among Loral Space & Communications Inc., Loral
Skynet Corporation, Public Sector Pension Investment Board, 4363205 Canada Inc. and 4363230 Canada
Inc.(7)
Adjustment Agreement, dated as of October 29, 2007, between Telesat Interco Inc. (formerly 4363213
Canada Inc.), BCE Inc. and Telesat(9)
Omnibus Agreement, dated as of October 30, 2007, by and among Loral Space & Communications Inc.,
Loral Skynet Corporation, Public Sector Pension Investment Board, Red Isle Private Investments Inc. and
Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(9)
Shareholders Agreement, dated as of October 31, 2007, between Public Sector Pension Investment Board,
Red Isle Private Investments Inc., Loral Space & Communications Inc., Loral Space & Communications
Holdings Corporation, Loral Holdings Corporation, Loral Skynet Corporation, John P. Cashman, Colin D.
Watson, Telesat Holdings Inc. (formerly 4363205 Canada Inc.), Telesat Interco Inc. (formerly 4363213
Canada Inc.), Telesat and MHR Fund Management LLC(9)
10.7
Consulting Services Agreement, dated as of October 31, 2007, by and between Loral Space &
Communications Inc. and Telesat(9)
10.8
Indemnity Agreement, dated as of October 31, 2007, by and among Loral Space & Communications Inc.,
Telesat, Telesat Holdings Inc., Telesat Interco Inc. and Henry Gerard (Hank) Intven(9)
10.9
Acknowledgement and Indemnity Agreement, dated as of October 31, 2007, between Loral Space &
Communications Inc., Telesat, Telesat Holdings Inc. (formerly 4363205 Canada Inc.), Telesat Interco Inc.
(formerly 4363213 Canada Inc.) and McCarthy Tétrault LLP(9)
10.10
Amended and Restated Registration Rights Agreement dated December 23, 2008 by and among Loral
Space & Communications Inc. and the Persons Listed on the Signature Pages Thereof(15)
63
Table of Contents
Exhibit
Number
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Description
Letter Agreement, dated as of June 30, 2009, by and among Loral Space & Communications Inc, MHR
Capital Partners Master Account LP, MHR Capital Partners (100) LP, MHR Institutional Partners LP,
MHRA LP, MHRM LP, MHR Institutional Partners II LP, MHR Institutional Partners IIA LP and MHR
Institutional Partners III LP.(20)
Partnership Interest Purchase Agreement dated December 21, 2007 by and among GSSI, LLC, Globalstar,
Inc., Loral/DASA Globalstar, LP, Globalstar do Brasil, SA., Loral/DASA do Brasil Holdings Ltda., Loral
Holdings LLC, Global DASA LLC, LGP (Bermuda) Ltd., Mercedes-Benz do Brasil Ltda. (f/k/a
DaimlerChrysler do Brasil Ltda.) and Loral Space & Communications Inc.(10)
Beam Sharing Agreement, dated as of January 11, 2008, by and between Loral Space & Communications
Inc. and ViaSat Inc.(11)
Satellite Capacity and Gateway Service Agreement dated as of December 31, 2009 between Loral Space &
Communications Inc. and Barrett Xplore Inc.(22)
Employment Agreement between Loral Space & Communications Inc. and Michael B. Targoff dated as of
March 28, 2006 and amended and restated as of December 17, 2008(17) ‡
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) ‡
10.18
Loral Space Management Incentive Bonus Program (Adopted as of December 17, 2008)(15) ‡
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Loral Space & Communications Inc. 2005 Stock Incentive Plan (Amended and Restated as of April 3, 2009)
(18) ‡
Form of Amended and Restated Non-Qualified Stock Option Agreement under Loral Space &
Communications Inc. 2005 Stock Incentive Plan for Senior Management dated as of December 21, 2005 and
amended and restated as of November 10, 2008(17) ‡
Non-Qualified Stock Option Agreement under Loral Space & Communications Inc. 2005 Stock Incentive
Plan between Loral Space & Communications Inc. and Michael B. Targoff dated March 28, 2006(4) ‡
Restricted Stock Unit Agreement dated March 5, 2009 between Loral Space & Communications Inc. and
Michael B. Targoff(16) ‡
Restricted Stock Unit Agreement dated March 5, 2010 between Loral Space & Communications Inc. and
Michael B. Targoff †‡
Restricted Stock Unit Agreement dated March 5, 2009 between Loral Space & Communications Inc. and
C. Patrick DeWitt(16) ‡
Option Agreement dated October 27, 2009, between Loral Space & Communications Inc. and Michael B.
Targoff(21) ‡.
Form of Restricted Stock Unit Agreement dated October 27, 2009 between Loral Space & Communications
Inc. and Loral executives(21) ‡
Form of Phantom Stock Appreciation Rights Agreement relating to Space Systems/Loral, Inc. dated
October 27, 2009 between Loral Space & Communications Inc. and Loral and SS/L executives(21) ‡
10.28
Form of Director 2006 Restricted Stock Agreement(6) ‡
10.29
Form of Director 2007 Restricted Stock Agreement(6) ‡
10.30
Form of Director 2008 Restricted Stock Agreement(17) ‡
10.31
Form of Director 2009 Restricted Stock Unit Agreement† ‡
10.32
Form of Employee Restricted Stock Agreement(6) ‡
10.33
10.34
Amended and Restated Space Systems/Loral, Inc. Supplemental Executive Retirement Plan (Amended and
Restated as of December 17, 2008)(15) ‡
Loral Savings Supplemental Executive Retirement Plan (Amended and Restated as of December 17, 2008)
(15) ‡
64
Table of Contents
Exhibit
Number
10.35
Description
Loral Space & Communications Inc. Severance Policy for Corporate Officers (Amended and Restated as of
December 17, 2008)(15) ‡
14.1
Code of Conduct, Revised as of June 11, 2008(13)
21.1
List of Subsidiaries of the Registrant†
23.1
Consent of Deloitte & Touche LLP†
23.2
Consent of Deloitte & Touche LLP†
31.1
31.2
32.1
32.2
9.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the
Sarbanes-Oxley Act of 2002†
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†
Credit Agreement, dated as of October 31, 2007, among Telesat Interco Inc. (formerly 4363213 Canada
Inc.), Telesat Holdings Inc. (formerly 4363205 Canada Inc.), 4363230 Canada Inc., Telesat LLC, certain
subsidiaries of Telesat Holdings Inc., as guarantors, the lenders party thereto from time to time, Morgan
Stanley Senior Funding, Inc., as administrative agent, and Morgan Stanley & Co. Incorporated, as collateral
agent for the lenders, UBS Securities LLC, as syndication agent, JPMorgan Chase Bank, N.A., The Bank of
Nova Scotia, as issuing bank, and Citibank, N.A., Canadian Branch or any of its lending affiliates, as co-
documentation agents, and Morgan Stanley & Co. Incorporated, UBS Securities LLC and J.P. Morgan
Securities Inc., as joint lead arrangers and joint book running managers(9)
99.2
Articles of Incorporation of Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(9)
99.3
By-Law No. 1 of Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(9)
99.4
Letter Agreement dated March 28, 2008 among Loral Space & Communications Inc., Loral Skynet
Corporation, Public Sector Pension Investment Board, Red Isle Private Investment Inc. and Telesat Holdings
Inc.(12)
(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 Annual Report on Form 10-K for the fiscal year ended December 31, 2005
filed on March 28, 2006.
(5) Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 21, 2006.
(6) Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 29, 2007.
(7) Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 9, 2007.
(8) Incorporated by reference from the Company’s Current Report on Form 8-K filed on September 27, 2007.
(9) Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 2, 2007.
(10) Incorporated by reference from the Company’s Current Report on Form 8-K filed December 21, 2007.
65
Table of Contents
(11) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 16, 2008.
(12) Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 31, 2008.
(13) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q filed on June 16, 2008.
(14) Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 22, 2008.
(15) Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 23, 2008.
(16) Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 10, 2009.
(17) Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008
filed on March 16, 2009.
(18) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q filed on May 11, 2009.
(19) Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 20, 2009.
(20) Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 30, 2009.
(21) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q filed on November 9, 2009.
(22) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 7, 2010.
(23) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 15, 2010.
†
‡
Filed herewith.
Management compensation plan.
66
Table of Contents
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
Vice Chairman of the Board,
Chief Executive Officer and President
Dated: March 15, 2010
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
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Vice Chairman of the Board, Chief Executive Officer
and President
Date
March 15, 2010
/s/ MARK H. RACHESKY, M.D.
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/ ARTHUR L. SIMON
Arthur L. Simon
/s/ JOHN P. STENBIT
John P. Stenbit
/s/ HARVEY B. REIN
Harvey B. Rein
/s/ JOHN CAPOGROSSI
John Capogrossi
Director, Non-Executive Chairman of the Board
March 12, 2010
Director
Director
Director
Director
Director
Senior Vice President and CFO
(Principal Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
67
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 15, 2010
March 15, 2010
Table of Contents
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Loral Space & Communications Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Equity for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Schedule II
Separate Financial Statements of Subsidiaries not consolidated Pursuant to Rule 3-09 of Regulation S-X
Telesat Holdings Inc. and Subsidiaries:
Report of Independent Registered Chartered Accountants
Consolidated Statements of Earnings (Loss) for the years ended December 31, 2009, 2008 and 2007
F-2
F-3
F-4
F-5
F-6
F-7
F-61
F-62
F-63
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007
F-64
Consolidated Statements of Shareholders’ Equity for the year ended December 31, 2009 with comparative figures
for the periods ended December 31, 2008, December 31, 2007, October 30, 2007
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Cash Flow for the years ended December 31, 2009, 2008 and 2007
Notes to the 2009 Consolidated Financial Statements
F-65
F-66
F-67
F-68
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Loral Space & Communications Inc. and subsidiaries
(the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity, and cash
flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement
schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2009, 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 15, 2010 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2010
F-2
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Table of Contents
Current assets:
Cash and cash equivalents
Contracts-in-process
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Long-term receivables
Investments in affiliates
Intangible assets, net
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued employment costs
Customer advances and billings in excess of costs and profits
Income taxes payable
Other current liabilities
Total current liabilities
Borrowings under revolving credit facility
Pension and other postretirement liabilities
Long-term liabilities
Total liabilities
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and
outstanding
Common Stock:
Voting common stock, $.01 par value; 50,000,000 shares authorized, 20,390,752 and
20,286,992 shares issued and outstanding
Non-voting common stock, $0.1 par value; 20,000,000 shares authorized, 9,505,673
issued and outstanding
Paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
See notes to consolidated financial statements.
F-3
December 31,
2009
2008
$
$
$
$
168,205
190,809
83,671
24,343
467,028
207,996
248,097
282,033
20,300
27,998
$ 1,253,452
$
86,809
44,341
291,021
1,539
17,608
441,318
—
226,190
153,953
821,461
117,548
213,651
109,755
54,286
495,240
188,270
184,701
72,642
31,578
23,436
995,867
91,052
41,819
184,592
233
31,678
349,374
55,000
230,660
151,176
786,210
—
—
204
203
95
1,013,790
(519,220 )
(62,878 )
431,991
$ 1,253,452
95
1,007,011
(750,922 )
(46,730 )
209,657
995,867
$
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Revenue from satellite manufacturing
Revenue from satellite services
Total revenues
Cost of satellite manufacturing
Cost of satellite services
Selling, general and administrative expenses
Gain on recovery from customer bankruptcy
Impairment of goodwill
Gain on contribution of Loral Skynet
Operating income (loss)
Interest and investment income
Interest expense
Gain on foreign exchange contracts
Gain on litigation, net
Impairment of available for sale securities
Loss on extinguishment of debt
Other (expense) income
Income (loss) before income taxes and equity in net income (losses) of
affiliates
Income tax provision
Income (loss) before equity in net income (losses) of affiliates
Equity in net income (losses) of affiliates
Net income (loss)
Net income attributable to noncontrolling interest
Net income (loss) attributable to Loral Space & Communications Inc.
Preferred dividends
Beneficial conversion feature related to the issuance of Loral Series A-1
Preferred Stock
Net income (loss) applicable to Loral Space & Communications Inc.
common shareholders
Basic and diluted income (loss) per share:
Basic income (loss) per share
Diluted income (loss) per share
Weighted average shares outstanding:
Basic
Diluted
$
$
$
$
$
$
Year Ended December 31,
2008
869,398
—
869,398
787,758
—
97,015
(9,338 )
187,940
—
(193,977 )
11,857
(2,268 )
—
38,823
(5,823 )
—
(135 )
2009
993,400
—
993,400
880,486
—
92,703
—
—
—
20,211
8,307
(1,422 )
—
—
—
—
(121 )
26,975
(5,571 )
21,404
210,298
231,702
—
231,702
—
(151,523 )
(45,744 )
(197,267 )
(495,649 )
(692,916 )
—
(692,916 )
(24,067 )
2007
761,363
121,091
882,454
688,991
86,213
166,936
—
—
(104,942 )
45,256
39,279
(2,312 )
89,364
—
—
(16,155 )
2,354
157,786
(83,457 )
74,329
(21,430 )
52,899
(23,240 )
29,659
(19,379 )
—
—
(25,685 )
231,702
$
(716,983 )
$
(15,405 )
7.79
7.73
$
$
(35.13 )
(35.13 )
$
$
(0.77 )
(0.77 )
29,761
29,981
20,407
20,407
20,087
20,087
See notes to consolidated financial statements.
F-4
Table of Contents
Balance, January 1, 2007
Uncertain tax positions, cumulative effect
upon adoption
Net income attributable to Loral Space &
Communications Inc.
Other comprehensive loss
Comprehensive income
Issuance of Series -1 preferred stock
Issuance of Series -1 preferred stock as
payment for dividend
Issuance of Loral Skynet preferred stock as
payment for dividend to non controlling
interest
Redemption of Loral Skynet preferred stock
Exercise of stock options
Shares surrendered to fund withholding taxes
Stock based compensation
Preferred stock dividends
Balance, December 31, 2007
Net loss
Other comprehensive loss
Comprehensive loss
Issuance of Series -1 preferred stock as
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Series A-1
Convertible
Series B-1
Convertible
Common Stock
Accumulated
Other
Voting
Preferred Stock Preferred Stock
Shares
Shares
Issued Amount Issued Amount Issued Amount Issued Amount Capital
20,000 $
Non-Voting
Shares
Shares
200
$ 644,708 $
Paid-In Earnings
(Deficit)
Accumulated Comprehensive
Income
(loss)
Noncontrolling Total
(37,981 ) $
40,075 $
(6,238 )
29,659
(3,558 )
137 $ 40,237 859 $ 253,013
(8,864 )
5
1,636
42
12,764
142 41,873 901 265,777 20,293
108
(20 )
205
1
—
2
1,920
(982 )
26,345
203 —
— 663,127
(19,379 )
(33,939 )
(692,916 )
36,517
(83,247 )
payment for dividend
3
822
78
23,427
Shares surrendered to fund withholding taxes
Stock based compensation
Series-1 preferred dividends
Cancellation and conversion of Series-1
—
618 —
4,179
(18 )
12
(338 )
7,621
preferred stock to non-voting common
stock
(145 ) (43,313 ) (979 ) (293,383 )
9,506 $
95 336,601
—
Preferred stock dividends
Balance, December 31, 2008
Net income
Other comprehensive loss
Comprehensive income
Exercise of stock options
Shares surrendered to fund withholding taxes
Stock based compensation
Balance, December 31, 2009
—
— —
— 20,287
203 9,506
95 1,007,011
(24,067 )
(750,922 )
231,702
(46,730 )
(16,148 )
74
(43 )
73
— 20,391 $
1
0
204 9,506 $
1,403
(1,559 )
6,935
95 $ 1,013,790 $
— —
(519,220 ) $
(62,878 )
See notes to consolidated financial statements.
F-5
Interest
Equity
214,256 $ 861,258
(6,238 )
26,101
284,386
14,400
23,343 23,343
(237,599 ) (237,599 )
1,921
(982 )
26,347
(19,379 )
— 973,558
(776,163 )
24,249
(338 )
7,621
4,797
(24,067 )
— 209,657
215,554
1,404
(1,559 )
6,935
— $ 431,991
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Non-cash items
Changes in operating assets and liabilities:
Accounts receivable
Contracts-in-process
Inventories
Long-term receivables
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
Net cash provided by (used in) operating activities
Investing activities:
Capital expenditures
Decrease (increase) in restricted cash in escrow
Proceeds received for the contribution of Loral Skynet net of cash
contributed
Distribution from an equity investment
Proceeds from the sale of short-term investments and available-for-sale
securities
Purchase of short-term investments
Investments in and advances to affiliates
Net cash (used in) provided by investing activities
Financing activities:
(Repayments) borrowings under SS/L revolving credit facility
Debt issuance costs
Proceeds from term loan (Loral Skynet Notes refinancing facility)
Repayment of Loral Skynet Notes
10% redemption fee on extinguishment of Loral Skynet Notes
Preferred stock issuance costs
Proceeds from the sale of Series-1 preferred stock
Redemption of Loral Skynet Preferred Stock
Proceeds from the exercise of stock options
Cash dividends paid on Loral Skynet Preferred Stock
Other
Net cash (used in) provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of year
Cash and cash equivalents — end of year
$
Year Ended December 31,
2008
2009
2007
$
231,702
$
(692,916 )
$
52,899
(164,785 )
762,210
(59,211 )
—
(7,913 )
17,482
(5,565 )
2,806
(5,628 )
(9,611 )
80,350
21,426
(4,158 )
(1,544 )
154,562
(43,557 )
10
—
277
—
—
(5,480 )
(48,750 )
(55,000 )
—
—
—
—
—
—
—
1,404
—
(1,559 )
(55,155 )
50,657
117,548
168,205
—
(216,354 )
(12,787 )
13,947
3,393
23,681
(22,455 )
(19,710 )
(55,034 )
(19,010 )
32,825
(202,210 )
(64,559 )
18,637
—
—
162
(500 )
(1,048 )
(47,308 )
55,000
(2,628 )
—
—
—
—
—
—
—
—
—
52,372
(197,146 )
314,694
117,548
$
64,828
(60,880 )
(15,872 )
(266 )
6,369
6,041
15,866
(17,751 )
28,719
8,663
(2,282 )
27,123
(95,761 )
(19,709 )
57,591
2,955
468,571
(350,895 )
(1,233 )
61,519
—
—
141,050
(126,000 )
(12,600 )
(8,864 )
293,250
(237,599 )
2,097
(11,824 )
—
39,510
128,152
186,542
314,694
$
See notes to consolidated financial statements.
F-6
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Principal Business
Loral Space & Communications Inc., together with its subsidiaries (“Loral”, the “Company”, “we”, “our” and “us”), is a
in satellite-based
in satellite manufacturing with
investments
leading satellite communications company engaged
communications services.
Loral has two segments:
Satellite Manufacturing:
Our subsidiary, Space Systems/Loral, Inc. (“SS/L”), designs and manufactures satellites, space systems and space
system components for commercial and government customers whose applications include fixed satellite services (“FSS”),
direct-to-home (“DTH”) broadcasting, mobile satellite services (“MSS”), broadband data distribution, wireless telephony,
digital radio, digital mobile broadcasting, military communications, weather monitoring and air traffic management.
Satellite Services:
Loral participates in satellite services operations principally through its investment in Telesat Holdings Inc. (“Telesat
Holdco”), which owns Telesat Canada (“Telesat”), a global FSS provider. Telesat owns and leases a satellite fleet that
operates in geosynchronous earth orbit approximately 22,000 miles above the equator. In this orbit, satellites remain in a
fixed position relative to points on the earth’s surface and provide reliable, high-bandwidth services anywhere in their
coverage areas, serving as the backbone for many forms of telecommunications.
Until October 31, 2007, the operations of our satellite services segment were conducted through Loral Skynet
Corporation (“Loral Skynet”), which leased transponder capacity to commercial and government customers for video
distribution and broadcasting, high-speed data distribution, Internet access and communications, and provided managed
network services to customers using a hybrid satellite and ground-based system. It also provided professional services such
as fleet operating services to other satellite operators. At October 31, 2007, Loral Skynet had four in-orbit satellites and had
one satellite under construction at SS/L.
On October 31, 2007, Loral and its Canadian partner, Public Sector Pension Investment Board (“PSP”), through
Telesat Holdco, a newly-formed joint venture, completed the acquisition of Telesat from BCE Inc. (“BCE”). In connection
with this acquisition, Loral transferred on that same date substantially all of the assets and related liabilities of Loral Skynet
to Telesat. Loral holds a 64% economic interest and a 33 1 / 3 % voting interest in Telesat Holdco (see Note 6). We use the
equity method of accounting for our investment in Telesat Holdco.
We refer to the acquisition of Telesat and the related transfer of Loral Skynet to Telesat as the Telesat transaction.
References to Telesat with respect to periods prior to the closing of this transaction are references to the subsidiary of BCE
and with respect to the period after the closing of this transaction are references to Telesat Holdco and/or its subsidiaries, as
appropriate. Similarly, unless otherwise indicated, references to Loral Skynet with respect to periods prior to the closing of
this transaction are references to the operations of Loral’s satellite services segment as conducted through Loral Skynet and
with respect to the period commencing on and after the closing of this transaction are, if related to the fixed satellite
services business, references to the Loral Skynet operations within Telesat.
Loral, a Delaware corporation, was formed on June 24, 2005, to succeed to the business conducted by its predecessor
registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal bankruptcy laws on
November 21, 2005 (the “Effective Date”) pursuant to the terms of the fourth amended joint plan of reorganization, as modified
(“the Plan of Reorganization”).
The terms “Loral,” the “Company,” “we,” “our” and “us” when used in these financial statements with respect to the period
prior to the Effective Date, are references to Old Loral, and when used with respect to the period commencing on and after the
Effective Date, are references to Loral. These references include the subsidiaries of Old Loral or Loral, as the case may be,
unless otherwise indicated or the context otherwise requires.
F-7
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Basis of Presentation
The consolidated financial statements include the results of Loral and its subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions
have been eliminated.
As noted above, we emerged from bankruptcy on November 21, 2005, and we adopted fresh-start accounting as of
October 1, 2005 and determined the fair value of our assets and liabilities. Upon emergence, our reorganization equity value was
allocated to our assets and liabilities, which were stated at fair value in accordance with the purchase method of accounting for
business combinations. In addition, our accumulated deficit was eliminated, and our new equity was recorded in accordance with
distributions pursuant to the Plan of Reorganization.
Investments in Telesat and XTAR, L.L.C. (“XTAR”) are accounted for using the equity method of accounting. Income and
losses of affiliates are recorded based on our beneficial interest. Intercompany profit arising from transactions with affiliates is
eliminated to the extent of our beneficial interest. Equity in losses of affiliates is not recognized after the carrying value of an
investment, including advances and loans, has been reduced to zero, unless guarantees or other funding obligations exist. The
Company monitors its equity method investments for factors indicating other-than-temporary impairment. An impairment loss
would be recognized when there has been a loss in value of the affiliate that is other than temporary.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the amounts of revenues and expenses reported for the period. Actual results could differ from
estimates.
Most of our satellite manufacturing revenue is associated with long-term contracts which require significant estimates.
These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including
orbital incentives) and the potential for component obsolescence in connection with long-term procurements. Significant
estimates also include the estimated useful lives of our plant and equipment, and finite lived intangible assets, the fair value of
indefinite lived intangible assets and goodwill, the fair value of stock based compensation, the realization of deferred tax assets,
uncertain tax positions, gains or losses on derivative instruments and our pension liabilities.
Cash and Cash Equivalents, Restricted Cash and Available for Sale Securities
As of December 31, 2009, the Company had $168.2 million of cash and cash equivalents, and $5.6 million of restricted
cash ($0.6 million included in other current assets and $5.0 million included in other assets on our consolidated balance sheet).
Cash and cash equivalents include liquid investments with maturities of less than 90 days at the time of purchase. Management
determines the appropriate classification of its investments at the time of purchase and at each balance sheet date. Investments in
publicly traded common stock are classified as available for sale securities. Available for sale securities are carried at fair value
with unrealized gains and losses, if any, reported in accumulated other comprehensive income (loss).
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash
equivalents, foreign exchange contracts, contracts-in-process, long-term receivables and advances and loans to affiliates (see
Note 6). Our cash and cash equivalents are maintained with high-credit-quality financial institutions. Historically, our customers
have been primarily large multinational corporations and U.S. and foreign governments for which the creditworthiness was
generally substantial. In recent years, we have added commercial customers which are highly leveraged, as well as those in the
development stage which are partially funded. Management believes that its credit evaluation, approval and monitoring
processes combined with contractual billing arrangements provide for management of potential credit risks with regard to our
current customer base. However, the global financial markets have been adversely affected by the current market environment
that includes illiquidity, market volatility, widening credit spreads, changes in interest rates, and currency exchange fluctuations.
These credit and financial market conditions may have a negative effect on certain of our customers and could negatively affect
the ability of such customers to pay amounts owed or to enter into future contracts with us.
F-8
Table of Contents
Inventories
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories are valued at the lower of cost or fair value and consist principally of parts and subassemblies used in the
manufacture of satellites which have not been specifically identified to contracts-in-process. Cost is determined using the first-in-
first-out (FIFO) or average cost method. As of December 31, 2009 and 2008, inventory was reduced by an allowance for
obsolescence of $28.3 million and $27.2 million, respectively. Inventory of $7.6 million was included in other assets as of
December 31, 2009.
Fair Value Measurements
U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer
a liability in the principal or most advantageous market in an orderly transaction between market participants. U.S. GAAP also
establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable
inputs. The three levels of the fair value hierarchy are described below:
Level 1: Inputs represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in
active markets at the measurement date.
Level 2: Inputs represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full
term of the assets or liabilities, and pricing inputs, other than quoted prices in active markets included in Level 1, which are
either directly or indirectly observable as of the reporting date.
Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar techniques.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2009:
Assets:
Marketable securities
Derivatives, net
Non-qualified pension plan assets
Level 1
Level 2
(In thousands)
Level 3
$
$
$
856
—
2,791
$
$
$
—
3,873
—
$
$
$
—
—
81
The Company does not have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair
value on a recurring basis as of December 31, 2009.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We review the carrying values of our equity method investments when events and circumstances warrant and consider all
available evidence in evaluating when declines in fair value are other than temporary. The fair values of our investments are
determined based on valuation techniques using the best information available and may include quoted market prices, market
comparables and discounted cash flow projections. An impairment charge would be recorded when the carrying amount of the
investment exceeds its current fair value and is determined to be other than temporary. We had no equity-method investments
measured at fair value at December 31, 2009.
F-9
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Plant and Equipment
Property, plant and equipment are generally stated at cost less accumulated depreciation and amortization. As of October 1,
2005, we adopted fresh-start accounting and our property, plant and equipment owned as of that date were recorded at their fair
values. Depreciation is provided primarily on accelerated methods 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, 2009:
Land improvements
Buildings and building improvements
Leasehold improvements
Equipment, furniture and fixtures
Years
20
10 to 45
2 to 17
5 to 10
Costs incurred in connection with the construction and deployment of Loral’s portion of the ViaSat-1 satellite and related
equipment are capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch and in-orbit
insurance costs and costs for gateway services equipment. Capitalized interest related to the construction of satellites during 2007
was $8.4 million.
Intangible Assets
Intangible assets consist primarily of backlog, internally developed software and technology and trade names all of which
were recorded at fair value in connection with the adoption of fresh-start accounting. The fair values were calculated using
several approaches that encompassed the use of excess earnings, relief from royalty and the build-up methods. The excess
earnings, relief from royalty and build-up approaches are variations of the income approach. The income approach, more
commonly known as the discounted cash flow approach, estimates fair value based on the cash flows that an asset can be
expected to generate over its useful life. Identifiable intangible assets with finite useful lives are amortized on a straight-line
basis over the estimated useful lives of the assets.
Valuation of Long-Lived Assets
Long-lived assets of the Company are reviewed for impairment whenever events or changes in circumstances indicate that
the net carrying amount of the asset may not be recoverable. In connection with such review, the Company also re-evaluates the
periods of depreciation and amortization for these assets. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed their fair value.
Contingencies
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the
likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs
relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. Such
estimates may be based on advice from third parties or on management’s judgment, as appropriate. Actual amounts paid may
differ from amounts estimated, and such differences will be charged to operations in the period in which the final determination
of the liability is made.
Revenue Recognition
Satellite Manufacturing
Revenue from satellite sales under long-term fixed-price contracts is recognized using the cost-to-cost percentage-of-
completion method. Revenue includes the basic contract price and estimated amounts for penalties and incentive payments,
including award fees, performance incentives, and estimated orbital incentives discounted to their present value at launch date.
Costs include the development effort required for the production of high-technology satellites, non-recurring engineering and
design efforts in early periods of contract performance, as well as the cost of qualification testing requirements. Contracts are
typically subject to termination for convenience or for default. If a contract is terminated for convenience by a customer or due to
a customer’s default, we are generally entitled to our costs incurred plus a reasonable profit.
F-10
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Loral Skynet
Through the closing of the Telesat transaction on October 31, 2007, satellite capacity and network services were provided
under lease and network services agreements that generally provided for the use of satellite transponders and, in certain cases,
earth stations and other terrestrial communications equipment for periods generally ranging from one year to the end of life of
the satellite. Some of these agreements had certain obligations, including providing spare or substitute capacity, if available, in
the event of satellite failure. If no spare or substitute capacity was available, the agreement may be terminated. Revenue under
transponder lease and network services agreements was recognized as services were performed, provided that a contract existed,
the price was fixed or determinable and collectibility was reasonably assured. Revenues under contracts that included fixed lease
payment increases were recognized on a straight-line basis over the life of the lease.
Lease contracts qualifying for capital lease treatment, typically based, among other factors, upon the term of the lease and
the transfer of substantially all of the benefits and risks incident to the ownership of the transponder or satellite, were accounted
for as sales-type leases. For sales-type lease transactions, we recognized as revenue the net present value of the future minimum
lease payments or the cash received for prepaid lease arrangements. The cost basis of the transponder was charged to cost of
sales. During the life of the lease, we recognized as interest income in each respective period, that portion of each periodic lease
payment, if any, deemed to be attributable to interest. The balance of each periodic lease payment, representing principal
repayment, was recognized as a reduction of the net investment in sales-type leases.
Other terrestrial communications equipment represents network elements (such as antennas and transmission equipment)
necessary to enable communication between multiple terrestrial locations through a customer-selected satellite communications
service provider. Revenue from equipment sales was recognized upon acceptance by the customer or upon delivery, if the
equipment already met all of the criteria and specifications in the customer-specific acceptance provision, provided that a
contract existed, the price was fixed or determinable and collectibility was reasonably assured. Revenues under arrangements
that included both services and equipment elements were allocated based on the relative fair values of the elements of the
arrangement; otherwise, revenue was recognized as services were provided over the life of the arrangement.
Research and Development
Research and development costs, which are expensed as incurred, were $23.0 million, $34.6 million and $36.5 million for
2009, 2008 and 2007, respectively, and are included in selling, general and administrative expenses in our consolidated
statements of operations.
Derivative Instruments
Derivative instruments are recorded at fair value. Changes in the fair value of derivatives that have been designated as cash
flow hedging instruments are included in the “Unrealized gains on cash flow hedges” as a component of other comprehensive
income (loss) in the accompanying consolidated statements of equity to the extent of the effectiveness of such hedging
instruments. Any ineffective portion of the change in fair value of the designated hedging instruments is included in the
consolidated statements of operations. Changes in fair value of derivatives that are not designated as hedging instruments are
included in the consolidated statements of operations (see Notes 6 and 13).
F-11
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Noncontrolling Interest
On November 21, 2005, Loral Skynet issued one million of its two million authorized shares of Series A 12% non-
convertible preferred stock, $0.01 par value per share (the “Loral Skynet Preferred Stock”), which were distributed in accordance
with the Plan of Reorganization and represented a noncontrolling interest in Loral Skynet.
Dividends on Loral Skynet Preferred Stock are reflected as net income attributable to noncontrolling interest on our
consolidated statements of operations for the year ended December 31, 2007. On November 5, 2007, all of the issued and
outstanding shares of Loral Skynet Preferred Stock were redeemed in connection with the completion of the Telesat transaction
(see Note 10).
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is
recognized as expense ratably over the award’s vesting period. We use the Black-Scholes-Merton option-pricing model and other
models as applicable to estimate the fair value of these awards. These models require us to make significant judgments regarding
the assumptions used within the models, the most significant of which are the stock price volatility assumption, the expected life
of the award, the risk-free rate of return and dividends during the expected term.
The Company estimates expected forfeitures of stock-based awards at the grant date and recognizes compensation cost only
for those awards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore,
changes in the forfeiture assumptions may affect the timing of the total amount of expense recognized over the vesting period.
Estimated forfeitures are reassessed in each reporting period and may change based on new facts and circumstances. We
emerged from bankruptcy on November 21, 2005, and as a result, we did not have sufficient stock price history upon which to
base our volatility assumption for measuring our stock-based awards. In determining the volatility used in our models, 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. We based our estimate of the average life
of a stock-based award using the midpoint between the vesting and expiration dates. Our risk-free rate of return assumption for
awards was based on term-matching, nominal, monthly U.S. Treasury constant maturity rates as of the date of grant. We
assumed no dividends during the expected term.
SS/L phantom stock appreciation rights that are expected to be settled in cash or that contain an obligation to issue a
variable number of shares based on the financial performance of SS/L are classified as liabilities in our consolidated balance
sheets.
Deferred Compensation
Pursuant to the Plan of Reorganization we entered into deferred compensation arrangements for certain key employees that
generally vest over four years and expire after seven years. The initial deferred compensation awards were calculated by
multiplying $9.44 by the number of shares of common stock underlying the stock options granted to these key employees (see
Note 10). We are accreting the liability through charges to expense over the vesting period. The value of the deferred
compensation may increase or decrease depending on stock price performance within a defined range, until the occurrence of
certain events, including the exercise of the related stock options and vesting will accelerate if there is a change of control as
defined. Deferred compensation charged (credited) to expense, net of estimated forfeitures, was $6.6 million, $(4.6) million and
$6.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, our consolidated
balance sheet included deferred compensation liabilities of $7.2 million. In connection with the Telesat transaction which closed
on October 31, 2007, deferred compensation cost of $2.6 million was charged to expense in 2007 due to accelerated vesting from
change in control provisions.
F-12
Table of Contents
Income Taxes
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loral Space & Communications Inc. and its subsidiaries are subject to U.S. federal, state and local income taxation on their
worldwide income and foreign taxation on certain income from sources outside the United States. Telesat is subject to tax in
Canada and other jurisdictions, and Loral will provide in operating earnings any additional U.S. current or deferred tax required
on distributions received or deemed distributions from Telesat. 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 anticipated 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.
For periods prior to January 1, 2009 any reduction to the balance of the valuation allowance as of October 1, 2005 first reduced
goodwill, then other intangible assets with any excess treated as an increase to paid-in-capital. Effective January 1, 2009, all
reversals of the valuation allowance balance as of October 1, 2005 are recorded as a reduction to the income tax provision (see
Note 9).
The tax effects of an uncertain tax position (“UTP”) taken or expected to be taken in income tax returns are recognized only
if it is “more likely-than-not” to be sustained on examination by the taxing authorities, based on its technical merits as of the
reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes
estimated accrued interest and penalties related to UTPs in income tax expense.
The Company recognizes the benefit of a UTP in the period when it is effectively settled. Previously recognized tax
positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained
upon examination.
F-13
Table of Contents
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 operating items:
Gain on contribution of Loral Skynet
Equity in net (income) losses of affiliates
Deferred taxes
Depreciation and amortization
Stock based compensation
Provisions for inventory obsolescence
Warranty expense accruals (reversals)
Provisions for (recoveries of) bad debts on billed receivables
Adjustment to revenue straightlining assessment
Write-off of construction in process
Loss on disposition of fixed assets
Loss on extinguishment of debt
Impairment of goodwill
Impairment of available for sale securities
Curtailment gain
Amortization of prior service credit and actuarial gains
Gain on disposition of an orbital slot
Amortization of fair value adjustments related to orbital incentives
Gain on disposition of available for sale securities
Unrealized (gain) loss on non-qualified pension plan assets
Non-cash net interest
(Gain)/loss on foreign currency transactions and contracts
Net non-cash operating items
Non-cash investing activities:
Available for sale securities received in connection with the sale of
Globalstar do Brazil
Capital expenditures incurred not yet paid
Investment in affiliate not yet paid
Non-cash financing activities:
Issuance of restricted stock
Issuance of preferred stock by subsidiary as payment for dividend
Issuance of Loral Series-1 Preferred Stock as payment for dividend
Accrued dividends on Loral Series-1 Preferred Stock
Issuance of non-voting common stock and cancellation of Loral Series-
1 Preferred Stock
Supplemental information:
Interest paid
Tax (refunds) payments
Cash paid for reorganization items:
Professional fees
Year Ended December 31,
2008
2009
2007
—
(210,298 )
(192 )
39,796
7,514
1,042
(65 )
2,759
—
—
—
—
—
—
—
412
—
(664 )
—
(831 )
(1,582 )
(2,676 )
(164,785 )
—
3,091
—
1,591
—
—
—
$
$
$
$
$
$
$
$
$
—
495,649
29,385
36,367
7,621
—
431
700
—
—
63
—
187,940
5,823
—
(3,200 )
—
(3,088 )
(162 )
1,391
(149 )
3,439
762,210
6,000
1,706
1,048
—
—
24,248
4,797
$
$
$
$
$
$
$
$
$
(104,942 )
21,430
32,205
76,910
26,347
543
(18,879 )
(1,917 )
(204 )
2,164
—
16,155
—
(1,686 )
(3,285 )
(3,600 )
—
(11,088 )
—
—
(89,364 )
(59,211 )
—
—
—
—
23,343
14,400
4,979
—
$
336,696
$
—
2,164
(17,972 )
$
$
2,380
29,835
$
$
$
24,891
5,292
(160 )
$
$
$
$
$
$
$
$
$
$
$
$
F-14
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
The amended provisions of ASC Topic 805, Business Combinations (“ASC 805”), were effective for the Company on
January 1, 2009. The revisions extend the applicability of guidance provided by ASC 805 to all transactions and other events in
which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of
assets acquired, liabilities assumed and interests transferred as a result of business combinations. It also requires the acquirer to
recognize an adjustment to income tax expense for changes in the valuation allowance for acquired deferred tax assets and
liabilities for uncertain tax positions. On January 1, 2009, the balances of our deferred tax valuation allowance and liabilities for
uncertain tax positions from October 1, 2005 (our fresh start accounting date) were $185.9 million and $36.6 million,
respectively.
Effective January 1, 2009, the Company adopted the amended provisions of ASC Subtopic 350-30, General Intangibles
Other than Goodwill . The amendment revised the factors to be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset. The intent of this change is to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The
adoption of this amendment did not have a material impact on our consolidated financial statements.
Effective January 1, 2009, the Company adopted the amended provisions of ASC 810, Consolidation . The revisions require
that a non-controlling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically
attributable to the non-controlling interest be identified in the consolidated financial statements. The revisions call for
consistency in the manner of reporting changes in the parent’s ownership interest and require fair value measurement of any non-
controlling equity investment retained in a deconsolidation. The adoption of the revised provisions has been reflected in our
consolidated financial statements.
Effective January 1, 2009, the Company adopted the expanded disclosure provisions of ASC Topic 815, Derivatives and
Hedging , (“ASC 815”), and ASC Topic 825, Financial Instruments . The new provisions require increased qualitative,
quantitative and credit-risk disclosures about an entity’s derivative instruments and hedging activities but did not change the
accounting for such instruments. See Note 13 for the required disclosures. Additionally, in April 2009, the FASB issued
guidelines requiring an entity to provide disclosures about fair value of financial instruments in interim financial information.
In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities, that amends ASC Topic 810, Consolidations (“ASC 810”).
The amendments to ASC Topic 810 are the result of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R),
that was issued in June 2009. ASU No. 2009-17 modifies the approach for determining the primary beneficiary of a variable
interest entity (“VIE”). Under the modified approach, an enterprise is required to make a qualitative assessment whether it has
(1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the
obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the
VIE. If an enterprise has both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate
the VIE. The modified approach for determining the primary beneficiary of a VIE, effective for the Company on January 1,
2010, is not expected to have a material impact on our consolidated financial statements.
In December 2008, the FASB issued guidance relating to the disclosure requirements of ASC Topic 715, Compensation —
Retirement Benefits (“ASC 715”) . This guidance expands an employer’s disclosures about plan assets of a defined benefit
pension plan or other retirement plan. See Note 12 for the required disclosures.
In November 2008, the FASB amended ASC Topic 323, Investments — Equity Method and Joint Ventures (“ASC 323”) .
As a result, transaction costs for an investment should be included in the cost of the equity-method investment (and not
expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should
be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through
earnings. The amended guidance was effective January 1, 2009 for transactions occurring on or after that date. The adoption of
these provisions did not have a material impact on our consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring
Liabilities at Fair Value, that amends ASC Subtopic 820-10, Fair Value Measurements and Disclosures — Overall. The update
provides guidance that in the absence of observable market information, the fair value of a liability should be determined using
prescribed valuation techniques. The guidance, effective for the Company on October 1, 2009, did not have a material impact on
our consolidated financial statements.
F-15
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In September 2009, the FASB issued Accounting Standards Update No. 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2009-12”). ASU 2009-12 amends ASC 820-10, Fair Value
Measurements and Disclosures — Overall , to provide additional guidance on how companies should measure the fair value of
certain alternative investments, such as hedge funds, private equity funds and venture capital funds. ASU 2009-12 allows
companies to determine the fair value of such investments using Net Asset Value (“NAV”) as a practical expedient, unless it is
probable the investment will be sold at something other than NAV. ASU 2009-12 also requires new disclosures for each major
category of alternative investments. The disclosure provisions of ASU 2009-12 are not applicable to employer’s disclosures
about pension and other postemployment benefit plan assets. The Company adopted ASU 2009-12 as of its annual reporting
period ended on December 31, 2009. Accordingly, the Company used the NAV of the alternative investments, including limited
partnerships and common/collective trusts, held in its pension plan as a measure of the fair values of those investments when
providing disclosures in the consolidated financial statements for the year ended December 31, 2009.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue
Arrangements, that amends ASC Subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”) to separate consideration in
multiple-deliverable arrangements and significantly expand disclosure requirements. ASU No. 2009-13 establishes a hierarchy
for determining the selling price of a deliverable, eliminates the residual method of allocation and requires that arrangement
consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The
amended guidance, effective for the Company on January 1, 2011, is not expected to have a material impact on our consolidated
financial statements.
3. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss and other comprehensive income (loss), net of tax, are as follows
(in thousands):
Foreign Currency
Translation
Adjustments
Balance at January 01, 2008
Period Change
Balance at December 31, 2008
Period Change
Balance at December 31, 2009
$
$
498
(498 )
—
—
—
Unrealized Gains
Derivatives
—
$
18,182
18,182
(11,900 )
6,282
$
$
$
(Losses) on
Investments
Postretirement
Benefits
442
(325 )
117
658
775
$
$
35,577
(100,606 )
(65,029 )
233
(64,796 )
F-16
Proportionate
Share of Telesat
Other
Accumulated
Other
Comprehensive Comprehensive
Income (Loss)
Income (Loss)
36,517
—
$
$
(83,247 )
—
(46,730 )
—
(16,148 )
(5,139 )
(62,878 )
(5,139 )
$
$
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity in other comprehensive loss and related income tax effects were as follows (in thousands):
Foreign currency translation adjustments:
Cumulative translation
Derivatives:
Unrealized (loss) gain on foreign currency hedges, net of tax benefit of
$1,132 in 2008
Less: reclassification adjustment for gains included in net income, net
of tax provision of $1,132 in 2008
Unrealized gain (loss) on derivatives, net
Unrealized gain on investments:
Unrealized gain (loss) on available-for-sale securities, net of tax benefit
of $2,339 and $1,976 for 2008 and 2007, respectively
Less: reclassification adjustment for losses included in net income, net
of tax provision of $2,338 in 2008 and tax benefit of $4,542 in 2007
Unrealized gain (loss) on investments, net
Postretirement benefits:
Net actuarial (losses) gains, net of tax provision of $37 and $6,532 for
2008 and 2007, respectively
Amortization of actuarial gains and prior service credits
Less: reclassification due to contribution of Loral Skynet, net of tax
benefit of $3,015
Postretirement benefits
Proportionate share of Telesat other comprehensive income:
Proportionate share of Telesat Holdco other comprehensive income
Less: reclassification of our proportionate share of Telesat Holdco other
comprehensive income
Unrealized gain (loss) of our proportionate share of Telesat Holdco
Year Ended December 31,
2008
2009
2007
$
—
$
(498 )
$
211
(94 )
20,965
(11,806 )
(11,900 )
(2,783 )
18,182
—
—
—
658
—
658
(179 )
412
—
233
(3,685 )
(2,850 )
3,360
(325 )
(6,546 )
(9,396 )
(97,360 )
(3,246 )
—
(100,606 )
(5,139 )
(4,065 )
—
4,065
10,121
(2,000 )
(2,494 )
5,627
—
—
other comprehensive income, net
Other comprehensive loss
(5,139 )
(16,148 )
$
—
(83,247 )
$
$
—
(3,558 )
4. 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
December 31,
2009
2008
$
$
$
520
1,566
2,086
2,218
2,448
4,666
123,514
65,209
188,723
190,809
$
120,237
88,748
208,985
213,651
As of December 31, 2009 and 2008, billed receivables were reduced by an allowance for doubtful accounts of $3.7 million
and $0.9 million, respectively.
F-17
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unbilled amounts include recoverable costs and accrued profit on progress completed, which have not been billed. Such
amounts are billed in accordance with the contract terms, typically upon shipment of the product, achievement of contractual
milestones, or completion of the contract and, at such time, are reclassified to billed receivables. Fresh-start fair value
adjustments relating to contracts-in-process are amortized on a percentage of completion basis as performance under the related
contract is completed.
Long-Term Receivables
Billed receivables relating to long-term contracts are expected to be collected within one year. We classify deferred billings
and the orbital component of unbilled receivables expected to be collected beyond one year as long-term. Fresh-start fair value
adjustments relating to long-term receivables are amortized on the effective interest method over the life of the related orbital
stream.
Receivable balances related to satellite orbital incentive payments, deferred billings and the Telesat consulting services fee
(see Note 16) as of December 31, 2009 are scheduled to be received as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
Less, current portion included in contracts-in-process
Long-term receivables
5. Property, Plant and Equipment
Property, plant and equipment consists of (in thousands):
Land and land improvements
Buildings
Leasehold improvements
Equipment, furniture and fixtures
Satellite capacity under construction (see Note 16)
Other construction in progress
Accumulated depreciation and amortization
$
Long-Term
Receivables
6,654
7,202
14,545
28,616
15,417
182,317
254,751
(6,654 )
248,097
$
December 31,
2009
26,852
68,698
11,133
156,669
27,412
17,243
308,007
(100,011 )
207,996
$
$
2008
26,913
59,038
10,870
133,916
10,478
21,863
263,078
(74,808 )
188,270
$
$
Depreciation and amortization expense for property, plant and equipment was $25.2 million, $23.8 million and
$62.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
F-18
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Investments in Affiliates
Investments in affiliates consist of (in thousands):
Telesat Holdings Inc.
XTAR, LLC
Other
Equity in net income (losses) of affiliates consists of (in thousands):
Telesat Holdings Inc.
XTAR, LLC
Other
$
$
December 31,
2009
208,101
72,284
1,648
282,033
$
$
2008
—
70,547
2,095
72,642
$
$
Year Ended December 31,
2008
(479,579 )
(16,070 )
—
(495,649 )
2009
213,241
(2,743 )
(200 )
210,298
$
$
$
$
2007
(1,792 )
(10,585 )
(9,053 )
(21,430 )
The consolidated statements of operations reflect the effects of the following amounts related to transactions with or
investments in affiliates (in thousands):
Revenues
Elimination of Loral’s proportionate share of (profits) losses relating to
affiliate transactions
Profits (losses) relating to affiliate transactions not eliminated
Telesat
Year Ended December 31,
2008
2009
2007
$
92,144
$
83,974
$
21,968
(10,071 )
5,671
(4,969 )
2,808
1,935
(1,082 )
On December 16, 2006, a subsidiary of Telesat Holdco, a joint venture formed by Loral and its Canadian partner, PSP,
entered into a definitive agreement (the “Share Purchase Agreement”) with BCE to acquire 100% of the stock of Telesat Canada
from BCE for CAD 3.25 billion. We hold equity interests in Telesat Holdco representing 64% of the economic interests and 33
1 / 3 % of the voting interests. Our Canadian partner, PSP, holds 36% of the economic interests and 66 2 / 3 % of the voting
interests in Telesat Holdco (except with respect to the election of directors as to which it holds a 30% voting interest).
Contribution of Loral Skynet
In connection with the transactions contemplated under the Share Purchase Agreement, on August 7, 2007, we and Loral
Skynet entered into an asset transfer agreement (the “Asset Transfer Agreement”) with Telesat Holdco, and an asset purchase
agreement (the “Asset Purchase Agreement”) with a subsidiary of Telesat. Pursuant to the Asset Transfer Agreement, we agreed,
subject to certain exceptions, to transfer substantially all of Loral Skynet’s assets and related liabilities to Telesat in return for an
equity interest in Telesat Holdco. In addition, pursuant to the Asset Purchase Agreement, we agreed to transfer certain of Loral
Skynet’s assets located in the U.S. and related liabilities to the Telesat subsidiary in exchange for $25.5 million in marketable
securities. On August 7, 2007, we, Loral Skynet, PSP, Telesat Holdco and a subsidiary of Telesat Holdco also entered into an
Ancillary Agreement providing, among other things, for the settlement of payments by and among us, PSP and Telesat Holdco in
connection with the Telesat acquisition, the transactions contemplated under the Asset Transfer Agreement, and related
transactions. As a result, we received true-up payments of $45.6 million from PSP in 2007 to bring the equity contributions into
the required economic positions. As part of the Telesat transaction, a final adjustment payment of approximately $9.2 million
was made by Loral to PSP on April 4, 2008.
The Telesat transaction closed on October 31, 2007.
F-19
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summary balance sheet information for the assets and liabilities of Loral Skynet contributed to Telesat on October 31, 2007
is as follows (in thousands):
Current assets
Property, plant and equipment, net
Foreign currency contracts
Goodwill
Intangible assets, net
Other assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities
$
$
$
$
25,360
443,776
83,614
42,246
50,404
3,183
648,583
181,045
27,000
208,045
The following summarizes the gain on the contribution of substantially all of the Loral Skynet assets and related liabilities
on October 31, 2007 (in thousands):
Consideration received for the contribution of Loral Skynet to Telesat Holdco:
Cash and marketable securities
Fair value of equity in Telesat Holdco
Total consideration
Book value of contributed net assets of Loral Skynet
Consideration in excess of book value
Gain recognized
$
$
$
61,480
670,562
732,042
440,538
291,504
104,942
The consideration we received for the contribution of substantially all of the Loral Skynet assets and related liabilities was
$291.5 million greater than the carrying value of those assets and liabilities. We recognized a gain of $104.9 million,
representing the gain attributable to PSP’s economic interest in the contributed assets and liabilities of Loral Skynet through its
36% ownership interest in Telesat. The gain attributable to Loral’s 64% interest in Telesat was not reflected because Loral has a
significant continuing interest in Telesat and could recognize a gain only to the extent of PSP’s economic interest in the
contributed assets and liabilities of Loral Skynet. The amount recorded as our investment in Telesat is based on our retained
interest in the historical book value of the contributed assets and liabilities of Loral Skynet, the gain recognized and our share of
the earnings of Telesat subsequent to the closing.
F-20
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents summary financial data for Telesat in accordance with U.S. GAAP, as of December 31, 2009
and 2008 and for the years ended December 31, 2009 and 2008 and the period October 31, 2007 to December 31, 2007,
subsequent to the acquisition by Loral and PSP (in thousands):
Statement of Operations Data:
Revenues
Operating expenses
Gain on disposition of long-lived assets
Impairment of long-lived and intangible assets
Depreciation, amortization and stock-based compensation
Operating income (loss)
Interest expense
Other income (expense)
Income tax (expense) benefit
Net income (loss)
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Long-term debt, including current portion
Total liabilities
Redeemable preferred stock
Shareholders’ equity
Year Ended December 31,
2009
2008
For the Period
October 31,
2007
to December 31,
2007
$ 691,566 $ 685,187 $
(203,417 )
29,311
—
(230,176 )
287,284
(227,986 )
289,442
(2,185 )
346,555
(258,010 )
—
(454,896 )
(225,949 )
(253,668 )
(231,062 )
(403,102 )
139,872
(747,960 )
117,767
(52,484 )
—
—
(41,200 )
24,083
(41,375 )
(45,550 )
61,520
(1,322 )
Year Ended December 31,
2009
2008
$
251,573
4,994,684
195,890
2,953,281
4,041,932
134,291
818,461
$
179,769
4,273,162
171,423
2,901,620
3,760,164
116,044
396,954
Gain on disposition of long-lived assets in 2009 results from the transfer of Telesat’s leasehold interests in the Telstar 10
satellite and related contracts to APT Satellite for a total consideration of approximately $69 million. Impairment of long-lived
and intangible assets consists primarily of an impairment charge in 2008 to reduce certain orbital slot assets to fair value. Other
expense, net includes non-cash foreign exchange gains of $439.2 million and non-cash losses on financial instruments of
$149.0 million in 2009 and non-cash foreign exchange losses of $654.2 million and $121.4 million and non-cash gains on
financial instruments of $254.7 million and $78.1 million in 2008 and 2007, respectively.
We use the equity method of accounting for our investment in Telesat because we own 33 1 / 3 % of the voting stock, and do
not exercise control via other means. Loral’s equity in net income (loss) of Telesat is based on our proportionate share of its
results in accordance with U.S. GAAP and in U.S. dollars. Our proportionate share of Telesat’s net income (loss) is based on our
64% economic interest as our holdings consist of common stock and non-voting participating preferred shares that have all the
rights of common stock with respect to dividends, return of capital and surplus distributions but have no voting rights.
The contribution of Loral Skynet to Telesat has been recorded by Loral at historical book value of our retained interest
combined with the gain as described above. However, the contribution has been recorded by Telesat at fair value. Accordingly,
the amortization of fair value adjustments applicable to the Loral Skynet assets and liabilities have been proportionately
eliminated in determining our share of the earnings of Telesat. Our equity in the net income (loss) of Telesat also reflects the
elimination of our profit, to the extent of our economic interest, on satellites we are constructing for them.
As of December 31, 2008 our investment in Telesat had been reduced to zero as a result of recording our proportionate
interest in Telesat’s losses. Equity in losses of affiliates, other than the elimination of our profit on transactions with such
affiliates, is not recognized after the carrying value of an investment, including advances and loans, has been reduced to zero,
unless guarantees or other funding obligations exist. During the year ended December 31, 2008, the Company recognized
$6.9 million of equity in losses of Telesat that due to an asset basis difference should have been recognized during the quarter
ended March 31, 2009. The Company does not believe such amount is material to the consolidated financial statements for the
years ended December 31, 2009 or 2008.
F-21
Table of Contents
XTAR
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We own 56% of XTAR, a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of Spain. We
account for our investment in XTAR under the equity method of accounting because we do not control certain of its significant
operating decisions.
XTAR owns and operates an X-band satellite, XTAR-EUR, located at 29° E.L., which is designed to provide X-band
communications services exclusively to United States, Spanish and allied government users throughout the satellite’s coverage
area, including Europe, the Middle East and Asia. XTAR also leases 7.2 72MHz X-band transponders on the Spainsat satellite
located 30° W.L., owned by Hisdesat. These transponders, designated as XTAR-LANT, provide capacity to XTAR for
additional X-band services and greater coverage and flexibility.
In January 2005, Hisdesat provided XTAR with a convertible loan in the amount of $10.8 million due 2011, for which
Hisdesat received enhanced governance rights in XTAR. If Hisdesat were to convert the loan into XTAR equity, our equity
interest in XTAR would be reduced to 51%.
XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders was $23 million in 2009, with increases thereafter
to a maximum of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2021. Under
this lease agreement, Hisdesat may also be entitled under certain circumstances to a share of the revenues generated on the
XTAR-LANT transponders. Interest on XTAR’s outstanding lease obligations to Hisdesat is paid through the issuance of a class
of non-voting membership interests in XTAR, which enjoy priority rights with respect to dividends and distributions over the
ordinary membership interests currently held by us and Hisdesat. In March 2009, XTAR entered into an agreement with Hisdesat
pursuant to which the past due balance on XTAR-LANT transponders of $32.3 million as of December 31, 2008, together with a
deferral of $6.7 million in payments due in 2009, will be payable to Hisdesat over 12 years through annual payments of
$5 million (the “Catch Up Payments”). XTAR has a right to prepay, at any time, all unpaid Catch Up Payments discounted at
9%. XTAR has also agreed that XTAR’s excess cash balance (as defined) will be applied towards making limited payments on
future lease obligations, as well as payments of other amounts owed to Hisdesat, Telesat and Loral for services provided by them
to XTAR (see Note 16).
XTAR-EUR was launched on Arianespace, S.A.’s (“Arianespace”) Ariane ECA launch vehicle in 2005. The price for this
launch had two components — the first, consisting of a $15.8 million 10% interest paid-in-kind loan provided by Arianespace,
was repaid in full by XTAR on July 6, 2007. The second component of the launch price consisted of a revenue-based fee to be
paid to Arianespace over XTAR-EUR’s 15 year in-orbit operations. This fee, also referred to as an incentive fee, equaled 3.5%
of XTAR’s annual operating revenues, subject to a maximum threshold. On February 29, 2008, XTAR paid Arianespace
$1.5 million representing the incentive fee through December 31, 2007. On January 27, 2009, Arianespace agreed to eliminate
the remaining incentive fee in exchange for $8.0 million payable in three installments. As of December 31, 2009, XTAR had
paid all three installments and has no further obligations under the launch services agreement with Arianespace. As a result,
XTAR’s net loss for the year ended December 31, 2009 included a gain of $11.7 million related to the extinguishment of this
liability.
To enable XTAR to make these settlement payments to Arianespace, XTAR issued a capital call to its LLC members. The
capital call required Loral to increase its investment in XTAR by approximately $4.5 million in the first quarter of 2009,
representing Loral’s 56% share of the $8 million capital call.
F-22
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents summary financial data for XTAR as of December 31, 2009 and 2008 and for each of the three
years in the period ended December 31, 2009 (in thousands):
Statement of Operations Data:
Revenues
Operating expenses
Depreciation and amortization
Operating loss
Gain on settlement of Arianespace incentive cap
Net loss
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Total liabilities
Members’ equity
Other
Year Ended December 31,
2008
2009
2007
$
32,038
(34,594 )
(9,618 )
(12,174 )
11,668
(4,849 )
$
$
$
20,405
(34,500 )
(9,650 )
(23,751 )
—
(28,597 )
19,339
(24,015 )
(9,747 )
(14,423 )
—
(18,421 )
December 31,
2009
2008
$
10,372
107,084
45,672
67,882
39,202
9,107
115,437
41,314
79,386
36,051
As of December 31, 2009, the Company held various indirect ownership interests in two foreign companies that currently
serve as exclusive service providers for Globalstar service in Mexico and Russia. The Company accounts for these ownership
interests using the equity method of accounting. Loral has written-off its investments in these companies, and, because we have
no future funding requirements relating to these investments, there is no requirement for us to provide for our allocated share of
these companies’ net losses. For the years ended December 31, 2009 and 2007, the Company recognized earnings of $0.3 million
and $3.4 million, respectively, from our Globalstar investment partnerships which were attributable to cash distributions received
from one of our investments.
On December 21, 2007, Loral and certain of its subsidiaries and DASA Globalstar LLC entered into an agreement to sell
their respective interests in Globalstar do Brasil S.A. (“GdB”), the Globalstar Brazilian service provider, to Globalstar Inc.
Closing of the transaction occurred on March 25, 2008. Pursuant to the sale agreement, Loral received 883,393 shares of
common stock of Globalstar Inc. in consideration for the sale of its interest. The shares have been registered under the Securities
Act of 1933 and may be sold by Loral without restriction. In addition, Loral agreed to indemnify Globalstar Inc. for certain GdB
pre-closing liabilities, primarily related to Brazilian taxes. Loral has agreed that proceeds from the sale of the Globalstar Inc.
stock received in the transaction will be kept in a segregated account and may be used only for payment of the indemnified
liabilities. As a result of the sale and taking into account our estimate of the indemnified liabilities, we recorded a loss of
$11.3 million during the year ended December 31, 2007. As of December 31, 2009, remaining indemnified liabilities of
$4.9 million are included in long-term liabilities in the consolidated balance sheet.
As of December 31, 2009, we owned 984,173 shares of Globalstar Inc. common stock, which are accounted for as
available-for-sale securities, with a fair value of $0.9 million. During 2008, management determined that there had been an
other-than-temporary impairment in the fair value of the Globalstar Inc. stock obtained in the sale of GdB. Accordingly,
impairment charges of $5.8 million were included in our consolidated statements of operations for the year ended December 31,
2008. Unrealized gains on other Globalstar shares were $0.7 million, net of taxes for the year ended December 31, 2009.
7. Goodwill and Intangible Assets
Goodwill
Goodwill represented 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, as of October 1, 2005, the date we adopted fresh-start
accounting. Our 2008 goodwill impairment test resulted in the recording of an impairment charge for the entire goodwill balance
of $187.9 million as a result of the decline of Loral’s stock price and the decline in comparable company values. The Company’s
estimate of the fair value of SS/L employed both a comparable public company analysis, which considered the valuation
multiples of companies deemed comparable, in whole or in part, to the Company and a discounted cash flow analysis that
calculated a present value of the projected future cash flows of SS/L. The Company considered both quantitative and qualitative
factors in assessing the reasonableness of the underlying assumptions used in the valuation process. Testing goodwill for
impairment requires significant subjective judgments by management.
F-23
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2009
and 2008 (in thousands):
Balance as of January 1,
Goodwill
Accumulated impairment losses
Reversal of uncertain tax positions due to expiration of statute of limitations
Reversal of valuation allowance on deferred tax assets
Impairment loss
Balance as of December 31,
Goodwill
Accumulated impairment losses
Intangible Assets
2009
2008
$
187,940
(187,940 )
—
$
227,058
—
227,058
—
—
—
(531 )
(38,587 )
(187,940 )
187,940
(187,940 )
—
$
187,940
(187,940 )
—
$
Intangible Assets were established in connection with our adoption of fresh-start accounting and consist of (in thousands):
Internally developed software and technology
Trade names
Total
Weighted Average
Remaining
Amortization
Period
(Years)
2
16
December 31, 2009
December 31, 2008
Accumulated Gross
Gross
Accumulated
Amount Amortization Amount Amortization
(35,154 )
$
(1,495 )
(36,649 )
(45,972 ) $
(1,955 )
(47,927 ) $
59,027 $
9,200
68,227 $
59,027 $
9,200
68,227 $
$
Total amortization expense for intangible assets was $11.3 million, $11.3 million and $18.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Annual amortization expense for intangible assets for the five years ended
December 31, 2014 is estimated to be as follows (in thousands):
2010
2011
2012
2013
2014
$
9,190
2,931
2,314
460
460
F-24
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes fair value adjustments in connection with our adoption of fresh start accounting related to
contracts-in-process, long-term receivables, customer advances and billings in excess of costs and profits and long-term
liabilities (in thousands):
Gross fair value adjustments
Accumulated amortization
December 31,
2009
$
$
(36,896 )
16,446
(20,450 )
$
$
2008
(36,896 )
19,084
(17,812 )
Amortization of these fresh-start accounting fair value adjustments was a charge to expense of $2.6 million in 2009 and a
credit to expense of $1.8 million and $4.7 million in 2008 and 2007, respectively.
8. Debt Obligations
SS/L Credit Agreement
On October 16, 2008, SS/L entered into a Credit Agreement (the “Credit Agreement”) with several banks and other
financial institutions. The Credit Agreement provides for a $100.0 million senior secured revolving credit facility (the
“Revolving Facility”). The Revolving Facility includes a $50.0 million letter of credit sublimit. The Credit Agreement is for a
term of three years, maturing on October 16, 2011 (the “Maturity Date”).
The following summarizes information related to the Credit Agreement (in thousands, except percentages):
Letters of credit outstanding
Borrowings
Interest rate on revolver borrowings
Interest expense (including commitment and letter of credit fees)
Amortization of issuance costs
December 31,
2009
2008
$
$
4,921
—
—
4,927
55,000
4.2575 %
Year Ended December 31,
2009
2008
$
1,168
878
$
323
183
The Credit Agreement also includes a feature that will allow SS/L, on a one-time basis, to increase the available
commitment by $25.0 million, subject to securing additional commitments from the current lenders or other lending institutions.
In addition, the Credit Agreement contains customary conditions precedent to each borrowing, including absence of defaults and
accuracy of representations and warranties. The Revolving Facility is available to finance the working capital needs and general
corporate purposes of SS/L.
The obligations under the Credit Agreement are secured by (i) a first mortgage on certain real property owned by SS/L,
(ii) a first priority security interest in certain tangible and intangible assets of SS/L and certain of its subsidiaries and (iii) a
pledge of all issued and outstanding common stock of SS/L and certain of its subsidiaries. As part of the transaction, Loral
entered into an agreement (the “Parent Guarantee”) guaranteeing loans under the Credit Agreement and SS/L’s other monetary
obligations thereunder. The Parent Guarantee contains a covenant that limits the amount of dividends or other distributions to our
stockholders that can be made by Loral from the disposition of any capital stock of Telesat Holdings to the greater of (i) 66 2 / 3
% of the proceeds and (ii) the amount by which the proceeds exceed $200 million.
At SS/L’s election, outstanding indebtedness under the Revolving Facility bears interest at an annual rate equal to either:
(a) 2.75% plus the greater of (1) the Prime Rate then in effect and (2) the Federal Funds Rate then in effect plus 0.5% (the “ABR
Rate”) or (b) the Eurodollar Rate plus 3.75%. Interest on an ABR loan is paid quarterly and interest on a Eurodollar loan is paid
either on the last day of the interest period or quarterly, whichever is shorter. In addition, the Credit Agreement requires the
Company to pay certain customary fees, costs and expenses of the lenders.
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Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Credit Agreement contains certain covenants which, among other things, limit the incurrence of additional
indebtedness, capital expenditures, investments, restricted payments, asset sales, mergers and consolidations, liens, changes to
the line of business and other matters customarily restricted in such agreements. The material financial covenants, ratios or tests
contained in the Credit Facility are:
•
SS/L must not permit its consolidated leverage ratio as of (i) the last day of any period of four consecutive fiscal
quarters or (ii) the date of incurrence of certain indebtedness to exceed 3.50 to 1.00 from October 16, 2008 to
September 29, 2009, 3.25 to 1.00 from September 30, 2009 through December 30, 2009 and 3.00 to 1.00 from
December 31, 2009 and thereafter until the Maturity Date.
•
SS/L must maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 as of the last day of any
fiscal quarter for the period of four consecutive fiscal quarters ending on such day.
SS/L may prepay outstanding principal in whole or in part, together with accrued interest, without premium or penalty. The
Credit Agreement requires SS/L to prepay outstanding principal and accrued interest upon certain events, including certain asset
sales. If an event of default shall occur and be continuing, the commitments of all Lenders under the Credit Agreement may be
terminated and the principal amount outstanding, together with all accrued and unpaid interest, may be declared immediately due
and payable. Under the Credit Agreement, events of default include, among other things, non-payment of amounts due under the
Credit Agreement, default in payment of certain other indebtedness, breach of certain covenants, bankruptcy, violations under
ERISA, violations under certain United States export control laws and regulations, a change of control of SS/L and if certain
liens on the collateral securing the obligations under the Credit Agreement fail to be perfected. All outstanding principal is
payable in full upon the Maturity Date.
Debt issuance costs of $2.6 million, are being amortized over the life of the revolving credit facility
Loan Payable Valley National Bank
On September 4, 2007, Loral Skynet entered into a Loan and Security Agreement (the “Loan Agreement”) with Valley
National Bank (“Valley National”). The purpose of the Loan Agreement was to make available to Loral Skynet a loan (the
“Loan”) to fund the redemption (the “Note Redemption”) of Loral Skynet’s 14% Senior Secured Cash/PIK Notes due 2015.
Pursuant to the Loan Agreement, Valley National made the Loan in a single advance of $141.1 million, which Loral Skynet used
to fund the Note Redemption on September 5, 2007.
As security for repayment of the Loan, Loral Skynet granted security interests in certain of its assets. The repayment of the
Loan was guaranteed by Loral (the “Guaranty”) with the Company’s obligations under the Guaranty being secured pursuant to a
pledge agreement (the “Pledge Agreement”) executed by the Company. Loral purchased a certificate of deposit (the “CD”) from
Valley National in the initial principal amount of $142,720,659, such amount being equal to the sum of the principal of the Loan
and accrued interest thereon from and including September 4, 2007 through, but not including, December 17, 2007. The CD
accrued interest at a rate of 3.85% per annum. Pursuant to the terms of the Pledge Agreement, the money on deposit under the
CD secured the obligations of Loral Skynet under the Loan Agreement and the Company under the Guaranty.
The interest rate on the Loan was 4.10% per annum. Interest expense related to the Loan was $0.9 million for the year
ended December 31, 2007. On October 31, 2007, the loan was assumed by Telesat as part of the Telesat transaction and was
repaid in full that same day by Telesat. Also on October 31, 2007, the cash collateral CD was released and the cash was returned
to Loral.
Loral Skynet Notes
On November 21, 2005, pursuant to the Plan of Reorganization, Loral Skynet issued $126.0 million principal amount of
14% Senior Secured Cash/PIK Notes due 2015 under an Indenture, dated as of November 21, 2005, which Notes were
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. On September 5, 2007, Loral Skynet paid $141.1 million in the aggregate to
redeem the Notes at a redemption price of 110% including accrued and unpaid interest from July 15, 2007 of $2.5 million.
Interest expense related to these Notes was $12.1 million for the year ended December 31, 2007. In addition to the
$2.5 million of cash interest paid on the redemption of the Notes discussed above, Loral Skynet made cash interest payments of
$8.8 million on the Loral Skynet Notes on each of January 15 and July 16, 2007.
As a result of the redemption of the Loral Skynet Notes in 2007, we incurred a loss on the early extinguishment of debt of
$16.2 million, which is comprised of the redemption premium of $12.6 million and a $3.6 million write-off of deferred financing
costs.
F-26
Table of Contents
9. Income Taxes
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision (benefit) for income taxes on the income (loss) before income taxes and equity in net income (losses) of
affiliates consists of the following (in thousands):
Current:
U.S. Federal
State and local
Foreign
Total current
Deferred:
U.S. Federal
State and local
Total deferred
Total income tax provision
Year Ended December 31,
2008
2009
2007
$
$
2,597
3,166
—
5,763
(669 )
477
(192 )
5,571
$
$
(21,213 )
37,572
—
16,359
29,574
(189 )
29,385
45,744
$
$
31,142
19,712
398
51,252
45,173
(12,968 )
32,205
83,457
Our income tax provision is summarized as follows: (i) for 2009, we recorded a current tax provision of $5.8 million, which
included a provision of $2.3 million to increase our liability for UTPs, and a deferred tax benefit of $0.2 million, resulting in a
total provision of $5.6 million on pre-tax income of $27.0 million; (ii) for 2008, we recorded a current tax provision of
$16.3 million, which included a provision of $41.6 million to increase our liability for UTPs and a current tax benefit of
$25.4 million derived from tax strategies, and a deferred tax provision of $29.4 million, resulting in a total provision of
$45.7 million on a pre-tax loss of $151.5 million; and (iii) for 2007, we recorded a current tax provision of $51.3 million, which
included a provision of $17.1 million to increase our liability for UTPs, and a deferred tax provision of $32.2 million, resulting in
a total provision of $83.5 million on pre-tax income of $157.8 million.
Our current tax provision includes an increase to our liability for UTPs for (in thousands):
Unrecognized tax benefits
Interest expense
Interest income
Penalties
Total
Year Ended December 31,
2008
2009
2007
$
$
(2,817 )
4,426
—
701
2,310
$
$
25,962
6,169
—
9,427
41,558
$
$
12,652
4,186
(41 )
303
17,100
For 2008, the deferred income tax provision of $29.4 million related primarily to (i) a provision of $38.6 million recorded
as a result of having utilized deferred tax benefits from Old Loral and tax strategies to reduce our tax liability (where the excess
valuation allowance was recorded as a reduction to goodwill) offset by (ii) a benefit of $9.2 million for the increase to our
deferred tax asset for federal and state AMT credits.
For 2007, the deferred income tax provision of $32.2 million related primarily to (i) a provision of $35.1 million recorded
as a result of having utilized deferred tax benefits from Old Loral to reduce our tax liability (where the excess valuation
allowance was recorded as a reduction to goodwill), (ii) a provision of $2.2 million for the decrease to our deferred tax asset for
federal and state AMT credits (which excludes an increase to AMT credits of $2.2 million upon adoption of the accounting
guidance for UTPs in ASC Topic 740), (iii) an additional valuation allowance of $3.0 million required against a net deferred tax
asset created when we reduced the deferred tax credits in accumulated other comprehensive income by $3.0 million, offset by
(iv) a benefit of $9.0 million relating to current activity.
F-27
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income taxes presented above excludes the following items for 2007: (i) a deferred tax benefit of
$6.3 million related to the initial adoption of the FASB’s guidance regarding UTPs, effective January 1, 2007, which was
adjusted by $4.1 million during 2007 for a change to our liability for UTPs, resulting in a $2.2 million increase to our AMT
credits upon adoption of the amended guidance for UTPs; (ii) a deferred tax benefit of $6.5 million related to the unrealized gain
on available-for-sale securities recorded in accumulated other comprehensive income; (iii) a deferred tax provision of
$3.5 million related to pension actuarial gains and prior service credits recorded in accumulated other comprehensive income;
and (iv) a deferred tax benefit of $6.8 million related to the reversal of Old Loral deferred state tax liabilities recorded as a
reduction to goodwill. There were no items excluded for 2009 and 2008.
The provision for income taxes on the income (loss) before income taxes and equity in net income (losses) of affiliates
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 provision( benefit) at U.S. Statutory Rate of 35%
Permanent adjustments which change statutory amounts:
State and local income taxes, net of federal income tax
Equity in net income (losses) of affiliates
Impairment of goodwill
Losses in litigation
Tax gain on transfer of Loral Skynet assets to Telesat
Provision for unrecognized tax benefits
Nondeductible expenses
Change in valuation allowance
Other, net
Total income tax provision
Year Ended December 31,
2008
2009
2007
$
9,441
$
(53,033 )
$
55,225
16,703
73,604
—
526
—
1,356
2,076
(96,617 )
(1,518 )
5,571
1,496
(173,477 )
65,779
6,815
—
(5,811 )
1,501
202,510
(36 )
45,744
$
$
(5,101 )
(7,162 )
—
—
16,419
8,370
2,682
16,287
(3,263 )
83,457
$
On January 1, 2007, we adopted the guidance for UTPs in ASC Topic 740 with unrecognized tax benefits relating to UTPs
of $42.5 million and also recorded the cumulative effect of adoption with an increase of $6.2 million to accumulated deficit, an
increase of $7.5 million to goodwill, a decrease of $6.3 million to deferred income tax liabilities and an increase of $20.0 million
to long-term liabilities.
The Company recognizes estimated accrued interest and penalties related to UTPs in income tax expense. As of January 1,
2007 in connection with the adoption, we recorded approximately $5.7 million and $12.6 million for the payment of tax-related
interest and penalties, respectively. During 2007 we recognized additional interest charges of $4.1 million. Interest and penalties
of $1.5 million and $0.1 million, respectively, were transferred to Telesat in connection with the Telesat transaction.
In 2008, we recognized additional charges of $6.8 million and $9.4 million for tax-related interest and penalties,
respectively. During 2008, the statute of limitations for assessment of additional tax expired with regard to our federal income
tax return filed for 2004, resulting in the reversal of $0.7 million and $0.4 million for accrued interest and penalties, respectively.
In 2009, we recognized additional charges of $6.4 million and $1.5 million for tax-related interest and penalties,
respectively. During 2009, the statute of limitations for assessment of additional tax expired with regard to several of our state
income tax returns filed for 2003 and 2004, resulting in the reversal of $2.0 million and $0.8 million for accrued interest and
penalties, respectively. At December 31, 2009 we have accrued $18.8 million and $22.2 million for the payment of tax-related
interest and penalties, respectively.
F-28
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the activity related to our unrecognized tax benefits (in thousands):
Balance at January 1
Increases related to prior year tax positions
Decreases related to prior year tax positions
Decrease as a result of statute expirations
Decrease as a result of tax settlements
Increases related to current year tax positions
Decrease for indemnified liabilities transferred to Telesat and recorded in
$
Year Ended December 31,
2008
2009
108,592
8,855
(1,969 )
(3,178 )
(4,887 )
12,711
$
$
59,903
5,312
(1,225 )
(1,832 )
—
46,434
2007
42,484
157
(342 )
—
(1,508 )
21,707
other long term liabilities
Balance at December 31
—
120,124
$
—
108,592
$
$
(2,595 )
59,903
With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax
authorities for years prior to 2005. Earlier years related to certain foreign jurisdictions remain subject to examination. Various
state and foreign income tax returns are currently under examination. While we intend to contest any future tax assessments for
uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve months, the
statute of limitations for assessment of additional tax will expire with regard to several of our state income tax returns filed for
2005 and federal and state income tax returns filed for 2006, potentially resulting in a $2.1 million reduction to our unrecognized
tax benefits.
The liability for UTPs is included in long-term liabilities in the consolidated balance sheets. For 2009, we increased our
liability for UTPs from $109.0 million to $111.3 million. The net increase of $2.3 million related to (i) an increase of
$0.4 million to our current provision for tax positions derived from tax strategies adopted in 2009, (ii) an increase of $7.9 million
to our current provision for potential additional interest and penalties, offset by (iii) a decrease of $6.0 million from the reversal
of liabilities for UTPs due to the expiration of the statute of limitations for the assessment of additional state tax for 2003 and
2004, of which $5.6 million was treated as current income tax benefit and $0.4 million reduced our deferred tax assets.
For 2008, we increased our liability for UTPs from $68.0 million to $109.0 million. The net increase of $41.0 million
related to (i) an increase of $27.7 million to our current provision for tax positions derived from tax strategies adopted in 2008,
(ii) an increase of $16.2 million to our current provision for potential additional interest and penalties, offset by (iii) a decrease of
$2.9 million from the reversal of liabilities for UTPs due to the expiration of the statute of limitations for the assessment of
additional federal tax for 2004, of which $0.5 million was recorded as a reduction to goodwill, $0.6 million was treated as
current income tax benefit and $1.8 million reduced our deferred tax assets.
For 2007, we increased our liability for UTPs from $61.1 million to $68.0 million. The net increase of $6.9 million related
to (i) current year provisions of $17.5 million for tax positions and potential additional interest and penalties, offset by (ii) the
settlement of liabilities with certain tax authorities totaling $2.4 million, of which $2.0 million was recorded as a reduction to
goodwill and $0.4 million was treated as a current income tax benefit, (iii) a reduction of $4.1 million to the deferred tax asset
established at adoption, and (iv) the transfer of $4.1 million of UTPs to Telesat in the Telesat transaction offset by a contractual
indemnification.
If our positions are sustained by the taxing authorities, approximately $111.5 million of the liability for UTPs will reduce
the Company’s income tax provision and $0.2 million will increase deferred tax assets. Other than as described above, there were
no significant changes to our unrecognized tax benefits during the twelve months ended December 31, 2009, and we do not
anticipate any other significant increases or decreases to our unrecognized tax benefits during the next twelve months.
In connection with the Telesat transaction, Loral provided a contractual indemnification to Telesat for Loral Skynet tax
liabilities, offset by tax deposits, relating to periods preceding 2007. The unrecognized tax benefits related to the Loral Skynet
subsidiaries were transferred to Telesat subject to the contractual tax indemnification provided by Loral. Loral’s net indemnified
liability at December 31, 2009 is not material.
At December 31, 2009, we had federal NOL carryforwards of approximately $478 million, state carryforwards of various
amounts and federal research credits of $7.5 million which expire from 2010 to 2029, as well as federal and state AMT credit
carryforwards of approximately $13.0 million that may be carried forward indefinitely.
F-29
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reorganization of the Company on the Effective Date constituted an ownership change under section 382 of the Internal
Revenue Code. Accordingly, use of our tax attributes, such as NOLs and tax credits generated prior to the ownership change, are
subject to an annual limitation of approximately $32.6 million, subject to increase or decrease based on certain factors. Our
annual limitation was increased significantly during 2007, 2008 and 2009 for the additional benefit from the recognition of our
“net unrealized built-in gains,” (i.e., the excess of fair market value over tax basis for our assets) as of the Effective Date.
We assess the recoverability of our NOLs and other deferred tax assets and based upon this analysis, record a valuation
allowance to the extent recoverability does not satisfy the “more likely than not” recognition criteria. Based upon this analysis,
we concluded that, due to insufficient positive evidence substantiating recoverability as of December 31, 2009, the 100%
valuation allowance against our deferred tax assets, with the exception of our $12.7 million deferred tax asset relating to AMT
credit carryforwards, should continue to be maintained.
As of December 31, 2009, we had valuation allowances totaling $414.0 million. For periods prior to January 1, 2009, any
reduction to the balance of the valuation allowance as of October 1, 2005 first reduced goodwill, then other intangible assets with
any excess treated as an increase to paid-in-capital. Effective January 1, 2009, all reversals of the valuation allowance balance as
of October 1, 2005 are recorded as a reduction to the income tax provision. We will continue to maintain the valuation allowance
until sufficient positive evidence exists to support full or partial reversal.
During 2009, our valuation allowance decreased by $73.7 million. The net change consisted primarily of (i) a decrease of
$96.6 million charged to continuing operations, (ii) an increase of $7.0 million charged to accumulated other comprehensive
income and (iii) an increase of $15.9 million offset by a corresponding increase to the deferred tax asset.
During 2008, our valuation allowance increased by $246.5 million. The net change consisted primarily of (i) an increase of
$202.5 million charged to continuing operations, (ii) a decrease of $38.6 million relating to the reversal of an excess valuation
allowance recorded as a reduction to goodwill, (iii) an increase of $35.6 million charged to accumulated other comprehensive
income and (iv) an increase of $47.0 million offset by a corresponding increase to the deferred tax asset.
During 2007 our valuation allowance decreased by $63.7 million. The net change consisted primarily of (i) a decrease of
$35.1 million relating to the reversal of an excess valuation allowance recorded as a reduction to goodwill, (ii) a decrease of
$45.2 million offset by a corresponding decrease to the deferred tax asset, (iii) an increase of $0.3 million as part of the
cumulative effect of adopting the guidance regarding UTPs in ASC Topic 740 and (iv) an increase of $16.3 million charged to
continuing operations.
F-30
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The significant components of the net deferred income tax assets are (in thousands):
Deferred tax assets:
Postretirement benefits other than pensions
Inventoried costs
Net operating loss and tax credit carryforwards
Compensation and benefits
Deferred research & development costs
Income recognition on long-term contracts
Investments in and advances to affiliates
Other, net
Federal benefit of uncertain tax positions
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
Total deferred tax liability
Net deferred tax asset
December 31,
2009
2008
$
28,912
17,932
180,874
29,339
10,646
21,475
67,883
5,378
22,488
67,421
452,348
(414,038 )
38,310
$
28,321
19,456
199,460
20,663
14,126
13,382
138,524
7,370
21,431
69,772
532,505
(487,762 )
44,743
(16,819 )
(8,776 )
(25,595 )
12,715
$
(18,637 )
(13,582 )
(32,219 )
12,524
$
At December 31, 2009 and 2008, the Company included $4.1 million and $4.0 million of net current deferred tax assets in
other current assets and $8.6 million and $8.5 million of net non-current deferred tax assets in other assets, respectively.
10. Equity
Common Stock
In accordance with the Plan of Reorganization, Loral issued 20 million shares of voting common stock, par value $0.01 per
share (the “Voting Common Stock”), which were distributed in accordance with the Plan of Reorganization.
On November 10, 2008, the Court of Chancery of the State of Delaware (the “Court”) issued an Implementing Order (the
“Implementing Order”) in the In re: Loral Space and Communications Consolidated Litigation . Effective December 22, 2008,
pursuant to the Implementing Order, the Securities Purchase Agreement by and between Loral and MHR Fund Management
LLC (together with its affiliates, “MHR”), as amended and restated on February 27, 2007 (the “SPA”), was reformed to provide
for MHR to have purchased 9,505,673 shares of Loral non-voting common stock, par value $.01 (the “Non-Voting Common
Stock”), which are in all respects identical to and treated equally with shares of Loral Voting Common Stock except for the
absence of voting rights (other than as provided in the New Charter (defined below) or as provided by law), in exchange for the
net payment of $293.3 million made by MHR to Loral on February 27, 2007 in connection with the SPA. Pursuant to the
Implementing Order, all other terms of the SPA are of no further force or effect.
Pursuant to the Implementing Order, on December 23, 2008, Loral filed an Amended and Restated Certificate of
Incorporation (the “New Charter”), which was accepted by the Secretary of State of Delaware. The New Charter, as ratified and
further amended by Loral’s stockholders on May 19, 2009, is the operative certificate of incorporation of Loral.
The New Charter, as amended, is substantially the same as the Restated Certificate of Incorporation of Loral previously in
effect, except that the New Charter, as amended, provides that the total authorized capital stock of the Company is eighty million
(80,000,000) shares consisting of two classes: (i) seventy million (70,000,000) shares of common stock, $0.01 par value per
share divided into two series, of which 50,000,000 shares are Voting Common Stock and 20,000,000 shares are Non-Voting
Common Stock, and (ii) ten million (10,000,000) shares of preferred stock, $0.01 par value per share.
F-31
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result of the cancellation of the Loral Series-1 Preferred Stock and the issuance of the Non-Voting Common Stock on
December 23, 2008, equity in our consolidated balance sheet has been adjusted to include the Non-Voting Common Stock at its
fair value on December 23, 2008 and remove the Loral Series-1 Preferred Stock balances. Fair value was determined based on
the closing market price per share of Loral common stock on December 23, 2008. The difference between the fair value of the
9,505,673 shares of Non-Voting Common Stock and the carrying value of the Loral Series-1 Preferred Stock, including accrued
dividends thereon, has been reflected as an increase to paid-in capital.
In connection with a stipulation entered into with certain directors and officers of Old Loral, certain claims aggregating
$30 million may result in the distribution of our Common Stock in addition to the 20 million shares distributed under the Plan of
Reorganization (see Note 14).
Preferred Stock
On February 27, 2007, Loral completed a $300.0 million preferred stock financing pursuant to the SPA, under which Loral
sold 136,526 shares of its Series A-1 cumulative 7.5% convertible preferred stock (the “Series A-1 Preferred Stock”) and
858,486 shares of its Series B-1 cumulative 7.5% convertible preferred stock (the “Series B-1 Preferred Stock” and, together
with the Series A-1 Preferred Stock, the “Loral Series-1 Preferred Stock”) at a purchase price of $301.504 per share to various
funds affiliated with MHR (the “MHR Funds”).
Prior to the conversion of the Loral Series-1 Preferred Stock to Non-Voting Common Stock, the Loral Series-1 Preferred
Stock had, among others, the following terms:
Each share of the Series A-1 Preferred Stock was convertible, at the option of the holder, into ten shares of Loral common
stock at a conversion price of $30.1504 per share. The conversion price reflected a premium of 12% to the closing price of
Loral’s common stock on October 16, 2006. The conversion price was subject to customary adjustments. Dividends on the Loral
Series-1 Preferred Stock were paid in kind (i.e., in additional shares of Loral Series-1 Preferred Stock).
The Company paid dividends of $24.2 million through the issuance of 2,725 shares and 77,698 shares of Series A-1 and
Series B-1 Preferred Stock, respectively, during the year ended December 31, 2008. During the year ended December 31, 2007,
the Company paid dividends of $14.4 million through the issuance of 5,427 shares of Series A-1 Preferred Stock and 42,335
shares of Series B-1 Preferred Stock. Accrued dividends at the date of conversion of the Loral Series-1 Preferred Stock were
$4.8 million.
The price of Loral’s common stock on October 16, 2006, the day before we signed the SPA, was $26.92 and the conversion
price was $30.1504. The price of Loral’s common stock on February 27, 2007, when the financing closed was $47.40. Because
of the difference between the fair value of the common stock on the date the financing closed, as compared to the conversion
price, the Company was required to reflect a beneficial conversion feature of the Loral Series A-1 Preferred Stock as a
component of its net loss applicable to common shareholders for the year ended December 31, 2007. This beneficial conversion
feature was recorded as a charge to net loss applicable to common shareholders and resulted in an increase of both basic and
diluted loss per share. For the year ended December 31, 2007, we recorded a charge to net loss applicable to common
shareholders of $25.7 million. Due to the fact that the fair value of Loral’s common stock on the ending date of all four quarters
of 2008 was less than the conversion price, we did not record any beneficial conversion feature for the year ended December 31,
2008.
Loral incurred issuance costs of $8.9 million in connection with this preferred stock financing. In addition, Loral paid MHR
a placement fee of $6.8 million upon closing of the financing.
Pursuant to the Implementing Order, the Certificates of Designation of the Series A-1 Preferred Stock and Series B-1
Preferred Stock were eliminated and are of no further force and effect.
Loral Skynet Series A Preferred Stock
On November 21, 2005, Loral Skynet Corporation issued 1.0 million of its 2.0 million authorized shares of Series A 12%
non-convertible preferred stock, $0.01 par value per share (the “Loral Skynet Preferred Stock”), which were distributed in
accordance with the Plan of Reorganization. The issued shares were distributed to holders of allowed claims in Orion Class 4, as
such term is used in the Plan of Reorganization. Dividends on the Loral Skynet Preferred Stock (if not paid or accrued as
permitted under certain circumstances) were payable in kind (in additional shares of Loral Skynet Preferred Stock) if the amount
of any dividend payment would exceed certain thresholds.
F-32
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Dividends of $23.2 million for the year ended December 31, 2007 related to the Loral Skynet Preferred Stock are reflected
as net income attributable to noncontrolling interest on our consolidated statements of operations.
Dividends paid on Loral Skynet Preferred Stock are as follows (in thousands, except share data):
Payment Date
November 5, 2007
July 13, 2007
January 12, 2007
Dividend Period
7/14/07 to 11/05/07 $
1/14/07 to 7/13/07
7/14/06 to 1/13/07
Cash
Dividends
8,790
1,260
1,770
PIK Dividends
Total
Shares
—
61,282
55,434
Amount
$
—
12,260
11,090
Dividends
$
8,790
13,520
12,860
On November 5, 2007, in connection with the completion of the Telesat transaction, all issued and outstanding shares of
Loral Skynet Preferred Stock were redeemed.
Stock Plans
The Loral 2005 stock incentive plan (the “Stock Incentive Plan”) allows for the grant of several forms of stock-based
compensation awards including stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and
other stock-based awards (collectively, the “Awards”). The total number of shares of Common Stock initially reserved and
available for issuance under the Stock Incentive Plan was 1,390,452 shares. In addition, shares of Common Stock that are
issuable under awards that expire, are forfeited or canceled, or withheld in payment of the exercise price or taxes relating to an
Award, will again be available for Awards under the Stock Incentive Plan. Options issued on December 21, 2005, totaling
1,390,452 shares, have an exercise price equal to the fair market value of our stock, as defined, vest over a four year period and
have a seven year life. The Awards provide for accelerated vesting if there is a change in control, as defined in the Stock
Incentive Plan.
On May 22, 2007, at our annual meeting of stockholders, our stockholders approved the Company’s Amended and Restated
2005 Stock Incentive Plan (the “Plan”) to increase by 1,582,000 the number of shares available for grant thereunder. These
amendments covered the following grants that were all subject to stockholder approval of the plan amendments: (a) the grant in
March 2006 of options to purchase 825,000 shares to our Chief Executive Officer in connection with his entering into an
employment agreement with us (the “CEO March 2006 Option Grant”), (b) the grant in June 2006 of options to purchase 20,000
shares to our former Chief Financial Officer in connection with his entering into an amendment to his employment agreement,
(c) the grant in June 2006 of options to purchase 120,000 shares to a former director in connection with his entering into a
consulting agreement and (d) grants of approximately 175,700 shares of restricted stock, to employees of SS/L and others. In
addition, these amendments covered 31,000 shares of restricted stock granted to our directors as part of their compensation.
These grants were recognized and measured upon stockholder approval of the amendments. The stock option grant to a former
director in connection with his entering into a consulting agreement has been accounted for as a non-employee grant (see Note
16).
In June 2009, Mr. Targoff was awarded an option to purchase 125,000 shares of Loral voting common stock with an
exercise price of $35 per share (the “CEO June 2009 Option Grant”). The option is vested with respect to 25% of the underlying
shares upon grant, with the remainder of the option subject to vesting as to 25% of the underlying shares on each of the first three
anniversaries of the grant date. The option expires on June 30, 2014.
F-33
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of stock options and restricted stock granted in 2007 was estimated using the Black-Scholes-Merton model
and the fair value of the CEO June 2009 Option Grant was estimated using the Hull-White I barrier lattice model based on the
assumptions below for the periods indicated:
Risk — free interest rate
Expected life (years)
Estimated volatility
Expected dividends
Weighted average grant date fair value
Year Ended
December 31,
2009
2007
2.72 %
4.67
64.77 %
None
11.39 $
4.5 %
2.80
32.8 %
None
23.46
$
A summary of the Company’s stock option activity for the year ended December 31, 2009 is presented below:
Weighted
Weighted
Average
Average Remaining
Exercise Contractual
Aggregate
Intrinsic
Value
(In thousands)
—
Term
3.2 years
Outstanding at January 1, 2009
Granted
Exercised
Forfeited
Outstanding at December 31, 2009
Vested and expected to vest at December 31, 2009
Exercisable at December 31, 2009
Shares
2,034,202
125,000
(363,125 )
(10,000 )
1,786,077
1,786,077
1,692,327
$
$
$
$
$
$
$
Price
27.81
35.00
28.37
28.44
28.20
28.20
27.82
2.3 years
2.3 years
2.1 years
$
$
$
6,523
6,523
6,523
A summary of the Company’s non-vested restricted stock activity for the year ended December 31, 2009 is presented
below:
Non-vested restricted stock at January 1, 2009
Granted
Vested
Forfeited
Non-vested restricted stock at December 31, 2009
Weighted Average
Shares
95,705 $
8,000 $
(55,492 ) $
(2,687 ) $
45,526 $
Grant- Date
Fair Value
42.43
33.58
43.01
46.65
39.91
On March 5, 2009, the Compensation Committee approved awards of restricted stock units (the “RSUs”) for certain
executives of the Company. Each RSU has a value equal to one share of Voting Common Stock and generally provides the
recipient with the right to receive one share of Voting Common Stock or cash equal to the value of one share of Voting Common
Stock, at the option of the Company, on the settlement date.
Michael B. Targoff, Chief Executive Officer of Loral, was awarded 85,000 RSUs (the “Initial Grant”) on March 5, 2009
(the “Grant Date”). In addition, the Company agreed to issue Mr. Targoff 50,000 RSUs on the first anniversary of the Grant Date
and 40,000 RSUs on the second anniversary of the Grant Date (the “Subsequent Grants”). Vesting of the Initial Grant requires
the satisfaction of two conditions: a time-based vesting condition and a stock price vesting condition. Vesting of the Subsequent
Grants is subject only to the stock-price vesting condition. The time-based vesting condition for the Initial Grant was satisfied
upon Mr. Targoff’s continued employment through March 5, 2010, the first anniversary of the Grant Date. The stock price
vesting condition, which applies to both the Initial Grant and the Subsequent Grants, has been satisfied. Both the Initial Grant
and the Subsequent Grants will be settled on March 31, 2013 or earlier under certain circumstances.
F-34
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of the RSUs awarded in 2009 that vest upon achievement of a market condition and a time-based vesting
condition was estimated using Monte Carlo simulation. Ex-dividend prices were simulated and those prices were used to
determine when the price hurdle target will be achieved, if ever. The following assumptions were used to derive the fair value of
such RSUs and the period over which the price hurdle target would be achieved:
Risk — free interest rate
Estimated volatility
Expected dividends
Weighted average grant date fair value
Year Ended December 31,
2009
1.581 %
59.83 %
None
8.51
$
C. Patrick DeWitt, formerly Senior Vice President of Loral and Chief Executive Officer of SS/L and currently Chairman of
the Board of SS/L, was awarded 25,000 RSUs on March 5, 2009, of which 66.67% vested on March 5, 2010, with the remainder
vesting ratably on a quarterly basis over the subsequent two years. All of Mr. DeWitt’s RSUs will be settled on March 12, 2012
or earlier under certain circumstances. The fair value of these RSUs is based upon the market price of Loral Voting Common
Stock as of the grant date. The weighted average grant date fair value of the award was $12.41.
In May 2009, the Loral directors were awarded 15,000 RSUs which vest evenly on the first and second anniversary of the
grant date. Each director’s RSUs will be settled on the earlier of death of the director, the date the director undergoes a separation
of service from the Company and the date of a change in control of the Company. The weighted average grant date fair value of
the award was $33.91. Other executives were awarded 8,250 RSUs in June 2009, which have two vesting conditions. The time-
based vesting condition is satisfied at grant for 25% of the RSUs and quarterly over the subsequent three years for the remaining
RSUs. The stock price vesting condition is satisfied when the average closing price of the Voting Common Stock has been at or
above $45 for 20 consecutive trading days. The weighted average grant date fair value of the award was $18.66.
A summary of the Company’s non-vested RSU activity for the year ended December 31, 2009 is presented below:
Non-vested RSUs at January 1, 2009
Granted
Vested
Forfeited
Non-vested RSUs at December 31, 2009
Weighted
Average
Grant- Date
Fair Value
Shares
—
223,250
—
—
223,250
$
$
11.03
—
—
11.03
In April 2009, other SS.L employees were granted 66,259 shares of Loral Voting Common Stock, which were fully vested
as of the grant date. The grant date fair value of the award is based on Loral’s average stock price of $24.01 at the date of grant.
In June 2009, the Company introduced a performance based long-term incentive compensation program consisting of SS/L
phantom stock appreciation rights (“SS/L Phantom SARs”). Because SS/L common stock is not freely tradable on the open
market and thus does not have a readily ascertainable market value, SS/L equity value under the program is derived from an
Adjusted EBITDA-based formula. Each SS/L Phantom SAR provides the recipient with the right to receive an amount equal to
the increase in SS/L’s notional stock price over the base price multiplied by the number of SS/L Phantom SARs vested on the
applicable vesting date, subject to adjustment. SS/L Phantom SARs are settled and the SAR value (if any) is paid out on each
vesting date. SS/L Phantom SARs may be settled in Loral common stock (based on the fair value of Loral common stock on the
date of settlement) or cash at the option of the Company. SS/L Phantom SARs awarded in 2009 have a three year or a four year
vesting schedule and expire on June 30, 2016.
During 2009, 475,000 SS/L Phantom SARs were awarded to employees with the following three year vesting schedule:
50% vest on March 18, 2010, 25% vest on March 18 of 2011 and 25% vest on March 18, 2012. In addition, 65,000 SS/L
Phantom SARs were awarded with the following four year vesting schedule: 25% vest on March 18, 2010, 25% vest on
March 18 of 2011, 25% vest on March 18, 2012 and 25% vest on March 18, 2013. The fair value of the SS/L Phantom SARs is
included as a liability in our consolidated balance sheets. The payout liability is adjusted each reporting period to reflect the fair
value of the underlying SS/L equity based on the actual performance of SS/L. As of December 31, 2009, the amount of the
liability in our consolidated balance sheet related to the SS/L Phantom SARs was $2.7 million.
F-35
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s non-vested SS/L Phantom SAR activity for the year ended December 31, 2009 is presented
below:
Non-vested SS/L Phantom SARs at January 1, 2009
Granted
Vested
Forfeited
Non-vested SS/L Phantom SARs at December 31, 2009
Weighted
Average
Grant- Date
Fair Value
Shares
—
540,000
—
—
540,000
$
$
6.53
—
—
6.53
During fiscal years 2009, 2008 and 2007, the following activity occurred under the Plans (in thousands):
Total intrinsic value of options exercised
Total fair value of restricted stock vested
Total fair value of stock awards vested
Year Ended December 31,
2008
2009
2007
$
$
1,578
1,395
1,591
$
—
1,131
—
2,930
3,016
—
We recorded total stock compensation expense of $9.6 million (of which $2.1 million is expected to be paid in cash),
$7.6 million and $26.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009,
total unrecognized compensation costs related to non-vested awards were $8.1 million and are expected to be recognized over a
weighted average remaining period of 1.4 years.
As of December 31, 2009, 572,373 shares of Loral Voting Common Stock were available for future grant under the Plan.
This number of shares available for grant would be reduced if SS/L Phantom SARS are settled in Loral Voting Common Stock.
11. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted average number of shares of voting and non-voting
common stock outstanding. The following is the computation of weighted average common shares outstanding for diluted
earnings (loss) per share:
Common and potential common shares:
Weighted average common shares outstanding
Stock options
Unvested restricted stock units
Unvested restricted stock
Unvested SARS
Common and potential common shares
F-36
2009
Year Ended December 31,
2008
(In thousands)
2007
29,761
48
115
4
53
29,981
20,407
—
—
—
—
20,407
20,087
—
—
—
—
20,087
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the year ended December 31, 2009, the effect of certain stock options outstanding, which would be calculated using the
treasury stock method and certain non-vested restricted stock and non-vested RSUs were excluded from the calculation of
diluted earnings per share, as the effect would have been antidilutive. For the years ended December 31, 2008 and 2007 all stock
options outstanding and non-vested restricted stock were excluded from the calculation of diluted loss per share as the effect
would have been anti-dilutive. The following summarizes stock options outstanding, non-vested restricted stock and non-vested
restricted stock units excluded from the calculation of diluted earnings (loss) per share:
Stock options outstanding
Shares of non-vested restricted stock
Non-vested restricted stock units
12. Pensions and Other Employee Benefits
Pensions
2009
Year Ended December 31,
2008
(In thousands)
2,034
96
—
125
30
8
2007
2,052
142
—
We maintain a pension plan and a supplemental retirement plan. These plans are defined benefit pension plans, and
members may contribute to the pension plan in order to receive enhanced benefits. Employees hired after June 30, 2006, do not
participate in the defined benefit pension plan, but participate in our defined contribution savings plan with an additional
Company contribution. Benefits are based primarily on members’ compensation and/or years of service. Our funding policy is to
fund the pension plan in accordance with the Internal Revenue Code and regulations thereon and to fund the supplemental
retirement plan on a discretionary basis. Plan assets are generally invested in equity investments and fixed income investments.
Pension plan assets are managed by Russell Investment Corp. (“Russell”), which allocates the assets into funds as we direct.
Other Benefits
In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees
and dependents. Participants are eligible for these benefits generally when they retire from active service and meet the eligibility
requirements for our pension plan. These benefits are funded primarily on a pay-as-you-go basis, with the retiree generally
paying a portion of the cost through contributions, deductibles and coinsurance provisions.
Curtailment
In connection with the Telesat transaction in 2007, the pension benefits of Loral Skynet employees have been frozen and
they will no longer earn additional benefits under the pension plans. Unvested pension plan participants will receive credit for
Telesat service for vesting purposes only. In addition, only service prior to the date of the Telesat transaction will be considered
to determine eligibility for retiree, medical and life insurance benefits. As a result, and because of other related employee actions,
a curtailment gain has been recorded upon completion of the Telesat transaction and is reflected in the tables below. The net
pension liability has been excluded from the Telesat transaction and retained by Loral.
F-37
Table of Contents
Funded Status
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for
2009 and 2008, and a statement of the funded status as of December 31, 2009 and 2008, respectively. We use a December 31
measurement date for the pension plans and other post retirement benefit plans.
Reconciliation of benefit obligation
Obligation at beginning of period
Service cost
Interest cost
Participant contributions
Actuarial loss (gain)
Benefit payments
Curtailment gain
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 at end of period
Pension Benefits
Year Ended
December 31,
2009
2008
(In thousands)
Other Benefits
Year Ended
December 31,
2009
2008
(In thousands)
$
$
380,919
9,436
24,447
1,455
27,366
(23,547 )
—
420,076
211,982
42,643
22,526
1,455
(22,440 )
256,166
(163,910 )
$
$
367,870
9,214
23,367
1,385
2,146
(22,630 )
(433 )
380,919
284,283
(80,059 )
27,904
1,385
(21,531 )
211,982
(168,937 )
$
$
66,587
863
3,965
1,863
(1,764 )
(4,122 )
—
67,392
742
5
2,019
1,863
(4,122 )
507
(66,885 )
$
$
73,788
1,056
4,108
1,792
(9,393 )
(4,764 )
—
66,587
955
27
2,732
1,792
(4,764 )
742
(65,845 )
The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $230.8 million at
December 31, 2009 (the “unfunded benefit obligations”). The unfunded benefit obligations were measured using a discount rate
of 6.0% and 6.5% at December 31, 2009 and 2008, respectively. Lowering the discount rate by 0.5% would have increased the
unfunded benefit obligations by approximately $26.6 million and $24.7 million as of December 31, 2009 and 2008, respectively.
Market conditions and interest rates will significantly affect future assets and liabilities of Loral’s pension and other employee
benefits plans.
The pre-tax amounts recognized in accumulated other comprehensive income (loss) as of December 31, 2009 and 2008
consist of (in thousands):
Actuarial (loss) gain
Amendments-prior service credit
Pension Benefits
December 31,
Other Benefits
December 31,
2009
2008
2009
2008
$
$
(78,028 )
25,392
(52,636 )
$
$
(80,213 )
28,111
(52,102 )
$
$
8,464
2,485
10,949
$
$
7,216
2,966
10,182
The amounts recognized in other comprehensive income (loss) during the year ended December 31, 2009 consist of (in
thousands):
Actuarial (loss) gain during the period
Amortization of actuarial loss (gain)
Amortization of prior service credit
Total recognized in other comprehensive income
Pension Benefits Other Benefits
1,719
(1,898 ) $
$
(471 )
4,083
(481 )
(2,719 )
767
(534 ) $
$
F-38
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in the balance sheet consist of (in thousands):
Current Liabilities
Long-Term Liabilities
Pension Benefits
December 31,
Other Benefits
December 31,
2009
2008
2009
2008
$
$
1,236
162,674
163,910
$
$
1,070
167,867
168,937
$
$
3,369
63,516
66,885
$
$
3,051
62,794
65,845
The estimated actuarial loss and prior service credit for the pension benefits that will be amortized from accumulated other
comprehensive income into net periodic cost over the next fiscal year is $3.2 million and $2.7 million, respectively. The
estimated actuarial gain and prior service credit for other benefits that will be amortized from accumulated other comprehensive
income into net periodic cost over the next fiscal year is $0.2 million and $0.5 million, respectively.
The accumulated pension benefit obligation was $412.1 million and $375.8 million at December 31, 2009 and 2008,
respectively.
During 2009, we contributed $22.5 million to the qualified pension plan and $2.0 million for other employee post-
retirement benefit plans. During 2010, based on current estimates, we expect to contribute approximately $24.9 million to the
qualified pension plan and expect to fund approximately $4.0 million for other employee post-retirement benefit plans.
The following table provides the components of net periodic cost for the plans for the years ended December 31, 2009,
2008 and 2007 (in thousands):
Pension Benefits
For the Year Ended December 31,
2007
2008
2009
$ 10,145
22,455
(23,768 )
(2,784 )
$
9,214
23,367
(24,469 )
(2,718 )
$
9,436
24,447
(17,176 )
(2,719 )
4,083
—
$ 18,071
$
(18 )
(433 )
4,943
(59 )
(2,345 )
3,644
$
Other Benefits
For the Year Ended December 31,
2007
2008
2009
$
$
863
3,965
(50 )
(481 )
(471 )
—
3,826
$
$
1,056
4,108
(72 )
(480 )
(30 )
—
4,582
$
1,607
4,995
(36 )
(553 )
111
(1,862 )
4,262
$
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Amortization of net actuarial loss
(gain)
Curtailment gain
Net periodic cost
Assumptions
The discount rate used to determine net periodic pension cost was 6.5% for the years ended December 31, 2009 and 2008.
The discount rate used to determine net periodic pension cost was 6.0% for the period January 1, 2007 to October 31, 2007 and,
as a result of the remeasurement for the curtailment as of October 31, 2007, 6.5% for the period November 1, 2007 to
December 31, 2007. Assumptions used to determine net periodic cost:
Discount rate
Expected return on plan assets
Rate of compensation increase
Assumptions used to determine the benefit obligation:
6.50 %
8.00 %
4.25 %
6.50 %
8.50 %
4.25 %
For the Year Ended December 31,
2008
2009
2007
6.00%/6.50 %
8.50 %
4.25 %
Discount rate
Rate of compensation increase
2009
6.00 %
4.25 %
December 31,
2008
6.50 %
4.25 %
2007
6.50 %
4.25 %
F-39
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Based on the target allocation of assets, which is 60% in equity investments and 40% in fixed income investments,
the twenty-five year historical return of our investment managers has been 9.3%. The expected long-term rate of return on plan
assets determined on this basis was 8.0% for the year ended December 31, 2009 and 8.5% for the years ended December 31,
2008 and 2007. Our expected long-term rate of return on plan assets for 2010 is 8.0%, which is unchanged from 2009.
Actuarial assumptions to determine the benefit obligation for other benefits as of December 31, 2009, used a health care
cost trend rate of 9.5% decreasing gradually to 5% by 2018. Actuarial assumptions to determine the benefit obligation for other
benefits as of December 31, 2008, used a health care cost trend rate of 10.0% decreasing gradually to 5% by 2018. Assumed
health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed
health care cost trend rates for 2009 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
$
$
313 $
4,759 $
(260 )
(3,826 )
Plan Assets
The Company has established the pension plan as a retirement vehicle for participants and as a funding vehicle to secure
promised benefits. The investment goal is to provide a total return that over time will earn a rate of return to satisfy the benefit
obligations given investment risk levels, contribution amounts and expenses. The pension plan invests in compliance with the
Employee Retirement Income Security Act 1974 as amended (“ERISA”), and any subsequent applicable regulations and laws.
The Company has adopted an investment policy for the management and oversight of the pension plan. It sets forth the
objectives for the pension plan, the strategies to achieve these objectives, procedures for monitoring and control and the
delegation of responsibilities for the oversight and management of Pension Plan assets.
The Company’s Board of Directors has delegated primary fiduciary responsibility for pension assets to an investment
committee. In carrying out its responsibilities, the investment committee establishes investment policy, makes asset allocation
decisions, determines asset class strategies and retains investment managers to implement asset allocation and asset class strategy
decisions. It is responsible for the investment policy and may amend such policy from time to time.
Pension plan assets are invested in various asset classes in what we believe is a prudent manner for the exclusive purpose of
providing benefits to participants. U.S. equities are held for their long-term expected return premium over fixed income
investments and inflation. Non-U.S. equities are held for their expected return premium (along with U.S. equities), as well as
diversification relative to U.S. equities and other asset classes. Fixed income investments are held for diversification relative to
equities. Alternative investments are held for both diversification and higher returns than those typically available in traditional
asset classes. Asset allocation policy is reviewed regularly.
Asset allocation policy is the principal method for achieving the pension plan’s investment objectives stated above. Asset
allocation policy is reviewed regularly by the investment committee. The pension plan’s actual and targeted asset allocations are
as follows:
Equities
Fixed Income
Actual Allocation
December 31,
2009
2008
59 %
41 %
100 %
51 %
49 %
100 %
Target Allocation
Target
Target Range
60 %
40 %
100 %
50-65 %
35-50 %
100 %
F-40
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The target and target range levels can be further defined as follows:
U.S. Large Cap Equities
U.S. Small Cap Equities
Non-U.S. Equities
Alternative Equity Investments
Total Equities
Fixed Income
Alternative Fixed Income Investments
Total Fixed Income
Total Target Allocation
Target Allocation
Target
Target Range
35 %
5 %
15 %
5 %
60 %
35 %
5 %
40 %
30-40 %
3-7 %
10-20 %
0-15 %
50-65 %
30-40 %
0-15 %
35-50 %
100 %
100 %
The pension plan’s assets are actively managed using a multi-asset, multi-style, multi-manager investment approach.
Portfolio risk is controlled through this diversification process and monitoring of money managers. Consideration of such factors
as differing rates of return, volatility and correlation are utilized in the asset and manager selection process. Diversification
reduces the impact of losses in single investments. Performance results and fund accounting are provided to the Company by
Russell on a monthly basis. Periodic reviews of the portfolio are performed by the investment committee with Russell. These
reviews typically consist of a market and economic review, a performance review, an allocation review and a strategy review.
Performance is judged by investment type against market indexes. Allocation adjustments or fund changes may occur after these
reviews. Performance is reported to the Company’s Board of Directors at quarterly board meetings.
F-41
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measurements
The values of the fund trusts are calculated using systems and procedures widely used across the investment industry.
Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation
services, discounted cash flow methodology, records of security exchanges, appraisal by qualified persons, transactions and bona
fide offers.
The table below provides the fair values of the Company’s pension plan assets at December 31, 2009, by asset category.
The table also identifies the level of inputs used to determine the fair value of assets in each category. The Company’s pension
plan assets are mainly held in commingled employee benefit fund trusts.
Fair Value Measurements
at December 31, 2009
Quoted Prices
In Active Markets Significant
Significant
Observable Unobservable
Total
Percentage
For Identical
Assets
Level 1
(In thousands)
Asset Category
Cash
Equity securities:
U.S. large-cap (1)
U.S. small-cap (2)
Non-U.S. (3)
Alternative investments:
Equity long/short fund (4)
Private equity fund (5)
$
79,854
13,087
45,957
5,468
6,245
150,611
31 %
5 %
18 %
2 %
3 %
59 %
Fixed income securities:
Commingled funds (6)
Alternative investments:
Distressed opportunity limited
partnership (7)
Diversified alternatives fund (8)
Other limited partnerships (9)
98,998
39 %
3,204
3,135
218
105,555
1 %
1 %
41 %
Inputs
Level 2
Inputs
Level 3
$
79,854
13,087
45,957
$
138,898
98,998
98,998
5,468
6,245
11,713
3,204
3,135
218
6,557
$ 256,166
100 %
$ 237,896 $
18,270
(1)
(2)
Investments in common stocks that rank among the largest 1,000 companies in the U.S. stock market.
Investments in common stocks that rank among the small capitalization stocks in the U.S. stock market.
F-42
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(3)
(4)
(5)
(6)
(7)
(8)
Investments in common stocks of companies from developed and emerging countries around the world.
Investments primarily in long and short positions in equity securities of U.S. and non-U.S. companies. This fund has semi-
annual tender offer redemption periods on June 30 and December 31.
Fund invests in portfolios of secondary interest in established venture capital, buyout, mezzanine and special situation funds
on a global basis. The Company committed to invest up to $10 million in this fund. $6.95 million has been invested through
December 31, 2009. Fund is valued on a quarterly lag with adjustment for subsequent cash activity.
Investments in bonds representing many sectors of the broad bond market with both short-term and intermediate-term
maturities.
Investments mainly in discounted debt securities, bank loans, trade claims and other debt and equity securities of financially
troubled companies. This partnership has a one year lock-up period with semi-annual withdrawal rights on June 30 and
December 31 thereafter. Our initial investment was made August 3, 2009.
Fund is a fund of hedge funds. Fund is closed and currently unwinding its holdings. The remaining portfolio is illiquid and
could take four or five years, possibly more to liquidate. Fund is valued on a one month lag with adjustment for subsequent
cash activity.
(9)
Company invested in other partnerships that have reached their end of life and have closed and are unwinding their
holdings. Mainly partnerships that provided mezzanine financing.
The significant amount of Level 2 investments in the table result from including in this category investments in
commingled funds that contain investments with values based on quoted market prices, but for which the funds are not valued on
a quoted market basis. These commingled funds are valued at their net asset values (NAVs) that are calculated by the investment
manager or sponsor. Equity investments in both U.S and non-U.S. stocks are primarily valued using a market approach based on
the quoted market prices of identical securities. Fixed income investments are primarily valued using a market approach with
inputs that include broker quotes, benchmark yields, base spreads and reported trades.
Additional information pertaining to the changes in the fair value of the pension plan assets classified as Level 3 for the
year ended December 31, 2009 is presented below:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Private Equity
Equity Long/Short Opportunity
Fund
Ltd. Partnership
Distressed
Fund
Diversified Other
Alternatives Limited
Fund
Partnership Total
Beginning balance at January 1, 2009 $
Unrealized gain/(loss)
Realized gain/(loss)
Purchases
Sales
Ending balance at December 31, 2009 $
6,645 $
(1,050 )
—
650
—
6,245 $
— $
468
—
5,000
—
5,468 $
(In thousands)
— $
204
—
3,000
—
3,204 $
8,735 $
(525 )
(1,095 )
—
(3,980 )
3,135 $
402 $ 15,782
(711 )
192
(1,439 )
(344 )
8,650
—
(32 )
(4,012 )
218 $ 18,270
F-43
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Both the Equity Long/Short Fund and the Distressed Opportunity Limited Partnership are valued at each month-end based
upon quoted market prices by the investment managers. They are included in Level 3 due to their restrictions on redemption to
semi-annual periods on June 30 and December 31.
The diversified alternatives fund is a fund of hedge funds. Hedge fund net asset value is calculated by the fund manager and
is not publicly available. The fund of funds manager accumulates all the underlying fund values and accumulates them in
determining the fund of funds net asset value. Due to the illiquidity issues of remaining holdings at December 31, 2009, the fund
manager derived fair market valuations from discussions focusing on underlying fundamentals and significant events.
The private equity fund and limited partnership valuations are primarily based on cost/price of recent investments,
earnings/performance multiples, net assets, discounted cash flows, comparable transactions and industry benchmarks. The annual
audited financial statements of all funds are reviewed by the Company.
Assets designated to fund the obligations of our supplemental retirement plan are held in a trust. Such assets amounting to
$2.9 million and $3.5 million as of December 31, 2009 and 2008, respectively, are available to general creditors in the event of
bankruptcy and, therefore, do not qualify as plan assets. Accordingly, other current assets included $0.8 million and $0.8 million
of these assets as of December 31, 2009 and 2008, and other assets included $2.1 million and $2.7 million of these assets as of
December 31, 2009 and 2008, respectively.
Benefit Payments
The following benefit payments, which reflect future services, as appropriate, are expected to be paid (in thousands):
Other Benefits
2010
2011
2012
2013
2014
2015 to 2019
Employee Savings (401k) Plan
$
Pension
Benefits
25,798
26,605
26,765
27,102
27,857
150,512
Gross
Benefit
Medicare
$
Payments
4,295
$
4,671
4,901
5,067
5,240
28,241
Subsidy
Receipts
304
337
372
405
442
2,736
We have an employee savings (401k) plan, to which the Company provides contributions which match up to 6% of a
participant’s base salary at a rate of 66 2 / 3 %, and retirement contributions. Retirement contributions represent contributions
made by the Company to provide added retirement benefits to employees hired on or after July 1, 2006, as they are not eligible to
participate in our defined benefit pension plan. Retirement contributions are provided regardless of an employee’s contribution to
the savings (401k) plan. Matching contributions and retirement contributions are collectively known as Company contributions.
Company contributions are made in cash and placed in each participant’s age appropriate “life cycle” fund. For the years ended
December 2009, 2008 and 2007, Company contributions were $8.7 million, $8.3 million and $7.7 million, respectively.
Participants of the savings (401k) plan are able to redirect Company contributions to any available fund within the plan.
Participants are also able to direct their contributions to any available fund.
13. Financial Instruments, Derivative Instruments and Hedging
Financial Instruments
The carrying amount of cash equivalents and restricted cash approximates fair value because of the short maturity of those
instruments. The fair value of short-term investments, investments in available-for-sale securities and supplemental retirement
plan assets is based on market quotations. The fair value of derivatives is based on the income approach, using observable Level
II market expectations at the measurement date and standard valuation techniques to discount future amounts to a single present
value.
F-44
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Foreign Currency
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We, in the normal course of business, are subject to the risks associated with fluctuations in foreign currency exchange
rates. To limit this foreign exchange rate exposure, the Company seeks to denominate its contracts in U.S. dollars. If we are
unable to enter into a contract in U.S. dollars, we review our foreign exchange exposure and, where appropriate, derivatives are
used to minimize the risk of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative
instruments for trading or speculative purposes.
As of December 31, 2009, SS/L had the following amounts denominated in Japanese Yen and EUROs (which have been
translated into U.S. dollars based on the December 31, 2009 exchange rates) that were unhedged:
Foreign Currency
U.S.$
Future revenues — Japanese Yen
Future expenditures — Japanese Yen
Contracts-in-process, unbilled receivables — Japanese Yen
Future revenues — EUROs
Future expenditures — EUROs
Derivatives and Hedging Transactions
¥
¥
¥
€
€
(In thousands)
35,062 $
380
4,613,707 $ 50,018
818
6,335
3,397
75,430 $
4,420 $
2,370 $
All derivative instruments are recorded at fair value as either assets or liabilities in our consolidated balance sheets. Each
derivative instrument is generally designated and accounted for as either a hedge of a recognized asset or a liability (“fair value
hedge”) or a hedge of a forecasted transaction (“cash flow hedge”). Certain of these derivatives are not designated as hedging
instruments and are used as “economic hedges” to manage certain risks in our business.
As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative
contracts will fail to meet their contractual obligations. The Company does not hold collateral or other security from its
counterparties supporting its derivative instruments. In addition, there are no netting arrangements in place with the
counterparties. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully
selected major financial institutions based upon their credit ratings and other factors.
The aggregate fair value of derivative instruments was a net asset position of $3.9 million as of December 31, 2009. This
amount represents the maximum exposure to loss at the reporting date as a result of the potential failure of the counterparties to
perform as contracted.
Cash Flow Hedges
The Company enters into long-term construction contracts with customers and vendors, some of which are denominated in
foreign currencies. Hedges of expected foreign currency denominated contract revenues and related purchases are designated as
cash flow hedges and evaluated for effectiveness at least quarterly. Effectiveness is tested using regression analysis. The
effective portion of the gain or loss on a cash flow hedge is recorded as a component of other comprehensive income (“OCI”)
and reclassified to income in the same period or periods in which the hedged transaction affects income. The ineffective portion
of a cash flow hedge gain or loss is included in income.
On July 9, 2008, SS/L was awarded a satellite contract denominated in EUROs and entered into a series of foreign
exchange forward contracts with maturities through 2011 to hedge associated foreign currency exchange risk because our costs
are denominated principally in U.S. dollars. These foreign exchange forward contracts have been designated as cash flow hedges
of future Euro denominated receivables.
F-45
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The maturity of foreign currency exchange contracts held as of December 31, 2009 is consistent with the contractual or
expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts. These
foreign exchange contracts mature as follows:
Maturity
2010
2011
Balance Sheet Classification
Euro
Amount
€
€
19,210
23,493
42,703
To Sell
At
Contract
Rate
(In thousands)
29,389
35,663
65,052
$
$
At
Market
Rate
$
$
27,529
33,650
61,179
The following summarizes the fair values and location in our consolidated balance sheet of all derivatives held by the
Company as of December 31, 2009:
Derivatives designated as hedging instruments
Foreign exchange contracts
Foreign exchange contracts
Derivatives not designated as hedging instruments
Foreign exchange contracts
Total Derivatives
Cash Flow Hedge Gains (Losses) Recognition
Asset Derivatives
Balance Sheet Location
Fair Value
(In thousands)
Other current assets
Other assets
$
Other assets
$
1,860
1,846
3,706
167
3,873
The following summarizes the gains (losses) recognized in the consolidated statement of operations and accumulated other
comprehensive income for all derivatives for the year ended December 31, 2009:
Amount of Gain
(Loss)
Recognized
in OCI on
Derivative
Gain Reclassified from
Accumulated
OCI into Income
(Effective Portion)
Loss on Derivative
Ineffectiveness and
amounts excluded from
Effectiveness Testing
(Effective Portion) Location
(In thousands)
Amount
(In thousands)
Location
11,806 Revenue
$
— Interest income $
Amount
(In thousands)
(1,085 )
(72 )
Derivatives in Cash Flow
Hedging Relationships
Foreign exchange contracts
Foreign exchange contracts
$
$
(274 ) Revenue $
180
Cash Flow Derivatives Not Designated as
Hedging Instruments
Gain
Recognized in Income
on Derivative
Location
Amount
(In thousands)
335
Foreign exchange contracts
Revenue
$
We estimate that $5.7 million of net gains from derivative instruments included in accumulated other comprehensive
income will be reclassified into earnings within the next 12 months.
Other Foreign Currency Contracts
On June 20, 2008, in anticipation of receiving the July 9, 2008 satellite contract described above, Loral entered into a
currency option transaction that allowed Loral to convert € 97.7 million into $149.5 million. Loral paid a premium of
$0.5 million for this option. For the year ended December 31, 2008, Loral recorded charges of $0.5 million as the options expired
unexercised on July 10, 2008.
F-46
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As part of the Telesat transaction, Telesat Holdco received financing commitments from a syndicate of banks for
$2.279 billion (based on an exchange rate of $1.00/CAD 0.9429 as of October 31, 2007) of senior secured credit facilities,
$692.8 million of a senior unsecured bridge facility and $217.2 million of a senior subordinated unsecured bridge facility. The
purchase price of Telesat was in Canadian dollars, while most of the debt financing was in U.S. dollars. Accordingly, to insulate
themselves from Canadian dollar versus U.S. dollar fluctuations, Loral, through Loral Skynet, and PSP, entered into financial
commitments to lock in exchange rates to convert some of the U.S. dollar denominated debt proceeds to Canadian dollars. On
October 23, 2007, Loral Skynet transferred its financial commitments under these contracts to Telesat Holdco.
A summary of these transactions is as follows:
1) In December 2006, Loral Skynet entered into a currency basis swap with a single bank counterparty effectively
converting $1.054 billion of U.S. debt into CAD 1.224 billion of Canadian debt for a seven year period beginning December 17,
2007. This debt amortizes 1% per year with a final maturity of December 17, 2014. No cash payment was made by Loral Skynet
for entering into this transaction. Loral Skynet recognized cumulative losses of $39.0 million through the date of transfer of the
swap to Telesat Holdco on October 23, 2007.
2) In December 2006, Loral Skynet entered into forward foreign currency contracts with a single bank counterparty selling
$497.4 million for CAD 570.1 million ($1.00/CAD 1.1461) with a settlement date of December 17, 2007. In January 2007, Loral
Skynet entered into additional forward foreign currency contracts with the same single bank counterparty selling $200.0 million
for CAD 232.8 million ($1.00/CAD 1.1512) with a settlement date of December 17, 2007. No cash payments were made by
Loral Skynet to the counterparty for entering into these transactions. Skynet recognized cumulative gains of $122.6 million
through the date of transfer of the foreign currency contracts to Telesat Holdco on October 23, 2007.
14. Commitments and Contingencies
Financial Matters
Due to the long lead times required to produce purchased parts, we have entered into various purchase commitments with
suppliers. These commitments aggregated approximately $469 million as of December 31, 2009 and primarily relate to Satellite
Manufacturing backlog. We also had total commitments of approximately $44 million relating to our portion of costs for the
ViaSat-1 satellite and the related gateways.
SS/L has deferred revenue and accrued liabilities for performance warranty obligations relating to satellites sold to
customers, which could be affected by future performance of the satellites. These reserves for expected costs for warranty
reimbursement and support are based on historical failure rates. However, in the event of a catastrophic failure of a satellite,
which cannot be predicted, these reserves likely will not be sufficient. SS/L periodically reviews and adjusts the deferred revenue
and accrued liabilities for warranty reserves based on the actual performance of each satellite and remaining warranty period. A
reconciliation of such deferred amounts for the years ended December 31, 2009, 2008 and 2007 is as follows (in thousands):
Balance of deferred amounts at January 1
Warranty costs incurred including payments
Accruals relating to pre-existing contracts (including changes in estimates)
Balance of deferred amounts at December 31
$
$
36,255
(1,239 )
2,151
37,167
$
$
35,026
(956 )
2,185
36,255
$
$
53,872
(10,790 )
(8,056 )
35,026
2009
2008
2007
Loral has restructured its corporate functions reducing the number of employees at its headquarters and consolidating some
functions at SS/L. In 2007 and 2008, Loral charged approximately $7.0 million and $0.3 million, respectively, to selling, general
and administrative expenses, mainly for severance and related costs. Loral paid restructuring costs of approximately $1.6 million,
$5.5 million and $0.2 million for the years 2009, 2008 and 2007, respectively and had no remaining liability for restructuring
costs at December 31, 2009.
F-47
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Many of SS/L’s satellite contracts permit SS/L’s customers to pay a portion of the purchase price for the satellite over time
subject to the continued performance of the satellite (“orbitals”), and certain of SS/L’s satellite contracts require SS/L to provide
vendor financing to its customers, or a combination of these contractual terms. Some of these arrangements are provided to
customers that are start-up companies, companies in the early stages of building their businesses or highly leveraged companies,
including some with near-term debt maturities. There can be no assurance that these companies or their businesses will be
successful and, accordingly, that these customers will be able to fulfill their payment obligations under their contracts with SS/L.
We believe that these provisions will not have a material adverse effect on our consolidated financial position or our results of
operations, although no assurance can be provided. Moreover, SS/L’s receipt of orbital payments is subject to the continued
performance of its satellites generally over the contractually stipulated life of the satellites. Because these orbital receivables
could be affected by future satellite performance, there can be no assurance that SS/L will be able to collect all or a portion of
these receivables. Orbital receivables included in our consolidated balance sheet as of December 31, 2009 were $240 million, net
of fair value adjustments of $19 million. Approximately $124 million of the gross orbital receivables are related to satellites
launched as of December 31, 2009 and $135 million are related to satellites under construction as of December 31, 2009. There
were no vendor financing receivables in our consolidated balance sheet as of December 31, 2009.
As of December 31, 2009, SS/L had receivables included in contracts in process from DBSD Satellite Services G.P.
(formerly known as ICO Satellite Services G.P. and referred to herein as “ICO”), a customer with an SS/L-built satellite in orbit,
in the aggregate amount of approximately $7 million. In addition, ICO has future payment obligations to SS/L which total in
excess of $26 million, of which approximately $12 million (including $9 million of orbital incentives) is included in long-term
receivables. ICO, which filed for bankruptcy protection under chapter 11 of the Bankruptcy Code in May 2009, has agreed to,
and the ICO Bankruptcy Court has approved, ICO’s assumption of its contract with SS/L, with certain modifications. The
contract modifications do not have a material adverse effect on SS/L, and, although the timing of payments to be received from
ICO has changed (for example, certain significant payments become due only on or after the effective date of ICO’s plan of
reorganization), SS/L expects to receive substantially the same net present value from ICO as SS/L was entitled to receive under
the original contract. ICO’s plan of reorganization was confirmed by the ICO Bankruptcy Court in October 2009. The effective
date of the plan is subject to, among other things, funding of a new exit financing facility, regulatory approval of the FCC and
favorable resolution of any appeals or a finding that such appeals are moot.
SS/L also had a past due receivable in the aggregate amount of approximately $3 million from Protostar Ltd. (“Protostar”),
another highly-leveraged customer with an SS/L-built satellite in orbit, which amount was included in contracts in process.
Protostar filed for bankruptcy protection under chapter 11 of the Bankruptcy Code in July 2009 and, in October 2009, SS/L filed
a proof of claim with respect to its receivable. On October 29, 2009, Protostar conducted an auction for the sale of substantially
all of the assets of Protostar I Ltd., including Protostar I, its SS/L-built satellite, and the sale to the winning bidder was approved
by the Protostar Bankruptcy Court on November 4, 2009. In consideration of SS/L’s ongoing business relationship with the
winning bidder, SS/L withdrew its claim subject to the closing of the sale to the winning bidder and wrote-off the full amount of
the Protostar receivable.
On July 30, 2007, SS/L entered into an Amended and Restated Customer Credit Agreement (the “Sirius Credit Agreement”)
with Sirius Satellite Radio Inc. (“Sirius”). Effective December 1, 2009, SS/L’s commitments to make loans to Sirius under the
Sirius Credit Agreement were terminated, SS/L has no remaining obligation to extend credit to Sirius under the Sirius Credit
Agreement, the Sirius Credit Agreement and related security agreement were terminated (except for provisions that expressly
provide for survival after termination), and liens granted to SS/L by Sirius were released.
Sirius had previously requested payment from SS/L of $15 million in liquidated damages with respect to the claimed late
delivery of the FM-5 Satellite. In October 2009, Sirius agreed that it was not entitled to such payment.
See Note 16 — Related Party Transactions — Transactions with Affiliates — Telesat for commitments and contingencies
relating to our agreement to indemnify Telesat for certain liabilities and our arrangements with ViaSat, Inc. and Telesat.
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. Thirty of the
satellites built by SS/L and launched since 1997 have experienced some loss of power from their solar arrays. There can be no
assurance that one or more of the affected satellites will not experience additional power loss. In the event of additional power
loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional
power loss, the level of redundancy built into the affected 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. SS/L has implemented remediation measures that SS/L believes will reduce this type of
anomaly for satellites launched after June 2001. Based upon information currently available relating to the power losses, we
believe that this matter will not have a material adverse effect on our consolidated financial position or our results of operations,
although no assurance can be provided.
F-48
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Non-performance can increase costs and subject SS/L to damage claims from customers and termination of the contract for
SS/L’s default. SS/L’s contracts contain detailed and complex technical specifications to which the satellite must be built. It is
very common that satellites built by SS/L do not conform in every single respect to, and contain a small number of minor
deviations from, the technical specifications. Customers typically accept the satellite with such minor deviations. In the case of
more significant deviations, however, SS/L may incur increased costs to bring the satellite within or close to the contractual
specifications or a customer may exercise its contractual right to terminate the contract for default. In some cases, such as when
the actual weight of the satellite exceeds the specified weight, SS/L may incur a predetermined penalty with respect to the
deviation. A failure by SS/L to deliver a satellite to its customer by the specified delivery date, which may result from factors
beyond SS/L’s control, such as delayed performance or non-performance by its subcontractors or failure to obtain necessary
governmental licenses for delivery, would also be harmful to SS/L unless mitigated by applicable contract terms, such as
excusable delay. As a general matter, SS/L’s failure to deliver beyond any contractually provided grace period would result in
the incurrence of liquidated damages by SS/L, which may be substantial, and if SS/L is still unable to deliver the satellite upon
the end of the liquidated damages period, the customer will generally have the right to terminate the contract for default. If a
contract is terminated for default, SS/L would be liable for a refund of customer payments made to date, and could also have
additional liability for excess re-procurement costs and other damages incurred by its customer, although SS/L would own the
satellite under construction and attempt to recoup any losses through resale to another customer. A contract termination for
default could have a material adverse effect on SS/L and us.
SS/L currently has a contract-in-process with an estimated delivery date later than the contractually specified date after
which the customer may terminate the contract for default. The customer is an established operator which will utilize the satellite
in the operation of its existing business. SS/L and the customer are continuing to perform their obligations under the contract,
and the customer continues to make milestone payments to SS/L. Although there can be no assurance, the Company believes that
the customer will take delivery of this satellite and will not seek to terminate the contract for default. If the customer should
successfully terminate the contract for default, the customer would be entitled to a full refund of its payments and liquidated
damages, which through December 31, 2009 totaled approximately $106 million, plus re-procurement costs and interest. In the
event of a termination for default, SS/L would own the satellite and would attempt to recoup any losses through resale to another
customer.
SS/L is building a satellite known as CMBStar under a contract with EchoStar Corporation (“EchoStar”). Satellite
construction is substantially complete. EchoStar and SS/L have agreed to suspend final construction of the satellite pending,
among other things, further analysis relating to efforts to meet the satellite performance criteria and/or confirmation that
alternative performance criteria would be acceptable. EchoStar has also stated that it is currently evaluating potential alternative
uses for the CMBStar satellite. There can be no assurance that a dispute will not arise as to whether the satellite meets its
technical performance specifications or if such a dispute did arise that SS/L would prevail. SS/L believes that it will not incur a
material loss with respect to this program.
In November 2004, Galaxy 27 (formerly Telstar 7) experienced an anomaly which caused it to completely cease operations
for several days before it was partially recovered. In June 2008, Galaxy 26 (formerly Telstar 6) experienced a similar anomaly
which caused the loss of power to one of the satellite’s solar arrays. Three other satellites manufactured by SS/L for other
customers have designs similar to Galaxy 27 and Galaxy 26 and, therefore, could be susceptible to similar anomalies in the
future. A partial or complete loss of these satellites could result in the incurrence of warranty payments by SS/L of up to
$3.3 million, of which $0.8 million has been accrued as of December 31, 2009.
SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position. There can be
no assurance that infringement of existing third party patents has not occurred or will not occur. In the event of infringement, we
could be required to pay royalties to obtain a license from the patent holder, refund money to customers for components that are
not useable or redesign our products to avoid infringement, all of which would increase our costs. We may also be required
under the terms of our customer contracts to indemnify our customers for damages.
See Note 16 — Related Party Transactions — Transactions with Affiliates — Telesat for commitments and contingencies
relating to SS/L’s obligation to make payments to Telesat for transponders on Telstar 10 and Telstar 18.
F-49
Table of Contents
Regulatory Matters
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 or
provision of defense services to foreign persons. Due to the relationship between launch technology and missile technology, the
U.S. government has limited, and is likely in the future to limit, launches from China and other foreign countries. Delays in
obtaining the necessary licenses and technical assistance agreements have in the past resulted in, and may in the future result in,
the delay of SS/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 and equipment under agreements expiring at various dates. Certain leases covering facilities
contain renewal and/or purchase options which may be exercised by us. Rent expense, net of sublease income is as follows (in
thousands):
Year ended December 31, 2009
Year ended December 31, 2008
Year ended December 31, 2007
Gross
Rent
Sublease
Income
$
$
$
16,337
12,154
26,302
$
$
$
—
(6 )
(76 )
Net Rent
16,337
12,148
26,226
$
$
$
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, 2009 (in thousands):
2010
2011
2012
2013
2014
Thereafter
Legal Proceedings
Insurance Coverage Litigation
$
$
10,737
8,356
5,811
3,774
3,508
10,016
42,202
The Company is obligated to indemnify its directors and officers for expenses incurred by them in connection with their
defense in the Delaware shareholder derivative case, entitled In re: Loral Space and Communications Inc. Consolidated
Litigation , relating to the Company’s sale of $300 million of preferred stock to certain funds affiliated with MHR (the “MHR
Funds”) pursuant to the Securities Purchase Agreement dated October 17, 2006, as amended and restated on February 27, 2007,
and the related Babus shareholder litigation in New York. The Company has purchased directors and officers liability insurance
coverage that provides the Company with coverage of up to $40 million for amounts paid as a result of the Company’s
indemnification obligations to its directors and officers and for losses incurred by the Company in certain circumstances,
including shareholder derivative actions.
The Company’s insurers have denied coverage of an award of fees and expenses of $8.8 million to counsel for the
derivative plaintiffs in the above-referenced Delaware litigation (the “Derivative Fee Award”) and of an award of fees and
expenses of $10.6 million to class counsel in that litigation (the “Class Counsel Fee Award” and, together with the Derivative
Fee Award, the “Fee Awards”). In December 2008, the insurers commenced an action against the Company in the Supreme
Court of the State of New York, County of New York, seeking a declaratory judgment declaring that (x) the applicable insurance
policies do not provide coverage for the Fee Awards; (y) even if the terms of the policies would otherwise cover the Fee Awards,
Loral breached the cooperation clause of the policies thereby relieving the insurers of any liability under the policies; and (z) in
the alternative, to the extent that the court finds that Loral is entitled to coverage of the Fee Awards, coverage is available only
for a small portion of the Derivative Fee Award. The Company believes that the Fee Awards are covered by and reimbursable
under its insurance and, in February 2009, the Company filed its answer and counterclaims in which it asserted its rights to
coverage. In April 2009, the insurers filed their reply and defenses to the Company’s counterclaims. In May 2009, the insurers
filed a motion for partial summary judgment declaring that there is no coverage for the Fee Awards. In July 2009, the Company
filed its opposition to the insurers’ motion and its own cross motion for partial summary judgment declaring that the Fee Awards
are covered under the applicable insurance policies. In February 2010, the court granted the Company’s motion and denied the
insurers’ motion, declaring that the Fee Awards are covered by the applicable insurance policies. The Company has filed a
motion to have final judgment entered on the Fee Award ruling, and the insurers have appealed the court’s decision.
F-50
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has received requests for indemnification and advancement of expenses from its directors who are not
affiliated with MHR under their indemnification agreements with the Company for any losses or costs they may incur as a result
of the In re: Loral Space and Communications Inc. Consolidated Litigation and Babus lawsuits. As of December 31, 2009, after
giving effect to a $5.0 million deductible, the insurers have advanced approximately $9.8 million in defense costs for the
Company’s directors who are not affiliated with MHR, but have denied coverage for approximately $1.6 million of such defense
costs (the “Denied Fees and Expenses”). The Company is disputing the insurers’ denial of the Denied Fees and Expenses and is
seeking to recover such fees and expenses in the above-referenced insurance coverage litigation.
In addition, the Company has received a request for indemnification from its directors who are affiliated with MHR for
defense costs in the amount, as of November 30, 2008, of approximately $18 million (the “MHR-Affiliated Director Indemnity
Claim”). The Company has received an opinion from an independent counsel that the MHR-affiliated directors are entitled to
indemnification for reasonable expenses incurred by them in defense of the claims asserted against them in their capacity as
directors. The Company has referred the request for indemnification to Mr. John Stenbit, who has been appointed by the Board
of Directors to act as an independent special committee of the Board with respect to determination of the amount of defense costs
properly allocable to the MHR-affiliated directors in their capacity as Loral directors and for which they are entitled to
indemnification. Since the special committee has not yet made any determinations with respect to its assignment, the Company
cannot estimate how much, if any, of the $18 million claimed by the directors affiliated with MHR will be subject to
indemnification. The insurers have taken the position that no coverage is available for the MHR-Affiliated Director Indemnity
Claim. The Company does not agree with the insurers’ position and is seeking to recover from the insurers in the above-
referenced insurance coverage litigation any fees and expenses that may properly be payable to the MHR-affiliated directors.
There can be no assurance that the Company’s positions regarding insurance coverage for the Fee Awards, the Denied Fees
and Expenses or the MHR-Affiliated Director Indemnity Claim will prevail or, if it does prevail on one or more of its positions,
that the coverage limit will be adequate to cover the Fee Awards, all defense costs for its directors (including any amounts
properly payable to the MHR-affiliated directors) and the Denied Fees and Expenses.
Reorganization Matters
On July 15, 2003, our predecessor, Loral Space & Communications Ltd. (“Old Loral”) and certain of its subsidiaries
(collectively with Old Loral, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of title 11 of the United
States Code in the U.S. Bankruptcy Court for the Southern District of New York (Lead Case No. 03-41710 (RDD), Case Nos.
03-41709 (RDD) through 03-41728 (RDD)). 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”).
Indemnification Claims of Directors and Officers of Old Loral. Old Loral was obligated to indemnify its directors and
officers for, among other things, any losses or costs they may incur as a result of the lawsuits described below in Old Loral
Class Action Securities Litigations . Most directors and officers filed proofs of claim (the “D&O Claims”) in unliquidated
amounts with respect to the prepetition indemnity obligations of the Debtors. The Debtors and these directors and officers agreed
that in no event will their indemnity claims against Old Loral and Loral Orion, Inc. in the aggregate exceed $25 million and
$5 million, respectively. If any of these claims ultimately becomes an allowed claim under the Plan of Reorganization, the
claimant would be entitled to a distribution under the Plan of Reorganization of Loral common stock based upon the amount of
the allowed claim. Any such distribution of stock would be in addition to the 20 million shares of Loral common stock
distributed under the Plan of Reorganization to other creditors. Instead of issuing such additional shares, Loral may elect to
satisfy any allowed claim in cash in an amount equal to the number of shares to which plaintiffs would have been entitled
multiplied by $27.75 or in a combination of additional shares and cash. We believe, although no assurance can be given, that
Loral will not incur any substantial losses as a result of these claims.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Old Loral Class Action Securities Litigations
Beleson. In August 2003, plaintiffs Robert Beleson and Harvey Matcovsky filed a purported class action complaint against
Bernard L. Schwartz, the former Chief Executive Officer of Old Loral, in the United States District Court for the Southern
District of New York. The complaint sought, among other things, damages in an unspecified amount and reimbursement of
plaintiffs’ reasonable costs and expenses. The complaint alleged (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 by Old Loral to Intelsat and Old Loral’s
chapter 11 filing and (b) that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20
(a) of the Exchange Act as an alleged “controlling person” of Old Loral. The class of plaintiffs on whose behalf the lawsuit has
been asserted consists of all buyers of Old Loral common stock during the period from 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. The defendant filed a motion for
summary judgment in July 2008, and plaintiffs filed a cross-motion for partial summary judgment in September 2008. On
February 24, 2009, the court granted defendant’s motion and denied plaintiffs’ cross motion. On or about March 24, 2009,
plaintiffs filed a notice of appeal with respect to the court’s decision. In February 2010, pursuant to a stipulation among the
parties and the plaintiffs in the Christ case discussed below, the appeal, which has been consolidated with the Christ case, was
withdrawn, provided however, that plaintiffs may reinstate the appeal on or before May 21, 2010. Since this case was not
brought against Old Loral, but only against one of its officers, we believe, although no assurance can be given, that, to the extent
that any award is ultimately granted to the plaintiffs in this action, the liability of Loral, if any, with respect thereto is limited
solely to the D&O Claims as described above under “Reorganization Matters — Indemnification Claims of Directors and
Officers of Old Loral.”
Christ. In November 2003, plaintiffs Tony Christ, individually and as custodian for Brian and Katelyn Christ, Casey
Crawford, Thomas Orndorff and Marvin Rich, filed a purported class action complaint against Bernard L. Schwartz and Richard
J. Townsend, the former Chief Financial Officer of Old Loral, in the United States District Court for the Southern District of
New York. The complaint sought, among other things, damages in an unspecified amount and reimbursement of plaintiffs’
reasonable costs and expenses. The complaint alleged (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. On September 30,
2008, the parties entered into an agreement to settle the case, pursuant to which a settlement will be funded entirely by Old
Loral’s directors and officers liability insurer, and Loral will not be required to make any contribution toward the settlement. By
order dated February 26, 2009, the court finally approved the settlement as fair, reasonable and adequate and in the best interests
of the class. Certain class members objected to the settlement and filed a notice of appeal, and other class members, who together
had class period purchases valued at approximately $550,000, elected to opt out of the class action settlement and commenced
individual lawsuits against the defendants. On August 4, 2009, the objecting and opt-out class members entered into an
agreement with the defendants to settle their claims, pursuant to which a settlement will be funded entirely by Old Loral’s
directors and officers liability insurer, and Loral will not be required to make any contribution toward the settlement. In addition,
on or about March 24, 2009, at the time that they filed a notice of appeal with respect to the Beleson decision (discussed above),
the plaintiffs in the Beleson case also filed a notice of appeal with respect to the court’s decision approving the Christ settlement,
arguing that the Christ settlement impairs the rights of the Beleson class. This appeal has been consolidated with the appeal in the
Beleson case discussed above and, pursuant to a stipulation entered into in February 2010 among the parties and the plaintiffs in
the Beleson case, was withdrawn, provided, however, that the Beleson plaintiffs may reinstate the appeal on or before May 21,
2010. Since this case was not brought against Old Loral, but only against certain of its officers, we believe, although no
assurance can be given, that, should the settlement not be consummated or should any objectors who opted out of the settlement
prevail in lawsuits they may bring, to the extent that any award is ultimately granted to the plaintiffs or objectors in this action,
the liability of Loral, if any, with respect thereto is limited solely to the D&O Claims as described above under “Reorganization
Matters — Indemnification Claims of Directors and Officers of Old Loral.”
Other and Routine Litigation
We are subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course
of business. Although the outcome of these legal proceedings and claims cannot be predicted with certainty, we do not believe
that any of these other existing legal matters will have a material adverse effect on our consolidated financial position or our
results of operations.
F-52
Table of Contents
15. Segments
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loral has two segments: Satellite Manufacturing and Satellite Services. Our segment reporting data includes unconsolidated
affiliates that meet the reportable segment criteria. The satellite services segment includes 100% of the results reported by
Telesat for the year ended December 31, 2009 and 2008 and for the period from October 31, 2007 to December 31, 2007.
Although we analyze Telesat’s revenue and expenses under the satellite services segment, we eliminate its results in our
consolidated financial statements, where we report our 64% share of Telesat’s results as equity in net income (losses) of
affiliates.
Our investment in XTAR, for which we use the equity method of accounting, is included in Corporate. XTAR was owned
by Loral Skynet until closing of the Telesat transaction; however, we retained our investment in XTAR, and it was not
transferred to Telesat in connection with the Telesat transaction.
The common definition of EBITDA is “Earnings Before Interest, Taxes, Depreciation and Amortization”. In evaluating
financial performance, we use revenues and operating income (loss) before depreciation, amortization and stock-based
compensation (including stock-based compensation from SS/L Phantom SARs expected to be settled in Loral common stock)
(“Adjusted EBITDA”) as the measure of a segment’s profit or loss. Adjusted EBITDA is equivalent to the common definition of
EBITDA before: goodwill and other impairment charges; gain on foreign exchange contracts; gains or losses on litigation not
related to our operations, impairment of available for sale securities; loss on extinguishment of debt; other income (expense) and
equity in net income (losses) of affiliates.
Adjusted EBITDA allows us and investors to compare our operating results with that of competitors exclusive of
depreciation and amortization, interest and investment income, interest expense, goodwill and other impairment charges, gains or
losses on foreign exchange contracts, gains or losses on litigation not related to our operations, impairments of available for sale
securities, other income (expense) and equity in net income (losses) of affiliates. Financial results of competitors in our industry
have significant variations that can result from timing of capital expenditures, the amount of intangible assets recorded, the
differences in assets’ lives, the timing and amount of investments, the effects of other income (expense), which are typically for
non-recurring transactions not related to the on-going business, and effects of investments not directly managed. The use of
Adjusted EBITDA allows us and investors to compare operating results exclusive of these items. Competitors in our industry
have significantly different capital structures. The use of Adjusted EBITDA maintains comparability of performance by
excluding interest expense.
We believe the use of Adjusted EBITDA along with U.S. GAAP financial measures enhances the understanding of our
operating results and is useful to us and investors in comparing performance with competitors, estimating enterprise value and
making investment decisions. Adjusted EBITDA as used here may not be comparable to similarly titled measures reported by
competitors. We also use Adjusted EBITDA to evaluate operating performance of our segments, to allocate resources and capital
to such segments, to measure performance for incentive compensation programs and to evaluate future growth opportunities.
Adjusted EBITDA should be used in conjunction with U.S. GAAP financial measures and is not presented as an alternative to
cash flow from operations as a measure of our liquidity or as an alternative to net income as an indicator of our operating
performance.
F-53
Table of Contents
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:
Segment Information
(In thousands)
2009
Year Ended December 31,
2008
(In thousands)
2007
Revenues
Satellite manufacturing:
External revenues
Intersegment revenues (1)
Satellite manufacturing revenues
Satellite services revenues (2)
Segment revenues before eliminations
Intercompany eliminations (3)
Affiliate eliminations (4)
Total revenues as reported
Segment Adjusted EBITDA
Satellite manufacturing
Satellite services (2)
Corporate (5)
Adjusted EBITDA before eliminations
Intercompany eliminations (3)
Affiliate eliminations (4)
Adjusted EBITDA
Reconciliation to Operating Income
Depreciation, Amortization and Stock-Based Compensation
Satellite manufacturing
Satellite services (2)
Corporate
Segment depreciation before affiliate eliminations
Affiliate eliminations (4)
Depreciation, amortization and stock-based compensation as
reported
Satellite manufacturing — impairment of goodwill
Satellite services — gain on contribution of Loral Skynet
Operating income (loss) as reported
Capital Expenditures
Satellite manufacturing
Satellite services (2)
Corporate
Segment capital expenditures before eliminations (6)
Affiliate eliminations (4)
Capital expenditures as reported
Total Assets (6)
Satellite manufacturing (7)
Satellite services (8)
Corporate
Total Assets before affiliate eliminations
Affiliate eliminations (4)
Total assets as reported
$
901,283
107,401
1,008,684
691,566
1,700,250
(15,284 )
(691,566 )
993,400
$
$
785,534
95,913
881,447
685,187
1,566,634
(12,049 )
(685,187 )
869,398
$
$
739,815
74,500
814,315
241,156
1,055,471
(55,250 )
(117,767 )
882,454
$
$
$
$
$
90,565
488,149
(21,371 )
557,343
(1,673 )
(488,149 )
67,521
(44,203 )
(230,176 )
(3,107 )
(277,486 )
230,176
(47,310 )
—
—
20,211
26,426
231,654
17,131
275,211
(231,654 )
43,557
$
$
$
$
45,055
436,514
(14,875 )
466,694
(1,569 )
(427,176 )
37,949
(38,646 )
(220,843 )
(5,342 )
(264,831 )
220,843
(43,986 )
(187,940 )
—
(193,977 )
53,883
255,506
10,676
320,065
(255,506 )
64,559
$
$
$
$
34,479
118,385
(37,935 )
114,929
(6,075 )
(65,283 )
43,571
(36,282 )
(85,905 )
(22,270 )
(144,457 )
41,200
(103,257 )
—
104,942
45,256
37,477
88,647
37
126,161
(30,400 )
95,761
As of December 31,
2008
2009
(In thousands)
$
863,866
5,202,785
181,485
6,248,136
(4,994,684 )
$ 1,253,452
$
799,476
4,273,162
196,391
5,269,029
(4,273,162 )
995,867
$
F-54
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Intersegment revenues include $92 million, $84 million and $22 million for the years ended December 31, 2009, 2008 and
2007, respectively, of revenue from affiliates.
Satellite Services for 2009 and 2008 represents Telesat. Satellite Services for 2007 includes Loral Skynet for the period
January 1, 2007 to October 30, 2007 and Telesat for the period October 31, 2007 to December 31, 2007. Satellite services
Adjusted EBITDA also includes approximately $9 million for the year ended December 31, 2008, related to the distribution
from a bankruptcy claim against a former customer of Loral Skynet.
Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under
construction by SS/L for Loral and its wholly owned subsidiaries and for satellite services leasing transponder capacity to
SS/L.
Affiliate eliminations represent the elimination of amounts attributable to Telesat whose results are reported under the
equity method of accounting in our consolidated statements of operations (see Note 6).
Includes corporate expenses incurred in support of our operations and includes our equity investments in XTAR and
Globalstar service providers.
Amounts are presented after the elimination of intercompany profit.
During 2008, we determined that the implied fair value of SS/L goodwill had decreased below its carrying value, and we
recorded an impairment charge for the entire goodwill balance of $187.9 million to reflect this impairment.
Includes $2.3 billion and $2.0 billion satellite services goodwill related to Telesat as of December 31, 2009 and 2008,
respectively.
Revenue by Customer Location
The following table presents our revenues by country based on customer location for the years ended December 31, 2009,
2008 and 2007 (in thousands):
United States
United Kingdom
Canada
Spain
Luxembourg
The Netherlands
People’s Republic of China (including Hong Kong)
Other
$
$
$
$
For the Year Ended December 31,
2008
612,282
68,956
83,767
25,506
11,398
50,110
13,236
4,143
869,398
2009
534,294
101,499
92,094
85,499
61,673
59,509
54,677
4,155
993,400
2007
702,605
45,596
43,552
385
—
6,849
47,591
35,876
882,454
$
$
During 2009, three of our customers accounted for approximately 22%, 16% and 10% of our consolidated revenues. During
2008, four of our customers accounted for approximately 20%, 15%, 14% and 11% of our consolidated revenues. During 2007,
two of our customers accounted for approximately 20% and 16% of our consolidated revenues. With the exception of our
satellites in-orbit through October 31, 2007, our long-lived assets are primarily located in the United States.
F-55
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Related Party Transactions
Transactions with Affiliates
Telesat
As described in Note 6, we own 64% of Telesat and account for our investment under the equity method of accounting.
In connection with the Telesat transaction, Loral and certain of its subsidiaries, PSP and one of its subsidiaries, Telesat
Holdco and certain of its subsidiaries, including Telesat, and MHR entered into a Shareholders Agreement (the “Shareholders
Agreement”). The Shareholders Agreement provides for, among other things, the manner in which the affairs of Telesat Holdco
and its subsidiaries will be conducted and the relationships among the parties thereto and future shareholders of Telesat Holdco.
The Shareholders Agreement also contains an agreement by Loral not to engage in a competing satellite communications
business and agreements by the parties to the Shareholders Agreement not to solicit employees of Telesat Holdco or any of its
subsidiaries. Additionally, the Shareholders Agreement details the matters requiring the approval of the shareholders of Telesat
Holdco (including veto rights for Loral over certain extraordinary actions), provides for preemptive rights for certain
shareholders upon the issuance of certain capital shares of Telesat Holdco and provides for either PSP or Loral to cause Telesat
Holdco to conduct an initial public offering of its equity shares if an initial public offering is not completed by the fourth
anniversary of the Telesat transaction. The Shareholders Agreement also restricts the ability of holders of certain shares of
Telesat Holdco to transfer such shares unless certain conditions are met or approval of the transfer is granted by the directors of
Telesat Holdco, provides for a right of first offer to certain Telesat Holdco shareholders if a holder of equity shares of Telesat
Holdco wishes to sell any such shares to a third party, and provides for, in certain circumstances, tag-along rights in favor of
shareholders that are not affiliated with Loral if Loral sells equity shares and drag-along rights in favor of Loral in case Loral or
its affiliate enters into an agreement to sell all of its Telesat Holdco equity securities.
Under the Shareholders Agreement, in the event that, subject to certain exceptions, either (i) ownership or control, directly
or indirectly, by Dr. Rachesky, President of MHR, of Loral’s voting stock falls below certain levels or (ii) there is a change in the
composition of a majority of the members of the Loral Board of Directors over a consecutive two-year period, Loral will lose its
veto rights relating to certain extraordinary actions by Telesat Holdco and its subsidiaries. In addition, after either of these
events, PSP will have certain rights to enable it to exit from its investment in Telesat Holdco, including a right to cause Telesat
Holdco to conduct an initial public offering in which PSP’s shares would be the first shares offered or, if no such offering has
occurred within one year due to a lack of cooperation from Loral or Telesat Holdco, to cause the sale of Telesat Holdco and to
drag along the other shareholders in such sale, subject to Loral’s right to call PSP’s shares at fair market value.
The Shareholders Agreement provides for a board of directors of each of Telesat Holdco and certain of its subsidiaries,
including Telesat, consisting of 10 directors, three nominated by Loral, three nominated by PSP and four independent directors
to be selected by a nominating committee comprised of one PSP nominee, one nominee of Loral and one of the independent
directors then in office. Each party to the Shareholders Agreement is obligated to vote all of its Telesat Holdco shares for the
election of the directors nominated by the nominating committee. Pursuant to action by the board of directors taken on
October 31, 2007, Dr. Rachesky, who is non-executive Chairman of the Board of Directors of Loral, was appointed non-
executive Chairman of the Board of Directors of Telesat Holdco and certain of its subsidiaries, including Telesat. In addition,
Michael B. Targoff, Loral’s Vice Chairman, Chief Executive Officer and President serves on the board of directors of Telesat
Holdco and certain of its subsidiaries, including Telesat.
As of December 31, 2009, SS/L had contracts with Telesat for the construction of the Telestar 14R and Nimiq 6 satellites.
Information related to satellite construction contracts with Telesat is as follows:
Revenues from Telesat satellite construction contracts
Milestone payments received from Telesat
$
2009
For Year Ended December 31,
2008
(In thousands)
83,767
79,107
92,095
89,419
$
$
2007
21,548
20,064
Amounts receivable by SS/L from Telesat related to satellite construction as of December 31, 2009 and 2008 were
$6.1 million and $3.2 million, respectively.
On October 31, 2007, Loral and Telesat entered into a consulting services agreement (the “Consulting Agreement”).
Pursuant to the terms of the Consulting Agreement, Loral provides to Telesat certain non-exclusive consulting services in
relation to the business of Loral Skynet which was transferred to Telesat as part of the Telesat transaction as well as with respect
to certain aspects of the satellite communications business of Telesat. The Consulting Agreement has a term of seven years with
an automatic renewal for an additional seven year term if certain conditions are met. In exchange for Loral’s services under the
Consulting Agreement, Telesat will pay Loral an annual fee of US $5.0 million payable quarterly in arrears on the last day of
March, June, September and December of each year during the term of the Consulting Agreement. If the terms of Telesat’s bank
or bridge facilities or certain other debt obligations prevent Telesat from paying such fees in cash, Telesat may issue junior
subordinated promissory notes to Loral in the amount of such payment, with interest on such promissory notes payable at the rate
of 7% per annum, compounded quarterly, from the date of issue of such promissory note to the date of payment thereof. Our
selling, general and administrative expenses for the years ended December 31, 2009, 2008 and 2007, included income of
$5.0 million, $5.0 million and $0.8 million, respectively, related to the Consulting Agreement. We also had a long-term
receivable related to the Consulting Agreement from Telesat of $11.6 million and $6.0 million as of December 31, 2009 and
2008, respectively.
F-56
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the Telesat transaction, Loral has indemnified Telesat for certain liabilities including Loral Skynet’s tax
liabilities arising prior to January 1, 2007. As of December 31, 2009 and 2008 we had recognized liabilities of approximately
$6.2 million representing our estimate of the probable outcome of these matters. These liabilities are offset by tax deposit assets
of $6.6 million relating to periods prior to January 1, 2007. There can be no assurance, however, that the eventual payments
required by us will not exceed the liabilities established.
In connection with an agreement entered into between SS/L and ViaSat, Inc. (“ViaSat”) for the construction by SS/L for
ViaSat of a high capacity broadband satellite called ViaSat-1, on January 11, 2008, we entered into certain agreements, described
below, pursuant to which we are investing in the Canadian coverage portion of the ViaSat-1 satellite and granted to Telesat an
option to acquire our rights to the Canadian payload. The option expired without having been exercised in October 2009.
Michael B. Targoff and another Loral director serve as members of the ViaSat Board of Directors.
A Beam Sharing Agreement between us and ViaSat provides for, among other things, (i) the purchase by us of a portion of
the ViaSat-1 satellite payload providing coverage into Canada (the “Loral Payload”) and (ii) payment by us of 15% of the actual
costs of launch and associated services, launch insurance and telemetry, tracking and control services for the ViaSat-1 satellite.
The aggregate cost to us for the foregoing is estimated to be approximately $60.0 million. SS/L commenced construction of the
Viasat-1 satellite in January 2008. We recorded sales to ViaSat under this contract of $86.6 million and $68.3 million for the
years ended December 31, 2009 and 2008, respectively. Loral’s cumulative costs for the Loral Payload were $27.4 million as of
December 31, 2009, which is reflected as satellite capacity under construction in property, plant and equipment.
An Option Agreement between us and Telesat gave Telesat the option to cause us to assign to Telesat our rights and
obligations with respect to the Loral Payload and all of our rights and obligations under the Beam Sharing Agreement upon
certain payments by Telesat to us. In consideration for the grant of the option, Telesat (i) agreed in a Cooperation Agreement
with us and ViaSat (the “Cooperation Agreement”) to relinquish certain rights Telesat has to the 115 degree W.L. orbital position
(the “Orbital Slot”) so as to make those rights available to ViaSat pursuant to a license (the “ViaSat License”) to be granted by
Mansat Limited (“Mansat”) to ViaSat and (ii) agreed to provide tracking, telemetry and control services to ViaSat for the ViaSat-
1 Satellite and to pay us all of the recurring fees Telesat receives for providing such services. We have agreed to reimburse
ViaSat for fees due to Mansat as well as certain other regulatory fees due under the ViaSat License for the life of the ViaSat-1
Satellite. Because Telesat did not exercise its option on or prior to its expiration, Telesat is obligated, at our request, to transfer to
us Telesat’s remaining rights from Mansat with respect to the Orbital Slot, and assign to us Telesat’s related rights and
obligations under the Cooperation Agreement.
In February 2010, a subsidiary of Loral entered into a contract with ViaSat for the procurement of certain RF equipment
and services to be integrated into the Loral gateways to be constructed by Loral to enable Loral to provide commercial service
using the Loral Payload. The contract is valued at approximately $7.8 million before the exercise of options. Loral guaranteed
the financial obligations of the subsidiary that entered into the contract.
In January 2010, we entered into a Consulting Services Agreement with Telesat for Telesat to provide services related to
gateway construction, regulatory and licensing support and preparation for satellite traffic operations for the Loral Payload.
Payments under the agreement are on a time and materials basis.
Costs of satellite manufacturing for sales to related parties were $153.5 million and $135.5 million for the years ended
December 31, 2009 and 2008, respectively.
In connection with an agreement reached in 1999 and an overall settlement reached in February 2005 with ChinaSat
relating to the delayed delivery of ChinaSat 8, SS/L has provided ChinaSat with usage rights to two Ku-band transponders on
Telesat’s Telstar 10 for the life of such transponders (subject to certain restoration rights) and to one Ku-band transponder on
Telesat’s Telstar 18 for the life of the Telstar 10 satellite plus two years, or the life of such transponder (subject to certain
restoration rights), whichever is shorter. Pursuant to an amendment to the agreement executed in June 2009, in lieu of rights to
one of the Ku-band transponders on Telstar 10, ChinaSat has rights to an equivalent amount of Ku-band capacity on Telstar 18
(the “Alternative Capacity”). The Alternative Capacity may be utilized by ChinaSat until April 30, 2019 subject to certain
conditions. Under the agreement, SS/L makes monthly payments to Telesat for the transponders allocated to ChinaSat. Effective
with the termination of Telesat’s leasehold interest in Telstar 10 in July 2009, SS/L makes monthly payments with respect to
capacity used by ChinaSat on Telstar 10 directly to APT, the owner of the satellite. As of December 31, 2009 and 2008, our
consolidated balance sheets included a liability of $8.7 million and $9.8 million, respectively, for the future use of these
transponders. For the year ended December 31, 2009, we made payments of $1.8 million to Telesat pursuant to the agreement.
F-57
Table of Contents
XTAR
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As described in Note 6, we own 56% of XTAR, a joint venture between Loral and Hisdesat and account for our investment
in XTAR under the equity method of accounting. We constructed XTAR’s satellite, which was successfully launched in
February 2005. XTAR and Loral have entered into a management agreement whereby Loral provides general and specific
services of a technical, financial, and administrative nature to XTAR. For the services provided by Loral, XTAR is charged a
quarterly management fee equal to 3.7% of XTAR’s quarterly gross revenues. Amounts due to Loral under the management
agreement as of December 31, 2009 and 2008 were $1.3 million and $1.3 million, respectively. During the quarter ended
March 31, 2008, Loral and XTAR agreed to defer amounts owed to Loral under this agreement and XTAR has agreed that its
excess cash balance (as defined), will be applied at least quarterly towards repayment of receivables owed to Loral, as well as to
Hisdesat and Telesat. Our selling, general and administrative expenses included offsetting income to the extent of cash received
under this agreement of $1.2 million and $1.1 million for the years ended December 31, 2009 and 2008, respectively.
Other Equity Investments
In 2007, we recognized $9.1 million of equity losses in affiliates from our other equity investments, which was primarily
attributable to a loss of $11.3 million due to an agreement to sell our Globalstar investment partnership in Brazil, offset by a
$3.4 million cash distribution from one of our Globalstar investment partnerships (see Note 6).
MHR Fund Management LLC
Three of the managing principals of MHR, Mark H. Rachesky, Hal Goldstein and Sai Devabhaktuni, are members of
Loral’s board of directors. Prior to December 23, 2008, various funds affiliated with MHR held all issued and outstanding shares
of Loral Series-1 Preferred Stock which was issued in February 2007. Pursuant to an order of the Delaware Chancery Court, on
December 23, 2008, we issued to the MHR Funds 9,505,673 shares of Non-Voting Common Stock, and all shares of Loral
Series-1 Preferred Stock (including all PIK dividends) previously issued to the MHR Funds pursuant to the Securities Purchase
Agreement were cancelled.
Also pursuant to the Delaware Chancery Court Order, on December 23, 2008, Loral and the MHR Funds entered into a
registration rights agreement which provides for registration rights for the shares of Non-Voting Common Stock, in addition and
substantially similar to, the registration rights provided for the shares of Voting Common Stock held by the MHR Funds. In
June 2009, Loral filed a shelf registration statement covering shares of Voting Common Stock and Non-Voting Common Stock
held by the MHR Funds, which registration statement was declared effective in July 2009. Various funds affiliated with MHR
held, as of December 31, 2009 and 2008, approximately 39.9% and 39.3%, respectively of the outstanding Voting Common
Stock and as of December 31, 2009 and 2008 had a combined ownership of Voting and Non-Voting Common Stock of Loral of
59.0% and 58.7%, respectively. These funds also held shares of Loral Skynet Preferred Stock which were redeemed on
November 5, 2007 for $90.8 million and Loral Skynet Notes, which were redeemed on September 5, 2007 for $61.9 million.
Information on dividends and interest paid to the funds affiliated with MHR, with respect to their holdings of the Loral Skynet
Preferred Stock, Loral Skynet Notes and Loral Series-1 Preferred Stock is as follows (in thousands, except share amounts):
Loral Series-1 Preferred Stock
Dividends paid in the form of additional shares
— Number of shares
— Amount
Loral Skynet Preferred Stock
Dividends paid in cash
Dividends paid in the form of additional shares
— Number of shares
— Amount
Loral Skynet Notes
Interest payments paid in cash
Redemption premium paid in cash
F-58
For Year Ended December 31,
2008
2007
80,423
24,248
—
—
—
—
—
$
$
$
$
$
47,762
14,400
4,513
44,539
8,908
8,967
5,624
$
$
$
$
$
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Funds affiliated with MHR are participants in a $200 million credit facility of Protostar Ltd. (“Protostar”), dated March 19,
2008, with an aggregate participation of $6.0 million. The MHR funds also own certain equity interests in Protostar and have the
right (which has not yet been exercised) to nominate one of nine directors to Protostar’s board of directors. During July 2009,
Protostar filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The recovery, if any, that the funds affiliated
with MHR may realize on their Protostar debt and equity holdings is subject to the Protostar bankruptcy process.
Pursuant to a contract with Protostar valued at $26 million, SS/L has modified a satellite that Protostar acquired from China
Telecommunications Broadcast Satellite Corporation, China National Postal and Telecommunication Broadcast Satellite
Corporation and China National Postal and Telecommunications Appliances Corporation under an agreement reached in 2006.
This satellite, renamed Protostar I, was launched on July 8, 2008. Pursuant to a bankruptcy auction, Protostar I was sold in
November 2009. For the year ended December 31, 2008, we recorded sales to Protostar of $15.3 million, and, during 2009, as a
result of Protostar’s bankruptcy process and the sale of the satellite, SS/L recorded a charge of approximately $3 million to
increase its allowance for billed receivables from Protostar (see Note 14).
As of December 31, 2009, funds affiliated with MHR hold $83.7 million in principal amount of Telesat 11% Senior Notes
and $29.75 million in principal amount of Telesat 12.5% Senior Subordinated Notes.
In connection with the $300.0 million preferred stock financing in 2007 with affiliated funds of MHR, we paid MHR a
placement fee of $6.8 million and paid $4.4 million in legal and financial advisory fees and out-of-pocket expenses incurred by
MHR (see Note 10).
Other Relationships
In 2006, Loral entered into a consulting agreement with a director, Dean A. Olmstead. Pursuant to this agreement,
Mr. Olmstead provided consulting services to the Company relating generally to exploration of strategic and growth
opportunities for Loral and achievement of efficiencies within the Company’s divisions. The Company granted to Mr. Olmstead
seven-year options to purchase 120,000 shares of common stock of the Company, with a per-share exercise price equal to
$27.135. Vesting of options for 100,000 of these shares was based on performance, while options for 20,000 shares were to vest
over a four-year period. Mr. Olmstead earned total compensation of $0.5 million for the year ended December 31, 2007, not
including stock-based compensation of $2.6 million recorded in 2007.
The consulting agreement was terminated effective as of October 31, 2007, and Mr. Olmstead was paid a termination fee of
$0.3 million during the first quarter of 2008. On January 10, 2008, Mr. Olmstead resigned from the Board of Directors of the
Company. All of Mr. Olmstead’s 100,000 performance-based options to purchase Loral common stock at $27.135 vested upon
consummation of the Telesat transaction, and he exercised those options in November 2007. 10,000 of Mr. Olmstead’s 20,000
time-based options to purchase shares of Loral common stock at $27.135 were fully vested as of the termination of
Mr. Olmstead’s consulting agreement but expired without having been exercised on January 31, 2008; the remaining 10,000
options were cancelled upon termination of his consulting agreement. In addition, Mr. Olmstead had previously been granted
1,000 shares of restricted stock as part of his compensation for services rendered as a director prior to his becoming a consultant,
500 shares of which were vested and 500 shares of which were forfeited upon his resignation as a director.
17. Selected Quarterly Financial Information (unaudited, in thousands, except per share amounts)
Quarter Ended
March 31,
$ 212,491 $ 271,447 $
June 30, September 30, December 31,
260,225
18,537
249,237 $
14,849
(7,695 )
Year ended December 31, 2009
Revenues
Operating income (loss)
Income (loss) before income taxes and equity in net
income (losses) of affiliates
Equity in net income (losses) of affiliates
Net income (loss)
Basic and diluted income (loss) per share (1) :
Basic income (loss) per share
Diluted income (loss) per share
(4,563 )
85,276
74,295
2.50
2.48
16,012
93,071
108,424
3.64
3.61
20,706
37,619
59,811
2.01
1.97
(5,480 )
(5,180 )
(5,668 )
(10,828 )
(0.36 )
(0.36 )
F-59
Table of Contents
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Quarter Ended
Year ended December 31, 2008
Revenues
Operating income (loss)
Income (loss) before income taxes and equity in net
income (losses) of affiliates
Equity in net income (losses) of affiliates
Net income (loss)
Basic and diluted income (loss) per share (1) :
Basic income (loss) per share
Diluted income (loss) per share
(10,810 )
(4,904 )
(64,537 )
(71,217 )
(3.83 )
(3.83 )
March 31,
$ 218,537 $ 208,061 $
June 30, September 30, December 31,
230,281
(181,908 ) (2)
212,519 $
(5,795 )
4,536
60,755
2,838
51,950
2.27
2.16
(5,433 )
(39,353 )
(44,225 )
(2.50 )
(2.50 )
(201,941 )
(394,597 ) (3)
(629,424 )
(31.13 )
(31.13 )
(1)
(2)
(3)
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.
Includes goodwill impairment charge of $188 million.
Includes our share of Telesat’s non-cash foreign exchange losses, net of non-cash gains on financial instruments, of
$295 million and Telesat’s charges for impairment of long-lived and intangible assets of $455 million.
F-60
Table of Contents
Description
Year ended 2007
Allowance for billed receivables
Inventory allowance
Deferred tax valuation allowance
Year ended 2008
Allowance for billed receivables
Inventory allowance
Deferred tax valuation allowance
Year ended 2009
Allowance for billed receivables
Inventory allowance
Deferred tax valuation allowance
LORAL SPACE & COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2009, 2008 and 2007
(In thousands)
Additions
Balance at Charged to Charged to Deductions
Beginning
of Period
Costs and
Expenses Accounts (1) Reserves (2)
Other
From
SCHEDULE II
Balance at
End of
Period
$
$
$
$
$
$
$
$
$
1,624
29,598
304,884
223
28,446
241,228
923
27,200
487,762
$
$
$
$
$
$
$
$
$
(397 )
(543 )
16,287
700
—
202,510
2,759
1,042
(96,617 )
$
$
$
$
$
$
$
$
$
20
—
(34,749 )
—
—
82,611
—
55
22,893
$
$
$
$
$
$
$
$
$
(1,024 )
(609 )
(45,194 )
—
(1,246 )
(38,587 )
—
—
—
$
$
$
$
$
$
$
$
$
223
28,446
241,228
923
27,200
487,762
3,682
28,297
414,038
(1)
The allowance for long-term receivables is recorded as a reduction to revenues. Changes in the deferred tax valuation
allowance which have been charged to other accounts have been recorded in accumulated other comprehensive income
(loss), goodwill and other deferred tax assets.
(2)
Deductions from reserves reflect write-offs of uncollectible billed receivables, disposals of inventory and reversal of excess
deferred tax valuation allowance recorded as a reduction to goodwill.
F-61
Table of Contents
To the Board of Directors and Shareholders of Telesat Holdings Inc.
Report of Independent Registered Chartered Accountants
We have audited the consolidated balance sheets of Telesat Holdings Inc. as at December 31, 2009 and 2008 and the
consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flow for the years ended
December 31, 2009 and 2008, and for the period from October 31 to December 31, 2007 (Successor Entity operations), and for
the period from January 1 to October 30, 2007 (Predecessor Entity operations). These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Successor Entity consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as at December 31, 2009 and 2008 and the results of its operations and its cash
flows for the years ended December 31, 2009 and 2008, and for the period from October 31 to December 31, 2007 in accordance
with Canadian generally accepted accounting principles. Further, in our opinion, the Predecessor Entity consolidated financial
statements referred to above present fairly, in all material respects, the consolidated results of the Company’s operations and its
cash flows for the period from January 1 to October 30, 2007 in accordance with Canadian generally accepted accounting
principles.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 2, 2010
F-62
Table of Contents
Telesat Holdings Inc.
Consolidated Statements of Earnings (Loss)
for the years ended December 31, 2009, 2008 and 2007
(in thousands of Canadian dollars)
Operating revenues
Service revenues
Equipment sales revenues
Sales-type lease revenues
Total operating revenues
Amortization
Operations and administration
Cost of equipment sales
Cost of sales-type lease
Impairment loss on long-lived assets
Impairment loss on intangible assets
Total operating expenses
Earnings (loss) from operations
Interest expense
(Loss) gain on financial instruments
Gain (loss) on foreign exchange
Other income (expense)
Earnings (loss) before income taxes
Income tax (expense) recovery
Net earnings (loss)
Net earnings (loss) applicable to
common shares
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
Notes
2009
2008
2007
2007
(4)
(10)
(11)
(5)
(6)
(7)
767,138
20,060
—
787,198
256,867
219,690
16,380
—
—
—
492,937
294,261
(273,568 )
(134,402 )
500,862
31,859
419,012
(4,949 )
414,063
680,791
30,584
—
711,375
235,640
247,550
24,368
—
2,373
483,000
992,931
(281,556 )
(257,641 )
251,686
(698,056 )
(1,713 )
(987,280 )
164,879
(822,401 )
103,509
7,907
—
111,416
40,046
43,276
6,485
—
—
—
89,807
21,609
(43,861 )
75,098
(118,034 )
(1,033 )
(66,221 )
62,170
(4,051 )
384,428
40,760
32,599
457,787
105,788
144,307
34,723
15,519
2,116
—
302,453
155,334
(8,548 )
(6,653 )
(935 )
(379 )
138,819
(57,077 )
81,742
414,063
(822,401 )
(4,051 )
81,742
F-63
Table of Contents
Telesat Holdings Inc.
Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2009, 2008, and 2007
(in thousands of Canadian dollars)
Net earnings (loss)
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) of
self sustaining foreign operations, net of related taxes
(2009 — $346, 2008 — ($2,090),
2007 — two months — $66,
2007 — ten months — ($827))
Loss on derivatives designated as cash flow hedges, net
of related taxes (2007 — ten months — $9,242)
Gain on derivatives designated as cash flow hedges in
prior periods transferred to net income in the current
period, net of related taxes (2007 — ten months —
($2,605))
Comprehensive income (loss)
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
414,063
2008
(822,401 )
2007
2007
(4,051 )
81,742
320
—
(7,143 )
(599 )
1,715
—
—
(19,819 )
—
414,383
—
(829,544 )
—
(4,650 )
5,585
69,223
F-64
Table of Contents
Telesat Holdings Inc.
Consolidated Statements of Shareholders’ Equity
for the year ended December 31, 2009 with Comparative Figures for the periods ended
December 31, 2008, December 31, 2007, October 30, 2007
Accumulated
deficit and
Accumulated Accumulated
other
other
Total
Common Preferred Accumulated comprehensive comprehensive Contributed shareholders’
shares
Shares
deficit
loss
loss
surplus
equity
(in thousands of Canadian dollars) (unaudited) Notes
Predecessor entity
Balance at January 1, 2007
341,116
—
386,398
(2,283 )
384,115
184,416
909,647
Adjustment for changes in accounting
policies
Stock compensation
Net earnings
Reorganization
Unrealized foreign currency translation
gains on translation of self sustaining
foreign operations
Gains and losses on derivatives designated
as cash flow hedges
Gains and losses on derivatives designated
as cash flow hedges in prior periods
transferred to net income in the current
period
Balance at October 30, 2007 (prior to
acquisition transactions)
Telesat Holdings Inc. Acquisition
Transactions and adjustments
Successor entity
Balance at October 31, 2007
Common shares issued as part of the sale
(1)
—
—
—
—
—
—
—
—
—
—
—
—
(401 )
—
81,742
(579,807 )
1,239
—
—
—
838
—
81,742
(579,807 )
—
617
—
(185,033 )
838
617
81,742
(764,840 )
—
—
1,715
1,715
—
1,715
(19,819 )
(19,819 )
—
(19,819 )
—
—
—
5,585
5,585
—
5,585
341,116
—
(112,068 )
(13,563 )
(125,631 )
—
215,485
(341,116 )
—
112,068
13,563
125,631
—
(215,485 )
transaction
(3)
756,414
—
—
Preferred shares issued as part of the sale
transaction
Net loss
Unrealized foreign currency translation
losses on translation of self sustaining
foreign operations
Balance at December 31, 2007
Net loss
Unrealized foreign currency translation
losses on translation of self sustaining
foreign operations
Stock-based compensation
Balance at December 31, 2008
Stock based compensation
Net earnings
Unrealized foreign currency translation
gains on translation of self-sustaining
foreign operations
Balance at December 31, 2009
(3)
— 541,764
—
—
—
(4,051 )
—
—
756,414 541,764
—
—
(4,051 )
(822,401 )
—
—
—
(599 )
(599 )
—
—
756,414
—
(4,051 )
—
—
541,764
(4,051 )
(599 )
(4,650 )
(822,401 )
—
—
(599 )
1,293,528
(822,401 )
—
—
—
—
756,414 541,764
—
—
—
—
—
—
(826,452 )
—
414,063
(19)
(7,143 )
—
(7,742 )
—
—
(7,143 )
—
(834,194 )
—
414,063
—
5,448
5,448
5,649
—
(7,143 )
5,448
469,432
5,649
414,063
—
—
756,414 541,764
—
(412,389 )
320
(7,422 )
320
(419,811 )
—
11,097
320
889,464
F-65
Table of Contents
Telesat Holdings Inc.
Consolidated Balance Sheets
as at December 31, 2009 and 2008
(in thousands of Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Current future tax asset
Other current assets
Total current assets
Satellites, property and other equipment, net
Other long-term assets
Intangible assets, net
Goodwill
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Other current liabilities
Debt due within one year
Total current liabilities
Debt financing
Future tax liability
Other long-term liabilities
Senior preferred shares
Total liabilities
Shareholders’ equity
Common shares (74,252,460 common shares issued and outstanding)
Preferred shares
Accumulated deficit
Accumulated other comprehensive loss
Contributed surplus
Total shareholders’ equity
Total liabilities and shareholders’ equity
F-66
Notes
2009
2008
(8)
(7)
(9)
(4), (10)
(9)
(11)
(11)
(12)
(13)
(13)
(7)
(12)
(14)
(15)
(15)
(19)
154,189
70,203
2,184
29,018
255,594
1,926,190
41,010
510,675
2,446,603
5,180,072
98,539
61,933
2,581
49,187
212,240
1,883,576
42,303
582,035
2,446,603
5,166,757
43,413
127,704
23,602
194,719
3,013,738
269,193
671,523
141,435
4,290,608
756,414
541,764
1,298,178
(412,389 )
(7,422 )
(419,811 )
11,097
889,464
5,180,072
44,455
142,432
23,272
210,159
3,513,223
266,372
566,136
141,435
4,697,325
756,414
541,764
1,298,178
(826,452 )
(7,742 )
(834,194 )
5,448
469,432
5,166,757
Table of Contents
Telesat Holdings Inc.
Consolidated Statements of Cash Flow
for the years ended December 31, 2009, 2008, and 2007
(in thousands of Canadian dollars)
Cash flows from operating activities
Net (loss) earnings
Adjustments to reconcile net earnings
(loss) to cash flows from operating
activities:
Gross profit on sales-type lease
Amortization
Future income taxes
Unrealized foreign exchange
(gain) loss
Unrealized loss (gain) on
derivatives
Dividends on senior preferred
shares
Stock-based compensation expense
(Gain) loss on disposal of assets
Impairment losses
Other
Customer prepayments on future
satellite services
Customer refunds
Operating assets and liabilities
Cash flows used in investing
activities
Satellite programs
Property additions
Maturity of short-term investments
Business acquisitions
Proceeds on disposals of assets
Insurance proceeds
Cash flows from financing activities
Debt financing and bank loans
Repayment of bank loans and debt
financing
Capitalized debt issuance costs
Note repayment
Success fee payments
Common shares issued
Preferred shares issued
Capital lease payments
Satellite performance incentive
payments
Effect of changes in exchange rates on
cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning
of period
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
Notes
2009
2008
2007
2007
414,063
(822,401 )
(4,051 )
81,742
(5)
(19)
(6)
(10), (11)
(16)
(3)
—
256,867
4,598
—
235,640
(175,951 )
—
40,046
(60,653 )
(5,881 )
105,788
24,292
(524,132 )
695,445
105,820
(10,396 )
134,402
(247,931 )
(62,754 )
8,907
13,540
5,649
(33,430 )
—
(46,015 )
82,966
(17,566 )
7,203
298,145
(258,083 )
(6,118 )
—
—
71,400
—
(192,801 )
9,855
5,448
252
485,373
(44,119 )
88,587
—
48,859
279,057
(263,763 )
(8,862 )
—
—
5,120
4,006
(263,499 )
1,695
—
27
—
(344 )
—
—
205,490
225,276
(15,496 )
(14,019 )
(3,229,194 )
25
—
(3,258,684 )
—
—
(108 )
—
3,318
17,721
—
27,244
252,627
(183,494 )
(5,830 )
2,312
(180 )
159
—
(187,033 )
23,880
186,687
2,767,716
73,000
(53,855 )
—
—
—
—
—
(14,620 )
(5,418 )
(50,013 )
319
55,650
(91,560 )
(19,131 )
—
—
—
—
(30,954 )
(3,524 )
41,518
(740 )
56,336
(44,899 )
(83,585 )
(129,334 )
—
311,124
258,833
(1,306 )
(4,196 )
3,074,353
1,258
42,203
(84,090 )
—
—
(24,000 )
—
—
(7,713 )
(2,022 )
(44,825 )
(1,676 )
19,093
98,539
42,203
—
38,661
Cash and cash equivalents, end of
period
Supplemental disclosure of cash flow
information
Interest paid
Income taxes paid
(16)
154,189
98,539
42,203
57,754
287,733
6,499
294,232
286,784
8,866
295,650
18,339
343
18,682
18,139
21,347
39,486
F-67
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
1. BACKGROUND OF THE COMPANY AND BASIS OF PRESENTATION
Telesat Holdings Inc. (“the Company” or “Telesat”) is the world’s fourth largest provider of fixed satellite services.
Headquartered in Ottawa, Canada, with offices and facilities around the world, Telesat provides voice, data, video and Internet
connectivity services using a global fleet of twelve owned and operated satellites, with two additional satellites under
construction. Telesat offers a broad suite of satellite services to more than 400 customers worldwide, comprising some of the
world’s leading television broadcasters, cable programmers, DTH service providers, ISPs, telecommunications carriers,
corporations and government agencies. In addition, the Company provides satellite-related consulting and technical services and
manages the operations of 13 additional satellites for third parties.
On October 31, 2007 Canada’s Public Sector Pension Investment Board (“PSP”) and Loral Space & Communications Inc.
(“Loral”), through a newly formed entity called Telesat Holdings Inc. completed the acquisition of Telesat Canada from BCE
Inc. (“BCE”). Loral and PSP indirectly hold an economic interest in Telesat of 64% and 36%, respectively. Loral indirectly holds
a voting interest of 33 1/3% on all matters. PSP indirectly holds a voting interest of 66 2/3% on all matters except for the election
of directors, and a 30% voting interest for the election of directors.
As part of the same transaction, substantially all of the assets of a Loral subsidiary, Loral Skynet Corporation (“Skynet”),
were transferred to Telesat, along with the shares of all of the legacy Skynet subsidiaries. Skynet is a satellite communications
company with substantial activities in satellite based communication services.
These consolidated financial statements reflect the financial statements of Telesat Holdings Inc. and its subsidiaries on a
consolidated basis. The consolidated financial statements of Telesat Canada presented for the period January 1, 2007 to
October 30, 2007, represent the “Predecessor” entity. The consolidated financial statements of Telesat Holdings Inc. for the two
months ended December 31, 2007 and the years ended December 31, 2008 and December 31, 2009 represent the “Successor”
entity. The consolidated financial statements of Telesat Holdings Inc. have been prepared in accordance with Canadian generally
accepted accounting principles (“GAAP”) and include the results of its wholly owned subsidiaries, the most significant of which
are: Telesat Interco Inc., Telesat Canada, Infosat Communications GP Inc. (“Infosat”), Able Infosat Communications Inc.
(“Able”), Telesat Brasil Limitada (“Telesat Brazil”), The SpaceConnection, Inc. (“SpaceConnection”), Telesat Satellite Holdings
Corporation and its wholly owned subsidiaries, and Telesat Asia Pacific Satellite (HK) Limited. All transactions and balances
between these companies have been eliminated on consolidation. As a result of the application of purchase accounting, the
financial statements of the Predecessor are not comparable with the financial statements of the Successor, because they are, in
effect, those of a new entity. See note 3 “Business acquisitions”.
Regulation
As an operator of a privately owned global satellite system, Telesat is subject to: the regulatory authority of the Canadian
government and other countries which license its satellites; the regulatory authority of other countries in which it operates; and
the frequency coordination process of the International Telecommunication Union (“ITU”). Telesat’s ability to provide satellite
services in a particular country or region is subject also to the technical constraints of its satellites, international frequency
coordination, constraints associated with local regulatory approval and any limitation to those approvals.
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
1. BACKGROUND OF THE COMPANY AND BASIS OF PRESENTATION — (continued)
The Company operates Canada’s domestic fixed satellite telecommunication system and is subject to regulation by the
Canadian Radio-television and Telecommunications Commission (“CRTC”). Under the current regulatory regime, Telesat has
pricing flexibility subject to a price ceiling on certain Full Period Fixed Satellite Services (“FSS”) offered in Canada under
minimum five-year lease arrangements. Telesat’s Direct Broadcast Services offered within Canada are also subject to CRTC
regulation, but have been treated as separate and distinct from Telesat’s FSS and facilities. The CRTC has approved the specific
customer agreements relating to the sale of the capacity on the Nimiq satellites, including the rates, terms and conditions of
service set out therein.
Telesat’s ground network services have been forborne from regulation since 1994. The CRTC has the right of examination
of the Company’s accounting policies.
2. SIGNIFICANT ACCOUNTING POLICIES
These policies are consistent with those followed by the Predecessor unless otherwise stated.
Use of Estimates
When preparing financial statements according to GAAP, management makes estimates and assumptions relating to the
reported amounts of revenues and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. Telesat
bases its estimates on a number of factors, including historical experience, current events and actions that the Company may
undertake in the future, and other assumptions that we believe are reasonable under the circumstances. Actual results could differ
from those estimates under different assumptions or conditions. We use estimates when accounting for certain items such as
revenues, allowance for doubtful accounts, useful lives of long-lived assets, capitalized interest, asset impairments, inventory
reserves, legal and tax contingencies, employee compensation plans, employee benefit plans, evaluation of minimum lease terms
for operating leases, income taxes and goodwill and intangible asset impairments. We also use estimates when recording the fair
values of assets acquired and liabilities assumed in a business combination.
Revenue Recognition
Telesat recognizes operating revenues when earned, as services are rendered or as products are delivered to customers.
There must be clear proof that an arrangement exists, the amount of revenue must be fixed or determinable and collectibility
must be reasonably assured. Consulting revenues for cost plus contracts are recognized after the work has been completed and
accepted by the customer. The percentage of completion method is used for fixed price consulting revenue contracts. Deferred
revenues consist of remuneration received in advance of the provision of service and are recognized in income on a straight-line
basis over the term of the related customer contract. When it is questionable whether or not Telesat is the principal in a
transaction, the transaction is evaluated to determine whether it should be recorded on a gross or net basis.
Equipment sales revenues are recognized when the equipment is delivered to and accepted by the customer. Only
equipment sales are subject to warranty or return and there is no general right of return. Historically Telesat has not incurred
significant expense for warranties and consequently no provision for warranty is recorded. When a transaction involves more
than one product or service, revenue is allocated to each deliverable based on its relative fair value; otherwise, revenue is
recognized as services are provided over the term of the customer contract.
Lease contracts that qualify for capital lease treatment are accounted for as sales-type leases. Sales-type leases are those
where substantially all of the benefits and risks of ownership are transferred to the customer. Sales revenue recognized at the
inception of the lease represents the present value of the minimum lease payments net of any executory costs, computed at the
interest rate implicit in the lease. Unearned finance income, effectively the difference between the total minimum lease payments
and the aggregate present value, is deferred and recognized in earnings over the lease term to produce a constant rate of return on
the investment in the lease. The net investment in the lease includes the minimum lease payments receivable less the unearned
finance income.
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES — (continued)
Cash and Cash Equivalents
All highly liquid investments with an original maturity of 90 days or less are classified as cash and cash equivalents.
Inventories
Inventories are valued at the lower of cost or net realizable value and consist of work in process and finished goods. Cost
for substantially all network equipment inventories is determined on an average cost basis. Cost for work in process and certain
one-of-a-kind finished goods is determined using the specific identification method.
Satellites, Property and Other Equipment
Satellites, property and other equipment, which are carried at cost, which was equal to fair value for assets acquired on
October 31, 2007 (see note 3), less accumulated amortization, include the contractual cost of equipment, capitalized engineering
and, with respect to satellites, the cost of launch services, launch insurance and capitalized interest during construction.
Capitalized interest is based on the Company’s average cost of debt.
The Company shares equally with a developer, the ownership and capital requirements of the Company’s headquarters’
land and building. In 2009, the Company leased its share of the building under a long term lease arrangement.
Amortization is calculated using the straight line method over the respective estimated service lives of the assets. The
Predecessor used the straight-line method over the respective estimated service lives of the assets based on equal life group
procedures. Below are the estimated useful lives in years of satellites, property and other equipment as of December 31, 2009.
Satellites
Transponders under capital lease
Earth stations
Office buildings and other
Years
6 to 15
6 to 14
5 to 30
3 to 30
The estimates of useful lives are reviewed every year and adjusted prospectively if necessary.
Liabilities related to the legal obligation of retiring property, plant and equipment are measured at fair value with a
corresponding increase to the carrying amount of the related long-lived asset. The liability is accreted over the period of expected
cash flows with a corresponding charge to operating expenses. The liabilities recorded to date have not been significant and are
reassessed annually.
In the event of an unsuccessful launch or total in-orbit satellite failure, all unamortized costs that are not recoverable under
launch or in-orbit insurance are recorded as an operating expense.
The investment in each satellite will be removed from the property accounts when the satellite has been fully amortized and
is no longer in service. When other property is retired from operations at the end of its useful life, the amount of the investment
and accumulated amortization are removed from the accounts. Earnings are credited with the amount of any net salvage and
charged with any net cost of removal. When an item is sold prior to the end of its useful life, the gain or loss is recognized in
earnings immediately.
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES — (continued)
Impairment of Long-Lived Assets
Long-lived assets, including finite life intangible assets and satellites, property and other equipment, are assessed for
impairment when events or changes in circumstances indicate that the carrying value exceeds the total undiscounted cash flows
expected from the use and disposition of the assets. If impairment is indicated, the loss is determined by deducting the asset’s fair
value (based on discounted cash flows expected from its use and disposition) from its carrying value and is recorded as an
operating expense.
Translation of Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates in effect
as of the balance sheet date. Operating revenues and expenses, and interest on debt transacted in foreign currencies are reflected
in the financial statements using the average exchange rates during the period. The translation gains and losses are included in
gain (loss) on foreign exchange in the statement of earnings.
For those subsidiaries considered to be self-sustaining foreign operations, assets and liabilities are translated at the exchange
rate in effect on the balance sheet date, and revenues and expenses are translated at average exchange rates during the year. The
resulting unrealized gains or losses are reflected as a component of other comprehensive income (“OCI”).
For those subsidiaries considered to be integrated foreign operations, non-monetary assets and liabilities are translated at
their historical exchange rates and monetary assets and liabilities are translated at the exchange rate in effect on the balance sheet
date, and revenues and expenses are translated at average exchange rates during the year. The resulting unrealized gains or losses
are reflected as a component of net earnings.
Financing costs
The debt issuance costs related to the revolving credit facility and Canadian term loan are included in deferred charges in
Other assets and are amortized to interest expense on a straight-line basis. All other debt issuance costs are amortized to interest
expense using the effective interest method.
Financial Instruments
Telesat uses derivative financial instruments to manage its exposure to foreign exchange rate risk associated with
anticipated purchases and with debt denominated in foreign currencies, as well as to reduce its exposure to interest rate risk
associated with debt. The Company’s risk management policy does not permit the use of derivative financial instruments for
speculative purposes. Currently, Telesat does not designate any of its derivative financial instruments as hedging instruments for
accounting purposes. All realized and unrealized gains and losses on these derivative financial instruments are recorded in the
statement of earnings.
The Predecessor documented all relationships between derivatives and the items they hedged, and the risk management
objective and strategy for using various hedges. This process included linking every derivative to a specific asset or liability on
the balance sheet, or to a specific firm commitment or to an anticipated transaction. The effectiveness of the derivative in
managing risk was assessed when the hedge was put in place and on an ongoing basis. Hedge accounting was stopped when a
hedge was no longer effective.
In a fair value hedging relationship, changes in both fair value of the hedging instrument and the fair value of the hedged
item were recognized in net income. The changes in the fair value of the hedged item were offset by changes in the fair value of
the hedging instrument to the extent that the hedging relationship was effective. In a cash flow hedging relationship, the effective
portion of the change in the fair value of the hedging instrument was recognized in OCI while the ineffective portion was
recognized in net earnings.
F-71
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES — (continued)
Unrealized gains and losses in OCI and Accumulated Other Comprehensive Income (“AOCI”) were reclassified into net
earnings and retained earnings on the same basis that the hedged item affected net earnings.
Financial assets and financial liabilities that are classified as held-for-trading (“HFT”) and available-for-sale (“AFS”) are
measured at fair value. AFS equity securities which do not have a quoted market price will continue to be recorded at cost. Loans
and receivables and other liabilities are recorded at amortized cost. Derivatives, including embedded derivatives that must be
separately accounted for, are recorded at fair value on the consolidated balance sheet. The unrealized gains and losses relating to
the HFT assets and liabilities are recorded in the consolidated statement of earnings. Unrealized gains and losses on assets and
liabilities classified as AFS are recorded in OCI until realized, at which time they are recognized in the consolidated statement of
earnings. Changes in the fair values of derivative instruments are recognized in the consolidated statement of earnings.
The Company has chosen to account for embedded foreign currency derivatives in a host contract as a single instrument
where the contract requires payments denominated in the currency that is commonly used in contracts to procure non-financial
items in the economic environment in which Telesat transacts.
Transaction costs are expensed as incurred for financial instruments classified or HFT or AFS.
Goodwill and Other Intangible Assets
The Company accounts for business combinations using the purchase method of accounting, which establishes specific
criteria for the recognition of intangible assets separately from goodwill. The excess of the cost of acquisition over the fair value
of net assets acquired, including both tangible and intangible assets, has been allocated to goodwill. For goodwill and intangible
assets with indefinite useful lives, an assessment for impairment is undertaken annually, or whenever events or changes in
circumstances indicate that the carrying amount of these assets is likely to exceed their fair value. The Company considers orbital
slots and trade names to be indefinite lived intangible assets.
Finite-lived intangible assets consist of revenue backlog, customer relationships, favourable leases, transponder rights and
patents, all of which were recorded in connection with the acquisition of Telesat Canada and Skynet (see note 1). Intangible
assets with finite useful lives are amortized over their estimated useful lives using the straight-line method of amortization.
Below are the estimated useful lives of the finite-lived intangible assets:
Revenue backlog
Customer relationships
Favourable leases
Concession right
Transponder rights
Patents
Years
4 to 17
11 to 21
4 to 5
15
3 to 14
18
The estimates of useful lives are reviewed every year and adjusted prospectively if necessary.
Deferred Revenues
Deferred revenues represent the Company’s liability for the provision of future services and are classified on the balance
sheet in other current liabilities and other long-term liabilities. The deferred amount is brought into income over the period of
service to which it applies.
F-72
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES — (continued)
Deferred Satellites Performance Incentive Payments
Deferred satellite performance incentive payments are obligations payable to satellite manufacturers over the lives of the
Nimiq 1, Nimiq 4, Nimiq 5, Anik F1, Anik F2, Anik F3 and Anik F1R satellites. The present value of the payments is capitalized
as part of the cost of the satellite and charged against operations as part of the amortization of the satellite.
Employee Benefit Plans
Telesat maintains one contributory and three non-contributory defined benefit pension plans which provide benefits based
on length of service and rate of pay. Telesat is responsible for adequately funding these defined benefit pension plans.
Contributions are made based on various actuarial cost methods that are permitted by pension regulatory bodies and reflect
assumptions about future investment returns, salary projections and future service benefits. Telesat also provides other post-
employment and retirement benefits, including health care and life insurance benefits on retirement and various disability plans,
workers compensation and medical benefits to former or inactive employees, their beneficiaries and covered dependents, after
employment but before retirement, under certain circumstances. The Company accrues its obligations under employee benefit
plans and the related costs, net of plan assets. Pension costs and other retirement benefits are determined using the projected
benefit method prorated on service and management’s best estimate of expected investment performance, salary escalation,
retirement ages of employees and expected health care costs.
Pension plan assets are valued at fair value which is also the basis used for calculating the expected rate of return on plan
assets. The discount rate is based on the market interest rate of high quality long-term bonds. Past service costs arising from plan
amendments are amortized on a straight-line basis over the average remaining service period of the active employees at the date
of amendment. The Company deducts 10% of the benefit obligation or the fair value of plan assets, whichever is greater, from
the net actuarial gain or loss and amortizes the excess over the average remaining service period of active employees. A
valuation is performed at least every three years to determine the present value of the accrued pension and other retirement
benefits. The 2009 and 2008 pension expense calculations are extrapolated from a valuation performed as of January 1, 2007.
The accrued benefit obligation is extrapolated from an actuarial valuation as of January 1, 2007. The most recent valuation of the
pension plans for funding purposes was as of January 1, 2007, and the next required valuation is as of January 1, 2010.
In addition, Telesat provides certain health care and life insurance benefits for retired employees and dependents of Skynet.
These benefits are funded primarily on a pay-as-go basis, with the retiree generally paying a portion of the cost through
contributions, deductibles and co-insurance provisions.
Stock-Based Compensation Plans
The Company introduced a stock incentive plan for certain key employees in 2008 and has adopted the fair-value based
method for measuring the compensation cost of employee stock options using the Black-Scholes pricing model.
Income Taxes
Current income tax expense is the estimated income taxes payable for the current year after any refunds or the use of losses
incurred in previous years. The Company uses the liability method to account for future income taxes. Future income taxes
reflect:
•
the temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the
amounts used for tax purposes
F-73
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES — (continued)
•
the benefit of unutilized tax losses that will more likely than not be realized and carried forward to future years to
reduce income taxes.
The Company estimates future income taxes using the rates enacted by tax law and those substantively enacted. The effect
of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change is
substantively enacted.
Recent Accounting Pronouncements
Changes in Accounting Policies
The Company has prepared the consolidated financial statements in accordance with Canadian GAAP using the same basis
of presentation and accounting policies as outlined in notes 1 and 2 to the consolidated financial statements for the year ended
December 31, 2008, except as follows:
On January 1, 2009, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook
Section 3064 “Goodwill and Intangible Assets”. This standard applies to goodwill and intangible assets subsequent to the initial
recognition in a business combination and establishes standards for the recognition, measurement, presentation and disclosure of
intangible assets. The standard had no material impact on Telesat’s reporting.
In January 2009, the CICA’s Emerging Issues Committee (EIC) issued Abstract No. 173 “Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities”. EIC 173 requires an entity to take into account its own credit risk and that of the
relevant counterparty(s) when determining the fair value of financial assets and financial liabilities, including derivative
instruments. This EIC, which was effective for Telesat on January 1, 2009, had no impact on the Company’s Balance Sheet or on
the Statement of Earnings (Loss) because the aforementioned credit risks had been incorporated into the valuation methodology
before the EIC was issued.
In June 2009, the CICA amended Handbook Section 3862 “Financial Instruments — Disclosures”, to include additional
disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments
require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair value
of financial assets and financial liabilities included in Level 1 are determined by reference to quoted prices in active markets for
identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than the quoted prices for
which all significant inputs are based on observable market data, either directly or indirectly. Level 3 valuations are based on
inputs that are not based on observable market data. The Company has adopted these new disclosure requirements in these 2009
annual financial statements.
Future Accounting Policies
In January 2009, the CICA issued Handbook Section 1582 “Business Combinations”, which will replace CICA Handbook
Section 1581 “Business Combinations”. The CICA also issued Handbook Section 1601 “Consolidated Financial Statements” and
Handbook Section 1602 “Non-Controlling Interests”, which will replace CICA Handbook Section 1600 “Consolidated Financial
Statements”. The new standards are effective for fiscal years beginning on or after January 1, 2011, with early adoption
permitted. The objective of the new standards is to harmonize Canadian GAAP for business combinations and consolidated
financial statements with the International and U.S. accounting standards. The new standards are to be applied prospectively on
or after January 1, 2011.
In December 2009, the CICA’s Emerging Issues Committee (EIC) issued Abstract No. 175 “Multiple Deliverable Revenue
Arrangements”. EIC 175 addresses how to determine whether an arrangement involving multiple deliverables contains more than
one unit of accounting. This EIC will become effective January 2011 and is to be applied prospectively.
F-74
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES — (continued)
The Accounting Standards Board confirmed in February 2008 that International Financial Reporting standards (“IFRS”)
will replace Canadian GAAP for publicly accountable enterprises for financial periods beginning on and after January 1, 2011.
IFRS is premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain
matters of recognition, measurement and disclosure. While the adoption of IFRS will not change the cash flows generated by the
Company, it will result in changes to the reported financial position and results of operations of the Company, the effects of
which may be material.
3. BUSINESS ACQUISITIONS
Fifth Dimension Television Acquisition
On May 9, 2008, SpaceConnection completed the acquisition of the assets of Fifth Dimension Television, with the effective
date of the agreement being April 1, 2008. The purchase price is based on a profit-sharing arrangement for a percentage of future
monthly occasional use revenues collected, as well as a percentage of future margins on certain space only customer contracts,
from the effective date of the acquisition until December 31, 2010, and will not exceed $0.8 million. Profit-sharing payments of
$0.3 million have been expensed in Operation and administration as at December 31, 2009 ($0.2 million — December 31, 2008).
Telesat Canada Acquisition
On October 31, 2007, PSP and Loral, through a newly formed entity, Telesat, completed the acquisition of 100% of the
common shares of Telesat Canada from BCE Inc. Loral and PSP acquired an economic interest in Telesat of 64% and 36%,
respectively, and a voting interest of 33 1/3% and 66 2/3% respectively. As part of the Telesat Canada acquisition, substantially
all of the assets of a Loral subsidiary, Loral Skynet Corporation, were transferred to Telesat. In addition, Telesat acquired the
shares of the remaining Loral Skynet subsidiaries. The aggregate fair value of the net assets transferred by Loral Skynet was
$773.7 million, of which $24 million was paid using cash equivalents and the balance in common shares and non-voting
participating preferred shares of Telesat. In addition, Loral Skynet transferred foreign exchange forward contracts with a value of
$119.9 million, in exchange for non-voting participating preferred shares, which were settled for cash on October 31, 2007 and
have been included in the balance of cash acquired. The Telesat Canada purchase price was paid in cash. The shares issued as
part of the purchase transaction were valued based on the estimated fair value of the assets contributed by Loral Skynet as agreed
to by the shareholders. The results of operations for Telesat Canada and Skynet have been included in these consolidated
financial statements since October 31, 2007. The acquisition has been accounted for as a purchase transaction.
The asset and liability values acquired were based on a purchase price which was calculated as follows:
Cash paid (net of cash acquired)
Shares issued
Transaction costs
Purchase price
The goodwill established in connection with Telesat Canada acquisition was $2,446 million.
Total
3,229,194
869,656
32,692
4,131,542
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
4. SEGMENTED INFORMATION
Telesat operates in a single industry segment, in which it provides satellite-based services to its broadcast, enterprise and
consulting customers around the world.
The Company derives revenues from the following services:
•
Broadcast — distribution or collection of video and audio signals in the North American and International markets
which include television transmit and receive services, occasional use, bundled Digital Video Compression and radio
services.
•
Enterprise — provision of satellite capacity and ground network services for voice, data, and image transmission and
internet access around the world.
•
Consulting and other — all consulting services related to space and earth segments, government studies, satellite
control services and R&D.
Revenues derived from the above service lines were as follows:
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
2008
2007
2007
406,712
349,530
30,956
787,198
345,382
333,834
32,159
711,375
52,771
53,758
4,887
111,416
254,276
178,888
24,623
457,787
Revenues
Broadcast
Enterprise
Consulting and other
Total operating revenues
Geographic Information
Revenue by geographic region was based on the point of origin of the revenues (destination of the billing invoice) and upon
the groupings of countries reviewed by the Chief Operating Decision Maker, allocated as follows:
Revenues
Canada
United States
Europe, Middle East & Africa
Asia, Australia
Latin America & Caribbean
Total operating revenues
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
2008
2007
2007
397,225
254,685
66,028
23,976
45,284
787,198
357,937
240,505
47,014
33,768
32,151
711,375
60,085
34,352
6,403
5,940
4,636
111,416
315,200
115,993
6,549
5,550
14,495
457,787
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
4. SEGMENTED INFORMATION — (continued)
Telesat’s satellites are in geosynchronous orbit. For disclosure purposes, the Anik and Nimiq satellites have been classified
as located in Canada, and the Telstar satellites have been classified as located in the United States. Satellites, property and other
equipment by geographic region, based on the location of the asset, are allocated as follows:
Satellites, property and other equipment
Canada
United States
all others
Total satellites, property and other equipment
Goodwill was not allocated to geographic regions in any of the periods.
Major Customers
December 31, December 31,
2009
1,448,111
469,508
8,571
1,926,190
2008
1,431,145
441,809
10,622
1,883,576
For the year ended December 31, 2009, two customers generating Broadcast revenues in Canada represented 22.67% and
9.63% respectively of consolidated revenues. The same two customers represented 18.18% and 10.94% of consolidated revenues
for the year ended December 31, 2008, 16.8% and 11.1% of consolidated revenues for the two month period ended
December 31, 2007, and 28.5% and 13.6% for the ten months ended October 30, 2007.
5. INTEREST EXPENSE
Debt service costs
Dividends on senior preferred shares
Capitalized interest
6. OTHER INCOME (EXPENSE)
Interest income
Interest on performance incentive payments
Other (a)
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
2008
2007
2007
279,432
13,540
(19,404 )
273,568
286,794
9,855
(39,008 )
257,641
47,535
1,695
(5,369 )
43,861
18,060
—
(9,512 )
8,548
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
2008
2007
2007
636
(4,642 )
35,865
31,859
1,888
(4,057 )
456
(1,713 )
301
(499 )
(835 )
(1,033 )
3,130
(4,078 )
569
(379 )
(a) On July 9, 2009, the Company terminated its leasehold interest in the Telstar 10 satellite and transferred certain related
customer contracts. The satellite and related revenue backlog and customer relationships were transferred for total
consideration of $80 million, of which $8 million are deferred payments recorded in Accounts receivable, with a resulting
gain of $34.6 million included in Other. In light of the complexities of the regulatory environment associated with the
satellite, and the upcoming requirement to replace Telstar 10, the Company decided to terminate its leasehold interest.
F-77
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
6. OTHER INCOME (EXPENSE) — (continued)
In May 2009, Telesat Network Services Inc., a wholly-owned subsidiary of Telesat, sold the equipment at its Kapolei site
and transferred the operating lease for the premises to the buyer of the equipment. Proceeds on this sale were $0.5 million
and the resulting loss of $0.2 million is included in Other.
In May 2008, Skynet Satellite Corporation, a wholly-owned subsidiary of Telesat, sold its Hawley facility. Proceeds on this
sale were $4.1 million and the resulting loss on the sale of $0.1 million is included in Other.
In February 2008, Infosat Communications Inc., a wholly-owned subsidiary of Telesat, sold its security division. Proceeds
on this sale were $0.6 million and the resulting gain on the sale of $0.4 million is included in Other.
7. INCOME TAXES
Income tax expense (recovery)
Future
Current
Successor Entity
Year Ended
December 31,
2009
Year Ended
December 31,
2008
For the Period
October 31 to
December 31,
2007
Predecessor
Entity
For the Period
January 1 to
October 30,
2007
4,598
351
4,949
(175,951 )
11,072
(164,879 )
(60,653 )
(1,517 )
(62,170 )
24,292
32,785
57,077
A reconciliation of the statutory income tax rate, which is a composite of federal and provincial rates, to the effective
income tax rate is as follows:
Statutory income tax rate
Permanent differences
Adjustment for tax rate changes
Impact of acquisition (see note 3)
Valuation allowance
Future taxes related to other comprehensive income
Charges reflected in equity
Other
Effective income tax rate
Successor Entity
Year Ended
December 31,
2009
Year Ended
December 31,
2008
For the Period
October 31 to
December 31,
2007
Predecessor
Entity
For the Period
January 1 to
October 30,
2007
33.0 %
(5.9 %)
(2.5 %)
—
(6.8 %)
—
—
(1.1 %)
16.7 %
35.3 %
(22.1 %)
109.1 %
—
(38.3 %)
—
—
9.9 %
93.9 %
35.3 %
(15.4 %)
(2.4 %)
1.8 %
6.5 %
4.8 %
7.6 %
2.9 %
41.1 %
32.3 %
(9.6 %)
(9.7 %)
—
(13.4 %)
—
—
1.6 %
1.2 %
F-78
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
7. INCOME TAXES — (continued)
The tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and
the amounts used for tax purposes are presented below:
Future tax assets
Capital assets
Intangible assets
Unrealized foreign exchange loss
Investments
Loss carry forwards
Other
Less: valuation allowance
Total future tax assets
Future tax liabilities
Capital assets
Intangibles
Derivative liabilities
Other
Total future tax liabilities
Net future income tax liability
Net future income tax liability is comprised of:
Net future income tax asset — current portion
Net future income tax liability — long-term portion
Net future income tax liability
Losses
December 31, December 31,
2009
2008
924
6,180
31,867
541
98,024
8,437
(45,040 )
100,933
8,904
9,482
98,087
9,355
112,386
5,415
(101,175 )
142,454
December 31, December 31,
2009
2008
(215,162 )
(124,955 )
(21,958 )
(5,867 )
(367,942 )
(267,009 )
2,184
(269,193 )
(267,009 )
(208,115 )
(147,916 )
(47,327 )
(2,887 )
(406,245 )
(263,791 )
2,581
(266,372 )
(263,791 )
As of December 31, 2009 Telesat Holdings Inc. had the following operating and capital losses carry-forwards which are
scheduled to expire in the following years:
2027
2028
2029
Indefinite
Non-Capital
Losses
Capital
Losses
27,027
309,337
13,272
—
—
—
—
40,077
The Company recognized a benefit of $8,755 related to tax losses for the year ended December 31, 2009 (2008 — $5,756).
F-79
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
8. ACCOUNTS AND NOTES RECEIVABLE
Trade receivables — net of allowance for doubtful accounts
Less: long-term portion of trade receivables
December 31, December 31,
2009
2008
74,018
(3,815 )
70,203
63,723
(1,790 )
61,933
The allowance for doubtful accounts was $8.7 million at December 31, 2009 (December 31, 2008 — $5.4 million).
The long-term portion of trade receivables includes items that will not be collected during the subsequent year and is
included in the long-term portion of other assets in note 9.
9. OTHER ASSETS
Net investment in leases (a)
Income taxes recoverable
Accrued pension benefit (note 20)
Prepaid expenses and deposits (b)
Deferred charges (c)
Derivative assets (note 18)
Inventories (d)
Other assets (e)
December 31, 2009
December 31, 2008
Current
portion
Long term
portion
Current
portion
Long term
portion
—
3,487
—
17,548
2,108
—
5,214
661
29,018
—
—
14,199
14,423
5,244
—
—
7,144
41,010
2,217
3,943
—
16,006
10,709
10,805
4,723
784
49,187
30
—
13,610
6,755
6,224
8,797
—
6,887
42,303
(a) The net investment under sales type leases expired in 2009 (2008 — $2.2 million).
(b) Prepaid expense and deposits includes mainly prepaid insurance for in-orbit satellites, deposits related to foreign taxes,
prepaid interest on long term debt, security deposits, and other prepaid expenses.
(c) Deferred charges at December 31, 2009 include the deferred financing charges related to the Canadian term loan facility
(note 13) and deferred leasing costs. At December 31, 2008, deferred charges also included costs incurred in relation to
deferred revenue.
(d) Inventories are valued at lower of cost and net realizable value and consist of $2.9 million (2008 — $3.8 million) of
finished goods and $2.3 million (2008 — $0.9 million) of work in process. Cost for substantially all network equipment
inventories is determined on an average cost basis. Cost for work in process and certain one-of-a-kind finished goods is
determined using specific identification. All of the inventories have been pledged as security pursuant to the terms of the
credit facilities.
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
9. OTHER ASSETS — (continued)
(e) Other assets, both short and long term components, include the following:
Tax indemnification receivable from Loral (note 21)
Investments
Long term trade receivables
Investment tax credit benefit
Other
December 31, 2009
December 31, 2008
Current
portion
Long term
portion
Current
portion
Long term
portion
—
—
—
661
—
661
2,461
475
3,815
—
393
7,144
—
—
—
441
343
784
2,862
637
1,790
—
1,598
6,887
Investments are recorded at cost. No impairments were recorded as no events or changes in circumstances were identified
during the period that may have a significant adverse effect on the carrying value of the investments. Telesat has a portfolio
interest in Hellas-Sat Consortium Limited. The consortium has one satellite which provides regional coverage to Greece, Cyprus
and the Balkans. Telesat also holds a nominal portfolio interest in Anik-Colombia. Telesat’s wholly-owned subsidiary Infosat
holds a 22% interest in Pakistan’s Comstar ISA Ltd., a satellite service provider which is recorded using the equity method.
10. SATELLITES, PROPERTY AND OTHER EQUIPMENT
December 31, 2009
Satellites
Earth stations
Transponders under capital lease
Office buildings and other
Construction in progress
December 31, 2008
Satellites
Earth stations
Transponders under capital lease
Office buildings and other
Construction in progress
Cost
Accumulated
Amortization
Net Book
Value
2,018,871
149,085
28,048
31,735
72,366
2,300,105
1,544,396
139,227
34,189
36,248
339,794
2,093,854
(323,734 )
(30,083 )
(8,550 )
(11,548 )
—
(373,915 )
1,695,137
119,002
19,498
20,187
72,366
1,926,190
(177,768 )
(19,012 )
(4,943 )
(8,555 )
—
(210,278 )
1,366,628
120,215
29,246
27,693
339,794
1,883,576
The Company had two successful launches in 2009, thereby reducing construction in progress significantly. The Nimiq 5
satellite was launched in September 2009, and was placed in service in October 2009. The Telstar 11N satellite was launched in
February 2009, and was placed in service in March 2009. The current construction in progress amounts relate primarily to
satellite construction and related launch service costs for Telstar 14 R.
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
10. SATELLITES, PROPERTY AND OTHER EQUIPMENT — (continued)
A no claims bonus, due to good satellite performance, of $2.3 million was received in January 2009 on the Nimiq 4
satellite, and a no claims bonus of $2.8 million was received in June 2009 on the T11N satellite. The proceeds reduced the cost
of the satellites.
Consistent with its accounting policy, the Company tests for asset impairment upon the occurrence of triggering events.
During the fourth quarter of 2008, the Company determined that, based on the results of certain fuel studies, the life span of the
Nimiq 3 satellite was shorter than previously expected, and a triggering event had occurred. Telesat therefore tested the Nimiq 3
satellite for impairment, and upon determining that its carrying amount was not recoverable, recorded an impairment charge of
$2.4 in operating expenses. The impairment charge was measured as the excess of the net carrying amount of the satellite over its
fair value, with the estimated fair value being based on the present value of the expected future cash flows of Nimiq 3.
There were no triggering events in 2009 on any of the assets, therefore, no impairment charges were recorded.
11. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets were initially established in connection with the Telesat Canada acquisition described in
note 3.
2009
Finite life intangible assets:
Revenue backlog
Customer relationships
Favourable leases
Concession right
Transponder rights
Patents
Indefinite life intangible assets:
Orbital slots
Trade name
Total intangible assets
Goodwill
Goodwill and intangible assets
Cost
Accumulated
Amortization
Net Book
Value
268,123
197,920
2,990
1,404
29,550
59
500,046
113,347
17,000
630,393
2,446,603
3,076,996
(77,210 )
(33,140 )
(1,774 )
(94 )
(7,493 )
(7 )
(119,718 )
—
—
(119,718 )
—
(119,718 )
190,913
164,780
1,216
1,310
22,057
52
380,328
113,347
17,000
510,675
2,446,603
2,957,278
F-82
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
11. GOODWILL AND INTANGIBLE ASSETS — (continued)
2008
Finite life intangible assets:
Revenue backlog
Customer relationships
Favourable leases
Concession right
Transponder rights
Patents
Indefinite life intangible assets:
Orbital slots
Trade name
Total intangible assets
Goodwill
Goodwill and intangible assets
Cost
Accumulated
Amortization
Net Book
Value
274,487
207,704
4,816
1,230
28,497
59
516,793
113,347
17,000
647,140
2,446,603
3,093,743
(44,988 )
(14,500 )
(1,987 )
—
(3,626 )
(4 )
(65,105 )
—
—
(65,105 )
—
(65,105 )
229,499
193,204
2,829
1,230
24,871
55
451,688
113,347
17,000
582,035
2,446,603
3,028,638
During the fourth quarter of 2008, Telesat performed its annual valuation of goodwill and indefinite life intangible assets,
which resulted in an impairment charge of $483.0 million to the orbital slots. The impairment charge was measured as the excess
of the carrying amount of orbital slots over their fair value, with the estimated fair value being based on the present value of the
expected future cash flows to be generated through the use of the orbital slots. The increase of the discount rate due to current
market conditions, the impact of a strengthened U.S. dollar on the cost of satellites, as well as the increases to insurance costs
and launch services in 2008 reduced the present value of the expected future cash flows for the orbital slots.
The Company also performed its annual impairment test on goodwill and indefinite life intangible assets in 2009 by
comparing the estimated fair value to the carrying value. The annual impairment test of goodwill and indefinite life intangible
assets did not result in any impairment in 2009.
The Company recorded amortization expense on intangible assets of $54.8 million for the year ended December 31, 2009
(2008 — $55.5 million; two months ended December 31, 2007 — $8.1 million).
12. OTHER LIABILITIES
Short term other liabilities
Long term other liabilities
December 31, December 31,
2009
2008
127,704
671,523
799,227
142,432
566,136
708,568
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
12. OTHER LIABILITIES — (continued)
Other liabilities include the following items and maturities:
Deferred revenues and deposits
Derivative liabilities (note 18)
Capital lease liabilities (a)
Deferred satellites performance incentive
payments
Interest payable
Dividends payable on senior preferred shares
(note 14)
Pension and other post retirement liabilities
(note 20)
Other liabilities (b)
2012
2011
2010
Thereafter Total
73,150 36,096 36,215 34,466 32,913 184,950 397,790
— 185,286
6,456 39,102
— 139,728
787 21,340
3,520 3,838 4,212 4,610 4,373
2014
2013
—
11,030 4,713 4,087 4,338 4,682
—
25,212
—
—
—
46,958 75,808
— 25,212
— 25,090
—
—
—
— 25,090
23,827 23,827
—
8,336
36,538 44,874
127,704 108,839 44,514 43,414 181,696 293,060 799,227
—
—
—
—
—
—
—
—
(a) At December 31, 2009, interest payable related to the capital lease liabilities totaled $5.3 million (December 31, 2008 —
$9.0 million).
(b) Other liabilities at December 31, 2009 included: promissory note payable to Loral (note 22) of $12.2 million (2008 —
$7.4 million), tax indemnifications payable to Loral (note 21) of $7.3 million (2008 — $8.5 million), unfavorable customer
revenue backlog of $7.1 million (2008 — unfavorable leases of $1.9 million, and unfavorable customer revenue backlog of
$12.8 million), potential income tax liabilities of $7.1 million (2008 — $2.6 million), income taxes payable of $0.1 million
(2008 — $0.8 million), and other liabilities of $11.1 million (2008 — $14.5 million). Due to the uncertainty in settlement
dates inherent in the long term portion of the other liabilities, they are presented as maturing after 2014.
13. DEBT FINANCING
Senior secured credit facilities (a) :
Revolving facility
The Canadian term loan facility
The U.S. term loan facility
The U.S. term loan II facility
Senior notes (b)
Senior subordinated notes (c)
Other debt financing
Current portion
Long-term portion
December 31, December 31,
2009
2008
—
185,000
1,777,138
152,494
702,909
219,799
—
3,037,340
(23,602 )
3,013,738
—
195,000
2,087,010
179,207
818,620
256,400
258
3,536,495
(23,272 )
3,513,223
The outstanding debt balances above, with the exception of the revolving credit facility and the Canadian term loan, are
shown net of related debt issuance costs.
(a) The senior secured credit facilities are secured by substantially all of Telesat’s assets. Under the terms of these facilities,
Telesat is required to comply with certain covenants including financial reporting, maintenance of certain financial
covenant ratios for leverage and interest coverage, a requirement to maintain minimum levels of satellite insurance,
restrictions on capital expenditures, a restriction on fundamental business changes or the creation of subsidiaries,
restrictions on investments, restrictions on dividend payments, restrictions on the incurrence of additional debt, restrictions
on asset dispositions, and restrictions on transactions with affiliates. The financial covenant ratios include total debt to
EBITDA for covenant purposes (earnings before interest, taxes, depreciation, amortization and other charges) and EBITDA
for covenant purposes to interest expense. Both financial covenant ratios become tighter over the term of the credit facility.
At December 31, 2009 Telesat was in compliance with all of the required covenants.
F-84
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
13. DEBT FINANCING — (continued)
Telesat was required to hedge, at fixed rates, prior to February, 2008, 50% of its floating interest rate debt for a three year
period ending October 31, 2010. The Company has complied with this obligation. These derivative instruments have not
been designated as hedging instruments for accounting purposes.
Each tranche of the credit facility is subject to mandatory principal repayment requirements, which, in the initial years, are
generally an annual amount representing 1% of the initial aggregate principal amount, payable quarterly. The senior secured
credit facility has several tranches which are described below:
(i) A revolving Canadian dollar denominated credit facility (the “revolving facility”) of up to the Canadian dollar
equivalent of $153 million is available to Telesat. This revolving facility matures on October 31, 2012 and is available
to be drawn at any time. The drawn loans will bear interest at the prime rate or LIBOR or Bankers’ Acceptance plus an
applicable margin of 150 to 250 basis points per annum. Undrawn amounts under the facility are subject to a
commitment fee. As of December 31, 2009, other than approximately $0.3 million in drawings related to letters of
credit, there were no borrowings under this facility.
(ii) The Canadian term loan facility is a $200 million loan facility denominated in Canadian dollars, bears interest at a
floating rate of the Bankers’ Acceptance rate plus an applicable margin of 275 basis points per annum, and has a
maturity of October 31, 2012. The required repayments on the Canadian term loan facility, in millions, are as follows:
2010
2011
2012
Total repayments
Annual
Repayments
15
90
80
185
The payments are made quarterly in varying amounts. The average interest rate was 3.61% for the year ended December 31,
2009 (2008 — 6.57%). This facility had $185 million outstanding at December 31, 2009, which represents the full amount
available, with principal repayments being made as required.
(iii) The U.S. term loan is a $1,755 million facility denominated in US dollars bears interest at LIBOR plus an applicable
margin of 300 basis points per annum, and has a maturity of October 31, 2014. The average interest rate was 3.80% for
the year ended December 31, 2009 (2008 — 6.35%). A total of US $1,720 million ($1,811 million CAD) was drawn at
December 31, 2009 (December 31, 2008 — US $1,737 million, $2,128 million CAD). Principal repayments of
$4.4 million US Dollars are made on a quarterly basis, with a lump sum repayment of the remaining balance payable on
the maturity date.
(iv) The U.S. term loan II is a $150 million delayed draw facility denominated in US dollars bears interest at LIBOR plus
an applicable margin of 300 basis points per annum, and has a maturity of October 31, 2014. The average interest rate
was 3.80% for the year ended December 31, 2009 (2008 — 6.17%). The U.S. term loan II facility was available to be
drawn for 12 months after the closing of the Telesat Canada acquisition to fund capital expenditures. The undrawn
amount of the U.S. term loan II was subject to a commitment fee. This facility had US $148 million ($156 million
CAD) outstanding at December 31, 2009, which represents the full amounts available, with principal repayments of
$0.4 million US Dollars being made on a quarterly basis, with a lump sum repayment of the remaining balance payable
on the maturity date.
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
13. DEBT FINANCING — (continued)
(b) The Senior notes, in the amount of US $693 million ($730 million CAD), bear interest at an annual rate of 11.0% and are
due November 1, 2015. The Senior notes include covenants or terms that restrict Telesat’s ability to, among other things,
(i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments
or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel the Company’s satellite insurance,
(vi) effect mergers with another entity, and (vii) redeem the Senior notes prior to May 1, 2012, in each case subject to
exceptions provided in the Senior notes indenture.
(c) The Senior subordinated notes, in the amount of US $217 million ($229 million CAD), bear interest at a rate of 12.5% and
are due November 1, 2017. The Senior subordinated notes include covenants or terms that restrict Telesat’s ability to,
among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted
payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel the
Company’s satellite insurance, (vi) effect mergers with another entity, and (vii) redeem the Senior subordinated notes prior
to May 1, 2013, in each case subject to exceptions provided in the Senior subordinated notes indenture.
The outstanding balance of long term debt, excluding debt issuance costs, will be repaid as follows (in millions of Canadian
dollars):
2010
35.1
2011
2012
2013
2014
110.1
100.0
20.1
1,886.7
Thereafter
958.4
Total
3,110.4
14. SENIOR PREFERRED SHARES
Telesat Holdings issued 141,435 senior preferred shares in exchange for cash with an issue price of $1,000 per Senior
Preferred Share on October 31, 2007 as part of the Telesat Canada acquisition transaction described in notes 1 and 3. The Senior
Preferred Shares rank in priority, with respect to the payment of dividends and return of capital upon liquidation, dissolution or
winding-up, ahead of the shares of all other classes of Telesat Holdings stock which have currently been created, as well as any
other shares that may be created that by their terms rank junior to the senior preferred shares. Senior Preferred Shares are entitled
to receive cumulative preferential dividends at a rate of 7% per annum on the Liquidation Value, being $1,000 per Senior
Preferred Share plus all accrued and unpaid dividends (8.5% per annum following a Performance Failure, being a failure to pay
annual dividends in cash or in Holding PIK Preferred Stock in any year, while such failure is continuing, the failure to redeem
the Holding PIK Preferred Stock when submitted for redemption on or after the twelfth anniversary of the date of issue, or the
failure to redeem Holding PIK Preferred Stock for which an offer of redemption is accepted following a Change of Control).
Such annual dividend may be paid in cash, subject to the requirements of the CBCA, if such payment is permitted under the
terms of (i) the senior secured credit facilities and (ii) the indentures governing the notes. If the cash payment is not permitted
under the terms of the senior secured credit facilities, the dividends will be paid, subject to the requirements of the CBCA, in
senior preferred shares based on an issue price of $1,000 per Senior Preferred Share. Dividends of $25.1 million (note 12) have
been accrued at December 31, 2009 (2008 — $11.6 million) and included as interest expense.
The Senior Preferred Shares may be submitted by the holder for redemption on or after the twelfth anniversary of the date
of issue, subject to compliance with law. Upon a change of control which occurs after the fifth anniversary of the issue of the
Senior Preferred Shares, or on the fifth anniversary if a change of control occurs prior to the fifth anniversary of the issue,
Telesat must make an offer of redemption to all holders of Senior Preferred Shares, and must redeem any Senior Preferred
Shares for which the offer of redemption is accepted within 25 days of such offer. As a result, the Senior Preferred Shares have
been classified as a liability on the balance sheet.
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
14. SENIOR PREFERRED SHARES — (continued)
The holders of the Senior Preferred Shares are not entitled to receive notice of or to vote at any meeting of shareholders of
the Company except for meetings of the holders of the Senior Preferred Shares as a class, called to amend the terms of the Senior
Preferred Shares, or otherwise as required by law.
15. CAPITAL STOCK
The authorized capital of the Company is comprised of: (i) an unlimited number of common shares, (ii) an unlimited
number of voting participating preferred shares, (iii) an unlimited number of non-voting participating preferred shares, (iv) an
unlimited number of redeemable common shares, (v) an unlimited number of redeemable non-voting participating preferred
shares, (vi) 1,000 director voting preferred shares, and (vii) 325,000 senior preferred shares. None of the Redeemable Common
Shares or Redeemable Non-Voting Participating Preferred Shares have been issued as at December 31, 2009.
Common Shares
The holders of the Common Shares are entitled to receive notice of and to attend all annual and special meetings of the
shareholders of the Company and to one vote in respect of each common share held on all matters at all such meetings, except in
respect of a class vote applicable only to the shares of any other class, in respect of which the common shareholders shall have
no right to vote. The holders of the Common Shares are entitled to receive dividends as may be declared by the Board of
Directors of the Company, and are entitled to share in the distribution of the assets of the Company upon liquidation, winding-up
or dissolution, subject to the rights, privileges and conditions attaching to any other class of shares ranking in order of priority.
The Common Shares are convertible at the holders’ option, at any time, into Voting Participating Preferred Shares or Non-
Voting Participating Preferred Shares, on a one-for-one basis.
There were 74,252,460 Common Shares issued and outstanding as at December 31, 2009 and 2008 with a stated value of
$756 million.
Voting Participating Preferred Shares
The rights, privileges and conditions of the Voting Participating Preferred Shares are identical in all respects to those of the
Common Shares, except for the following:
•
The holders of Voting Participating Preferred Shares are not entitled to vote at meetings of the shareholders of the
Company on resolutions electing directors.
•
For all other meetings of the shareholders of the Company, the holders of Voting Participating Preferred Shares are
entitled to a variable number of votes per Voting Participating Preferred Share based on the number of Voting
Participating Preferred Shares, Non-Voting Participating Preferred Shares and Redeemable Non-Voting Participating
Preferred Shares outstanding on the record date of the given meeting of the shareholders of the Company.
•
The Voting Participating Preferred Shares are convertible, at any time, at the holders’ option into Common Shares or
Non-Voting Participating Preferred Shares on a one-for-one basis as long as the result of such conversion does not
cause the Company to cease to be a “qualified corporation” within the meaning of the Canadian Telecommunication
Common Carrier Ownership and Control Regulations pursuant to the Telecommunications Act (Canada).
There were 7,034,444 Voting Participating Preferred Shares issued and outstanding as at December 31, 2009 and 2008 with
a stated value of $117 million.
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
15. CAPITAL STOCK — (continued)
Non-Voting Participating Preferred Shares
The rights, privileges and conditions of the Non-Voting Participating Preferred Shares are identical in all respects to those
of the Common Shares, except for the following:
•
The holders of Non-Voting Participating Preferred Shares are not entitled to vote on any matter at meetings of the
shareholders of the Company, except in respect of a class vote applicable only to the Non-Voting Participating
Preferred Shares.
•
The Non-Voting Participating Preferred Shares are convertible, at any time, at the holders’ option into Common
Shares or Voting Participating Preferred Shares on a one-for-one basis as long as the result of such conversion does
not cause the Company to cease to be a “qualified corporation” within the meaning of the Canadian
Telecommunication Common Carrier Ownership and Control Regulations pursuant to the Telecommunications Act
(Canada).
There were 35,953,824 Non-Voting Participating Preferred Shares issued and outstanding as at December 31, 2009 and
2008 with a stated value of $424 million.
Director Voting Preferred Shares
The rights, privileges and conditions of the Director Voting Preferred Shares are identical in all respects to those of the
Common Shares, except for the following:
•
The holders of Director Voting Preferred Shares are entitled to receive notice of and to attend all meetings of the
shareholders of the Company at which directors of the Company are to be elected. The holders of the Director Voting
Preferred Shares are not entitled to attend meetings of the shareholders of the Company and have no right to vote on
any matter other than the election of directors of the Company.
•
The holders of Director Voting Preferred Shares are entitled to receive annual non-cumulative dividends of $10 per
share if declared by the Board of Directors of the Company, in priority to the payment of dividends on the Common
Shares, Voting Participating Preferred Shares, Non-Voting Participating Preferred Shares, Redeemable Common
Shares, and Redeemable Non-Voting Participating Preferred Shares, but after payment of any accrued dividends on
the Senior Preferred Shares.
•
In the event of liquidation, wind-up or dissolution, the holders of Director Voting Preferred Shares are entitled to
receive $10 per share in priority to the payment of dividends on the Common Shares, Voting Participating Preferred
Shares, Non-Voting Participating Preferred Shares, Redeemable Common Shares, and Redeemable Non-Voting
Participating Preferred Shares, but after payment of any accrued dividends on the Senior Preferred Shares.
•
The Director Voting Preferred Shares are redeemable at the option of the Company, at any time, at a redemption price
of $10 per share.
There were 1,000 Director Voting Preferred Shares issued and outstanding as at December 31, 2009 and 2008 with a
nominal stated value.
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
16. CASH FLOW INFORMATION
Cash and cash equivalents is comprised of:
Cash
Short term investments, original maturity 90 days or less
Changes in operating assets and liabilities are comprised of:
Receivables
Other assets
Accounts payable and accrued liabilities
Income taxes payable
Other liabilities
Non-cash investing and financing activities are comprised of:
Purchase of satellites, property and other equipment
Purchase of concession right
Shares issued in exchange of assets contributed
17. CAPITAL DISCLOSURES
December 31, December 31, December 31,
2009
2008
2007
89,679
64,510
154,189
(2,021 )
15,693
7,270
(2,906 )
(10,833 )
7,203
5,026
—
—
26,584
71,955
98,539
(3,303 )
(34,885 )
(12,947 )
960
99,034
48,859
3,595
1,230
—
32,737
9,466
42,203
(4,718 )
132,768
72,380
(749 )
5,809
205,490
4,767
—
869,656
Telesat Holdings Inc. is a privately held company with registered debt in the United States. The Company’s financial
strategy is designed to maintain compliance with its financial covenants under its senior secured credit facility, and to provide
adequate returns to its shareholders and other stakeholders. Telesat meets these objectives through its monitoring of its financial
covenants and operating results on a quarterly basis.
The Company defines its capital as follows:
Shareholders’ equity, excluding accumulated other comprehensive loss
Debt financing
Cash and cash equivalents
December 31, December 31,
2009
896,886
3,037,340
154,189
2008
477,174
3,536,495
98,539
Telesat manages its capital by measuring the financial covenant ratios contained in its senior secured credit agreement (the
“credit agreement”), dated October 31, 2007 and which terminates in October 2014. As of December 31, 2009, the Company was
subject to three financial covenant compliance tests: a maximum Consolidated Total Debt to Consolidated Earnings Before
Interest, Taxes, Depreciation and Amortization (“EBITDA”) for covenant purposes ratio test, a minimum Consolidated EBITDA
for covenant purposes to Consolidated Interest Expense ratio test and a maximum Permitted Capital Expenditure Amount test.
Compliance with financial covenants is measured on a quarterly basis, except for the maximum Permitted Capital Expenditure
Amount which is only measured at the end of every fiscal year.
As of December 31, 2009, Telesat’s Consolidated Total Debt to Consolidated EBITDA for covenant purposes ratio, for
credit agreement compliance purposes, was 5.49:1 (December 31, 2008 — 7.29:1), which was less than the maximum test ratio
of 8.25:1. The Consolidated EBITDA for covenant purposes to Consolidated Interest Expense ratio, for credit agreement
compliance purposes, was 2.08:1 (December 31, 2008 — 1.74:1), which was greater than the minimum test ratio of 1.30:1. For
the quarter ending March 31, 2010, the Consolidated Total Debt to Consolidated EBITDA for covenant purposes ratio test
becomes 8.00:1, and the ratio test generally becomes more restrictive over the life of the credit agreement, such that for the
period beginning October 1, 2013, the ratio test is a maximum of 5.50:1. For the quarter ending March 31, 2010, the minimum
Consolidated EBITDA for covenant purposes to Consolidated Interest Expense ratio becomes 1.35:1, and the ratio test generally
becomes more restrictive over the life of the credit agreement, such that for the quarter ending September 30, 2014, the minimum
test ratio is 1.95:1.
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
17. CAPITAL DISCLOSURES — (continued)
The Capital Expenditure Amount, for credit agreement compliance purposes, was $260.6 million (2008 — $263.6 million),
which was less than the maximum permitted under the credit agreement. The maximum Permitted Capital Expenditure Amount
varies in each fiscal year with the possibility to carry forward or carry back unused amounts based on conditions specified in the
credit agreement. Including the permitted carry forward amount, the maximum permitted under the credit agreement for 2009
was $303.3 million.
As part of the on-going monitoring of Telesat’s compliance with its financial covenants, interest rate risk due to variable
interest rate debt is managed through the use of interest rate swaps (note 18), and foreign exchange risk exposure arising from
principal and interest payments on Telesat’s debt is partially managed through a cross currency basis swap (note 18). In addition,
operating expenses are tracked against budget on a monthly basis, and this analysis is reviewed by senior management.
18. FINANCIAL INSTRUMENTS
Fair Value
Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market
for instruments with the same risk, principal and remaining maturity. Where possible, fair values are based on the quoted market
values in an active market. In the absence of an active market, we determine fair values based on prevailing market rates (bid and
ask prices, as appropriate) for instruments with similar characteristics and risk profiles or internal or external valuation models,
such as option pricing models and discounted cash flow analysis, using observable market-based inputs.
At December 31, 2009 and December 31, 2008, the current and long term portions of the fair value of the Company’s
derivative assets and liabilities and the fair value methodologies used to calculate those values were as follows:
Short term derivative assets
Long term derivative assets
Short term derivative liabilities
Long term derivative liabilities
Fair value methodology:
Net position determined using actively quoted prices (level 1)
Net position determined using observable data or market corroboration (level 2)
Net position determined using extrapolated data (level 3)
Level 1 Quoted prices in active markets for identical assets or liabilities.
F-90
December 31, December 31,
2009
2008
—
—
(6,456 )
(178,830 )
(185,286 )
—
185,286
—
(185,286 )
10,805
8,797
—
(82,255 )
(62,653 )
—
62,653
—
(62,653 )
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
18. FINANCIAL INSTRUMENTS — (continued)
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less
frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with
inputs that are observable in the market or can be derived principally from or corroborated by observable market data. For
Telesat, this category includes forward foreign exchange contracts, the credit basis swap and interest rate swaps.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation.
Estimates of fair values are affected significantly by the assumptions for the amount and timing of estimated future cash
flows and discount rates, which all reflect varying degrees of risk. Potential income taxes and other expense that would be
incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not
necessarily the net amounts that would be realized if these instruments were actually settled.
The carrying amounts for cash and cash equivalents, short term investments, trade receivables, promissory notes receivable,
other current liabilities and accounts payable and accrued liabilities, approximate fair market value due to the short maturity of
these instruments. At December 31, 2009 the fair value of the debt financing is equal to the market value derived from
transactions and quotations from third parties excluding financing charges considering market interest rates.
The carrying amounts and fair values of financial instruments were as follows as at:
December 31, 2009
Financial assets
Cash and cash equivalents
Accounts and notes receivable
Other assets
December 31, 2009
Financial liabilities
Accounts payable and accrued liabilities
Debt
Derivative financial instruments
Other liabilities
Carrying Value
HFT
AFS
Loans &
Receivables
Total
Fair Value
154,189
—
6,970
161,159
—
—
474
474
—
70,203
5,351
75,554
154,189
70,203
12,795
237,187
154,189
70,203
12,795
237,187
HFT
Carrying Value
Other
Total
Fair Value
—
—
185,286
—
185,286
43,413
3,037,340
—
291,412
3,372,165
43,413
3,037,340
185,286
291,412
3,557,451
43,413
3,104,151
185,286
322,187
3,655,037
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
18. FINANCIAL INSTRUMENTS — (continued)
December 31, 2008
Financial assets
Cash and cash equivalents
Accounts and notes receivable
Derivative financial instruments
Other assets
December 31, 2008
Financial liabilities
Accounts payable and accrued liabilities
Debt
Derivative financial instruments
Other liabilities
Carrying Value
HFT
AFS
Loans &
Receivables
Total
Fair Value
98,539
—
19,602
14,936
133,077
—
—
—
637
637
—
61,933
—
2,202
64,135
98,539
61,933
19,602
17,775
197,849
98,539
61,933
19,602
17,775
197,849
HFT
Carrying Value
Other
Total
Fair Value
—
—
82,255
—
82,255
44,455
3,536,237
—
291,770
3,872,462
44,455
3,536,237
82,255
291,770
3,954,717
44,455
2,371,014
82,255
195,371
2,693,095
(1) Included in cash and cash equivalents are $62.9 million (2008 — $72.0 million) in short term investments classified as level
2 in the fair value hierarchy.
The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a
measurement of risks as at the balance sheet date of December 31, 2009.
Measurement of Risks
Credit Risk
Credit risk is the risk that a counterparty to a financial asset will default, resulting in the Company incurring a financial loss.
At December 31, 2009, the maximum exposure to credit risk is equal to the carrying value of the financial assets, $237.2 million
(December 31, 2008 — $197.8 million) as listed above. Cash and cash equivalents and short term investments are invested with
high quality investment grade financial institutions and are governed by the Company’s corporate investment policy, which aims
to reduce credit risk by restricting investments to high-grade US dollar and Canadian dollar denominated investments.
It is expected that the counterparties to our financial assets will be able to meet their obligations as they are institutions with
strong credit ratings. Telesat regularly monitors the credit risk and credit exposure.
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
18. FINANCIAL INSTRUMENTS — (continued)
Telesat has a number of diverse customers, which limits the concentration of credit risk with respect to accounts receivable.
The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. Telesat’s
standard payment terms are 30 days. Interest at a rate of 1.5% per month, compounded monthly, is typically charged on balances
remaining unpaid at the end of the standard payment terms. Telesat’s historical experience with customer defaults has been
minimal. As a result, Telesat considers the credit quality of its North American customers to be high; however due to the
additional complexities of collecting from its International customers the Company considers the credit quality of its
International customers to be lower than the North American customers. At December 31, 2009, North American and
International customers made up 39% and 61% of the outstanding trade receivable balance, respectively. Anticipated bad debt
losses have been provided for in the allowance for doubtful accounts. The allowance for doubtful accounts at December 31, 2009
was $8.7 million (2008 — $5.4 million). A reconciliation of the allowance for doubtful accounts is as follows:
Allowance for Doubtful Accounts
Balance at January 1
Provision for receivables impairment
Receivables written off during the period as uncollectible
Balance at December 31
Foreign Exchange Risk
2009
2008
5.4
4.1
(0.8 )
8.7
4.3
1.6
(0.5 )
5.4
The Company’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that
transactions are made in currencies other than Canadian dollars. The most significant impact of variations in the exchange rate is
on the US dollar denominated debt financing. At December 31, 2009, approximately $2,852 million of the $3,037 million total
debt financing (note 13) was US dollar denominated.
The Company has entered into a cross currency basis swap to economically hedge the foreign currency risk on a portion of
its US dollar denominated debt. At December 31, 2009, the Company had a cross currency basis swap of $1,200 million (2008
— $1,212 million) which requires the Company to pay Canadian dollars to receive US $1,033 million (2008 — US
$1,043 million). At December 31, 2009, the fair value of this derivative contract was a liability of $137.1 million (2008 — asset
of $8.8 million). Any non-cash gain/loss will remain unrealized until the contract is settled. This contract is due on October 31,
2014.
Telesat uses forward contracts to hedge foreign currency risk on anticipated transactions, mainly related to the construction
of satellites. At December 31, 2009, the Company had one outstanding foreign exchange contract which will require the
Company to pay $21.5 million Canadian dollars (2008 — $61.0 million) to receive US $20.0 million (2008 — US$58.7 million)
for future capital expenditures and interest payments. At December 31, 2009, the fair value of this derivative contract was a
liability of $0.4 million (December 31, 2008 — asset of $10.8 million). Any non-cash gain/loss will remain unrealized until the
contract is settled. This forward contract matured on January 15, 2010.
The Company’s main currency exposures as at December 31, 2009 lie in its US dollar denominated cash and cash
equivalents, accounts receivable, accounts payable and debt financing.
As at December 31, 2009, a 5 percent increase (decrease) in the Canadian dollar against the US dollar would have increased
(decreased) the Company’s net earnings by approximately $158.3 million and increased (decreased) other comprehensive
income by $1.7 million. This analysis assumes that all other variables, in particular interest rates, remain constant.
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Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
18. FINANCIAL INSTRUMENTS — (continued)
Interest Rate Risk
The Company is exposed to interest rate risk on its cash and cash equivalents and its long term debt which is primarily
variable rate financing. Changes in the interest rates could impact the amount of interest Telesat is required to pay. Telesat uses
interest rate swaps to economically hedge the interest rate risk related to variable rate debt financing.
On November 30, 2007, we entered into a series of five interest rate swaps to fix interest rates on US$600 million of U.S.
dollar denominated debt and $630 million of Canadian dollar denominated debt for an average term of 3.2 years. On August 25,
2009, we entered into delayed-start interest rate swaps related to the $630 million of Canadian dollar denominated debt to extend
their maturities to October 31, 2014. On October 1, 2009, we entered into a delayed-start interest rate swap for an additional
CAD$300 million to fix the interest rate on Canadian dollar denominated debt from January 2011 to October 2014. As of
December 31, 2009, the fair value of these derivative contracts was a liability of $47.8 million. This non-cash loss will remain
unrealized until the contracts are settled. These contracts mature on various dates between January 31, 2010 and October 31,
2014.
If the interest rates on the unhedged variable rate debt change by 0.25% this would result in a change in the net earnings of
approximately $2.6 million for the year ended December 31, 2009.
Liquidity Risk
The Company maintains credit facilities to ensure it has sufficient available funds to meet current and foreseeable financial
requirements. The following are the contractual maturities of financial liabilities as at December 31, 2009:
In millions of
Canadian Dollars
Accounts payable and
accrued liabilities
Customer and other
deposits
Other liabilities
Derivative financial
instruments
Long term debt
Carrying Contractual
Amount Cash Flows
2010
2011
2012
2013
2014
After
2014
43,413
43,413
43,413
—
—
—
—
—
5,297
144,680
5,297
144,680
3,040
42,601
2,257
42,013
—
4,088
—
4,338
—
4,682
—
46,958
185,286
3,037,340
3,416,016
185,286
3,110,396
3,489,072
6,456
35,063
130,573
39,102
110,065
193,437
—
100,063
104,151
—
20,064
24,402
139,728
1,886,729
2,031,139
—
958,412
1,005,370
19. STOCK-BASED COMPENSATION PLANS
BCE stock options
There were no outstanding options at December 31, 2009 under the BCE stock option programs. All previously outstanding
options expired on April 30, 2008.
Telesat Holdings Stock Options
On September 19, 2008, Telesat adopted a stock incentive plan for certain key employees of the Company and its
subsidiaries. The plan provides for the grant of up to 8,824,646 options to purchase non-voting participating preferred shares of
Telesat Holdings Inc., convertible into common shares.
Two different types of stock options can be granted under the plan: time-vesting options and performance-vesting options.
The time-vesting options generally become vested and exercisable over a five year period by 20% increments on each
October 31st starting in 2008. The vesting amount is prorated for optionees whose employment with the Company or its
subsidiaries started after October 31, 2007. The performance-vesting options become vested and exercisable over a five year
period starting March 31, 2009, provided that the Company has achieved or exceeded an annual or cumulative target
consolidated EBITDA established and communicated on the grant date by the Board of Directors.
F-94
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Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
19. STOCK-BASED COMPENSATION PLANS — (continued)
The exercise periods of the share options expire ten years from the grant date. The exercise price of each share underlying
the options will be the higher of a fixed price, established by the Board of Directors on the grant date, and the fair market value
of a non-voting participating preferred share on the grant date.
Outstanding, January 1, 2009
Granted
Exercised
Forfeited
Expired
Outstanding December 31, 2009
Options exercisable at December 31, 2009
At December 31, 2008
Exercise price $11.07
Time Vesting Option Plan Performance Vesting Option Plan
Weighted-
Average
Exercise
Price ($)
11.07
11.07
—
11.07
—
11.07
Number
of Options
6,846,035
608,283
—
(150,613 )
—
7,303,705
2,740,969
Number
of Options
894,441
743,457
—
(184,084 )
—
1,453,814
162,091
Weighted-
Average
Exercise
Price ($)
11.07
11.07
—
11.07
—
11.07
Options Outstanding
Weighted-
Average
Options
Remaining Exercisable
Number
7,740,476
Life
9 years
Number
1,538,623
The assumptions used to determine the stock-based compensation expense under the Black-Scholes option pricing model
were as follows:
Compensation cost (credited to contributed surplus)
Number of stock options granted
Weighted-average fair value per option granted ($)
Weighted average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (years)
F-95
December 31, December 31,
2009
5,649
1,351,740
4.76
2008
5,448
7,740,476
8.52
—%
30.0 %
2.98 %
10
—%
31.5 %
3.78 %
10
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
20. EMPLOYEE BENEFIT PLANS
Telesat Canada
The Company’s funding policy is to make contributions to its pension funds based on various actuarial cost methods as
permitted by pension regulatory bodies. Contributions reflect actuarial assumptions concerning future investment returns, salary
projections and future service benefits. Plan assets are represented primarily by Canadian and foreign equity securities, fixed
income instruments and short-term investments.
Skynet Satellite Corporation
The Company provides certain health care and life insurance benefits for retired employees of the legacy Skynet companies
and their dependents. Participants are eligible for these benefits generally when they retire from active service and meet the
eligibility requirements for the pension plan. These benefits are funded primarily on a pay-as-you-go basis, with the retiree
generally paying a portion of the cost through contributions, deductibles and coinsurance provisions.
The changes in the benefit obligations and in the fair value of assets and the funded status of the defined benefit plans were
as follows:
Pension and other benefits
Change in benefit obligations
Benefit obligation, January 1, 2009
Current service cost
Interest cost
Actuarial (gains) losses
Benefit payments
Employee contributions
Benefit obligation, December 31, 2009
Pension and other benefits
Change in fair value of plan assets
Fair value of plan assets, January 1, 2009
Return on plan assets
Benefit payments
Employee contributions
Employer contributions
Fair value of plan assets, December 31, 2009
Funded status
Plan surplus (deficit)
Unamortized net actuarial (gain) loss
Accrued benefit asset (liability)
Telesat Canada
Pension
Other
Skynet
Other
Total
December 31, 2009
126,754
1,963
9,470
23,975
(11,899 )
1,714
151,977
12,527
260
936
2,167
(633 )
—
15,257
8,725
—
508
(1,759 )
(320 )
21
7,175
148,006
2,223
10,914
24,383
(12,852 )
1,735
174,409
Telesat Canada
Pension
Other
Skynet
Other
Total
December 31, 2009
138,293
20,692
(11,899 )
1,714
1,946
150,746
(1,231 )
15,430
14,199
—
—
(633 )
—
633
—
(15,257 )
(1,394 )
(16,651 )
—
—
(320 )
21
299
—
(7,176 )
—
(7,176 )
138,293
20,692
(12,852 )
1,735
2,878
150,746
(23,664 )
14,036
(9,628 )
F-96
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
20. EMPLOYEE BENEFIT PLANS — (continued)
Pension and other benefits
Change in benefit obligations
Benefit obligation, January 1, 2008
Current service cost
Interest cost
Actuarial (gains) losses
Benefit payments
Employee contributions
Benefit obligation, December 31, 2008
Pension and other benefits
Change in fair value of plan assets
Fair value of plan assets, January 1, 2008
Return on plan assets
Benefit payments
Employee contributions
Employer contributions
Fair value of plan assets, December 31, 2008
Funded status
Plan surplus (deficit)
Unamortized net actuarial (gain) loss
Accrued benefit asset (liability)
Telesat Canada
Pension
Other
Skynet
Other
Total
December 31, 2008
163,546
3,926
9,271
(40,426 )
(10,884 )
1,321
126,754
16,224
433
862
(4,396 )
(596 )
—
12,527
8,089
—
883
(129 )
(155 )
37
8,725
187,859
4,359
11,016
(44,951 )
(11,635 )
1,358
148,006
Telesat Canada
Pension
Other
Skynet
Other
Total
December 31, 2008
173,457
(29,811 )
(10,884 )
1,321
4,210
138,293
11,539
2,071
13,610
—
—
(596 )
—
596
—
(12,527 )
(3,705 )
(16,232 )
—
—
(155 )
37
118
—
(8,725 )
—
(8,725 )
173,457
(29,811 )
(11,635 )
1,358
4,924
138,293
(9,713 )
(1,634 )
(11,347 )
The fair value of the Telesat Canada plan assets consists of the following asset categories:
Equity securities
Fixed income instruments
Short-term investments
Total
Plan assets are valued as at the measurement date of December 31 each year.
December 31, December 31,
2009
2008
60 %
37 %
3 %
100 %
59 %
39 %
2 %
100 %
F-97
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
20. EMPLOYEE BENEFIT PLANS — (continued)
The significant weighted-average assumptions adopted in measuring Telesat Canada’s pension and other benefit obligations
and Skynet’s other benefit obligations were as follows:
Accrued benefit obligation
Discount rate
Rate of compensation increase
Benefit costs for the periods ended
Discount rate
Expected long-term rate of
return on plan assets
Rate of compensation increase
Telesat Canada
Pension
Other
Skynet
Other
Telesat Canada
Pension
Other
Skynet
Other
December 31, 2009
December 31, 2008
7.5 %
3.5 %
6.4 %
7.5 %
3.5 %
7.5 %
3.5 %
6.4 %
—
3.5 %
6.0 %
—
6.0 %
—
—
7.5 %
3.5 %
5.5 %
7.5 %
3.5 %
7.5 %
3.5 %
5.5 %
—
3.5 %
6.5 %
4.3 %
6.5 %
—
4.3 %
For the Telesat Canada plans, for measurement purposes, a 10.5% (drugs)/4.5% (other) annual rate of increase in the per
capita cost of covered health care benefits (the health care cost trend) was assumed for 2009. The drug rate is assumed to
gradually decrease to 4.5% by 2014 and remain at that level thereafter. For the Skynet plan, actuarial assumptions to determine
the benefit obligation for other benefits as of December 31, 2009, used a health care cost trend rate of 9.5% decreasing gradually
to 5% by 2018. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The net benefit expense included the following components:
Successor Entity
Telesat Canada
Skynet
Pension Other Other
Telesat Canada
Skynet
Total Pension Other Other
Total
Year Ended
December 31, 2009
260
935
—
508
1,963
9,470
2,223
10,913
3,926
9,271
Year Ended
December 31, 2008
433
862
—
883
4,359
11,016
(10,011 )
(65 )
1,357
—
(144 )
1,051
—
—
508
(10,011 )
(209 )
2,916
(12,686 )
—
511
—
—
1,295
—
—
883
(12,686 )
—
2,689
Current service cost
Interest cost
Expected return on plan
assets
Amortization
Net benefit expense
F-98
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
20. EMPLOYEE BENEFIT PLANS — (continued)
Successor Entity
Telesat Canada
Skynet
For the Period October 31 to
December 31, 2007
Other
79
146
Other
—
—
Pension
774
1,513
Predecessor Entity
Telesat Canada
For the Period January 1 to
October 30, 2007
Total Pension
3,612
7,149
853
1,659
Other
396
681
Total
4,008
7,830
(2,206 )
—
—
—
—
81
—
—
—
—
—
225
—
(2,206 )
(10,610 )
—
(10,610 )
—
—
—
—
—
—
—
—
34
—
—
—
—
306
(1,288 )
169
(934 )
515
—
1,592
—
34
(773 )
169
658
Current service cost
Interest cost
Expected return on plan
assets
Amortization of past service
cost
Amortization of net actuarial
loss
Amortization of transitional
(asset) obligation
Additional expense
Net benefit expense (income)
Sensitivity of assumptions
The impact of a hypothetical 1% change in the health care cost trend rate on the other post-retirement benefit obligation and
the aggregate of service and interest cost would have been as follows:
As reported
Impact of increase of 1% point
Impact of decrease of 1% point
Benefit
obligation
22,433
1,938
(1,700 )
Aggregate of
service and
interest cost
1,703
166
(140 )
The above sensitivities are hypothetical and should be used with caution. Changes in amounts based on a 1% point variation
in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in amounts
may not be linear. The sensitivities have been calculated independently of changes in other key variables. Changes in one factor
may result in changes in another, which could amplify or reduce certain sensitivities.
21. COMMITMENTS AND CONTINGENT LIABILITIES
Off balance sheet commitments include operating leases, commitments for future capital expenditures and other future
purchases.
Off balance sheet commitments
Operating leases
Purchase commitments —
2010
27,100
2011
22,875
2012
17,962
2013
16,493
2014 Thereafter
46,564
14,910
Total
145,904
Satellite programs
157,925
107,233
15,412
386
416
7,930
289,302
Purchase commitments — Earth
programs
2,385
—
—
—
—
—
2,385
Purchase commitments — Other
programs
Total off balance sheet
commitments
3,686
—
—
—
—
—
3,686
191,096
130,108
33,374
16,879
15,326
54,494
441,277
F-99
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
21. COMMITMENTS AND CONTINGENT LIABILITIES — (continued)
Certain of the Company’s satellite transponders, offices, warehouses, earth stations, vehicles, and office equipment are
leased under various terms. The aggregate lease expense for the year ended December 31, 2009, and the year ended
December 31, 2008 was $34.5 million, and $21.0 million respectively. The expiry terms range from January 2010 to July 2024.
Telesat has entered into contracts for the construction and launch of Telstar 14R (targeted for launch in 2011), and Nimiq 6
(targeted for launch in 2012). The total outstanding commitments at December 31, 2009 are in US dollars.
Telesat has non-satellite purchase commitments with various suppliers. The total outstanding commitments at
December 31, 2009 are in US dollars.
Telesat has agreements with various customers for prepaid revenues on several satellites which take effect on final
acceptance of the spacecraft. Telesat is responsible for operating and controlling these satellites. Deposits of $358.4 million
(2008 — $341.3 million), refundable under certain circumstances, are reflected in other liabilities, both current and long-term.
In the normal course of business, Telesat has executed agreements that provide for indemnification and guarantees to
counterparties in various transactions. These indemnification undertakings and guarantees may require Telesat to compensate the
counterparties for costs and losses incurred as a result of certain events including, without limitation, loss or damage to property,
change in the interpretation of laws and regulations (including tax legislation), claims that may arise while providing services, or
as a result of litigation that may be suffered by the counterparties.
Certain indemnification undertakings can extend for an unlimited period and may not provide for any limit on the
maximum potential amount, although certain agreements do contain specified maximum potential exposure representing a
cumulative amount of approximately $4.5 million (2008 — $20.7 million). The nature of substantially all of the indemnification
undertakings prevents the Company from making a reasonable estimate of the maximum potential amount Telesat could be
required to pay counterparties as the agreements do not specify a maximum amount and the amounts are dependent upon the
outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, Telesat
has not made any significant payments under such indemnifications.
Telesat and Loral have entered into an indemnification agreement whereby Loral will indemnify Telesat for any tax
liabilities for taxation years prior to 2007. Likewise, Telesat will indemnify Loral for the settlement of any tax receivables for
taxation years prior to 2007.
F-100
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
21. COMMITMENTS AND CONTINGENT LIABILITIES — (continued)
Telesat Canada’s Anik F1 satellite, built by Boeing and launched in November 2000, has defective solar arrays that have
caused a drop in power output on the satellite and reduced its operational life. Telesat Canada filed a claim for Anik F1 as a
constructive total loss under its insurance policies and received an amount from its insurers in settlement of that claim. Telesat
Canada continues to seek recovery of an additional approximately $18 million, as noted below. In November 2006, Telesat
Canada commenced arbitration proceedings against Boeing. A portion of its claim was in respect of the subrogated rights of its
insurers. Telesat Canada is alleging in this proceeding that Boeing was grossly negligent and/or engaged in willful misconduct in
the design and manufacture of the Anik F1 satellite and in failing to warn Telesat Canada prior to the launch of a material
deficiency in the power performance of a similar satellite previously launched. The arbitration tribunal has been constituted and
Telesat Canada has filed its Statement of Claim seeking approximately $331 million plus costs and post-award interest. Boeing
has responded by alleging that Telesat Canada failed to obtain what it asserts to be contractually required waivers of subrogation
rights such that, if Telesat Canada is successful in obtaining an award which includes an amount in respect of the subrogated
rights of the insurers, Boeing is entitled to off-setting damages in that amount. This amount is alleged to be as much as
approximately US$182 million. Boeing also asserts that Telesat Canada owes Boeing performance incentive payments pursuant
to the terms of the satellite construction contract in the amount of approximately US$5.5 million. It is anticipated that Telesat
Canada and Boeing will exchange further submissions and evidence and a hearing will take place during late 2010 or 2011.
While it is not possible to determine the ultimate outcome of the arbitration, Telesat Canada intends to vigorously prosecute its
claims and defend its position that no liability is owed Boeing in connection with the dispute and that, in the circumstances of
this case, it was not contractually required to obtain waivers of the subrogation rights at issue.
Telesat Canada filed a claim with its insurers on December 19, 2002 for Anik F1 as a constructive total loss under its
insurance policies for losses suffered as a result of the power loss on the satellite. In March 2004, Telesat reached a settlement
agreement with its insurers pursuant to which the insurers made an initial payment in 2004 of US$136.2 million, with potential
additional payments to be made according to the amount of degradation of the power on Anik F1 through 2007. In
December 2005, a number of insurers elected to pay a discounted amount, equal to US$26.2 million, of the proceeds potentially
due in 2007. In October 2007, Telesat submitted final claims to its insurers for approximately US$20 million as a result of the
continued power degradation. In January 2008, those insurers disputed Telesat’s determination of the available power,
contending that the final payment should be approximately US$2.7 million. During 2008, one insurer paid Telesat approximately
US$2.0 million in full settlement of its share of Telesat’s claim, such that the amount in dispute now totals approximately
US$18 million. Telesat advised the insurers of its intention to proceed with arbitration of the dispute, and on July 30, 2009,
Telesat served its Claim in accordance with the procedural rules governing the arbitration. The insurers served their Statement of
Defense on October 16, 2009. No date for a hearing has yet been set, but it is not anticipated to commence prior to the first
quarter of 2011. While it is not possible to determine the ultimate outcome of the arbitration, Telesat Canada intends to
vigorously prosecute its claim.
F-101
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
22. RELATED PARTY TRANSACTIONS
Related parties include PSP and Loral, the common shareholders, together with their subsidiaries and affiliates.
The following transactions are in the normal course of operations and are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related parties. The related party transactions as at and for the period
ended December 31, 2009 and 2008 were between Telesat and Loral, and subsidiaries and affiliates of Loral.
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
2008
2007
2007
6,360
8,480
97,815
3,560
6,295
83,203
440
825
12,318
139,706
5,340
—
December 31, December 31,
2009
2008
3,480
8,567
8,068
12,210
3,200
13,770
—
7,380
Service revenues
Operations and administration expenses
Capital expenditures — satellites
The balances with related parties are as follows:
Receivables at end of period
Payables at end of period
Long term liabilities
Note and interest payable at end of period
23. COMPARATIVE FIGURES
Certain of the prior years’ figures have been reclassified to conform with the current year’s presentation, the most
significant of which was to reclassify certain liabilities of $4.3 million from Accounts payable and accrued liabilities to Other
current liabilities. This was not a material change to the financial statements since it was a reclassification within Total current
liabilities.
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP
Telesat has prepared these consolidated financial statements according to Canadian GAAP. The following tables are a
reconciliation of differences relating to the statement of (loss) earnings and total shareholder’s equity reported according to
Canadian GAAP and United States GAAP (“U.S. GAAP”).
F-102
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP — (continued)
Reconciliation of Net (Loss) Earnings
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
Canadian GAAP — Net earnings (loss)
(Losses) gains on embedded derivatives (a)
Losses on derivatives designated as cash flow hedges
under Canadian GAAP (a)
Sales type lease — operating lease for U.S. GAAP (b)
Capital lease — operating lease for U.S. GAAP (b)
Lease amendments (c)
Dividends on senior preferred shares (d)
Tax effect of above adjustments (e)
Uncertainty in income taxes (f)
U.S. GAAP — Net earnings (loss)
Other comprehensive (loss) earnings items:
Change in currency translation adjustment
Loss on derivatives designated as cash flow hedges (a)
Net actuarial plans cost (g)
Net actuarial losses
Net transitional assets
U.S. GAAP — Comprehensive earnings (loss)
Accumulated Other Comprehensive Loss
2009
414,063
(35,480 )
2008
(822,401 )
20,118
—
1,514
(1,567 )
719
13,540
10,510
(8,053 )
395,246
—
18,808
(7,584 )
(1,233 )
9,855
(8,761 )
(6,875 )
(798,073 )
214
—
(7,143 )
—
(9,373 )
—
386,087
(1,169 )
—
(806,385 )
2007
2007
(4,051 )
774
—
2,748
(78 )
—
1,695
275
(2,648 )
(1,285 )
(599 )
—
—
—
(1,884 )
81,742
(5,051 )
(10,361 )
(23,617 )
9,436
—
—
9,606
3,234
64,989
1,715
(7,168 )
(314 )
(525 )
58,697
Successor Entity
Predecessor
Entity
For the Period For the Period
Year Ended Year Ended October 31 to January 1 to
December 31, December 31, December 31, October 30,
2009
2008
2007
2007
Cumulative translation adjustment, net of tax
Loss on derivatives designated as cash flow hedges (a)
Net benefit plans cost (g)
Net actuarial losses
Net transitional assets
Accumulated other comprehensive loss
(7,528 )
—
(10,541 )
—
(18,069 )
(7,742 )
—
(1,169 )
—
(8,911 )
(599 )
—
—
—
(599 )
(568 )
(7,168 )
(7,448 )
3,980
(11,204 )
F-103
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP — (continued)
Reconciliation of Total Shareholders’ Equity
Canadian GAAP
Adjustments
Gains on embedded derivatives (a)
Net actuarial losses (g)
Sales type lease — operating lease for U.S. GAAP (b)
Capital lease — operating lease for U.S. GAAP (b)
Lease amendment (c)
Tax effect of above adjustments (e)
Uncertainty in income taxes (f)
U.S. GAAP
Description of United States GAAP adjustments:
(a) Derivatives and embedded derivatives
Embedded derivatives
December 31, December 31,
2009
2008
889,464
469,432
(14,588 )
(10,541 )
23,070
(9,229 )
(619 )
2,024
(17,576 )
862,005
20,892
(1,169 )
21,556
(7,662 )
(1,233 )
(8,486 )
(9,523 )
483,807
The accounting for derivative instruments and hedging activities under Canadian GAAP is now substantially
harmonized with U.S. GAAP, with the exception of the accounting for certain embedded derivatives. Under U.S.
GAAP an embedded foreign currency derivative in a host contract that is not a financial instrument must be separated
and recorded on the balance sheet unless the currency in which payments are to be paid or received is: i) either the
functional currency of either party to the contract or ii) the currency that the price of the related good or service is
routinely denominated in commercial transactions around the world (typically referring to a traded commodity). The
same applies to an embedded foreign currency derivative in a host contract under Canadian GAAP except that the
entity has the option, as a matter of accounting policy, to account for the embedded foreign currency derivative in a
host contract as a single instrument providing certain criteria are met. One of these criteria is that the payments to be
paid or received are in a currency that is commonly used in contracts to purchase or sell such non-financial items in
the economic environment in which the transaction takes place. This option under Canadian GAAP results in
embedded derivatives that must be recorded separately under U.S. GAAP to not have to be separately recorded and
disclosed under Canadian GAAP. The additional option loosens the more stringent U.S. GAAP requirement that the
currency be one in which such commercial transactions are denominated around the world to be one that is commonly
used in the economic environment in which the transaction takes place.
In accordance with U.S. GAAP, all derivative instruments embedded in contracts are recorded on the balance sheet at
fair value. The Company denominates many of its long-term international purchase contracts in U.S. dollars resulting
in embedded derivatives. This exposure to the U.S. dollar is partially offset by revenue contracts that are also
denominated in U.S. dollars. For Canadian GAAP, the Company has elected to account for such contracts as single
instruments (as explained above), resulting in a U.S. GAAP reconciling item. At December 31, 2009, the estimated
fair value of assets resulting from embedded derivatives is $20.0 million (December 31, 2008 — $55.4 million), while
the year to date loss is $35.5 million (2008 — gain of $20.1 million).
Derivatives
In 2007, the Company hedged a portion of its exposure to foreign exchange. Upon the adoption of the Canadian
GAAP standards for hedging activities on January 1, 2007, the Company elected to designate the forward contracts as
hedging instruments for both Canadian and U.S. GAAP purposes. Accordingly, the changes in fair value of derivatives
designated as cash flow hedges were recognized in other comprehensive income. Changes in fair value of derivatives
that were not designated as cash flow hedges prior to adoption of the Canadian GAAP standards are recognized in net
earnings. Effective October 31, 2007, hedge accounting was discontinued.
F-104
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP — (continued)
(b) Sales-type and capital leases
Under U.S. GAAP, if the beginning of a lease term falls within the last 25% of a leased asset’s total estimated
economic life; then it can only be classified as a capital lease if the lease transfers ownership at the end of the lease
term or there is a bargain purchase option. This exception does not exist under Canadian GAAP, therefore certain
leases are reported as a capital lease and sales-type lease respectively under Canadian GAAP, and as operating leases
for U.S. GAAP as the limited capital lease criteria were not met.
(c) Lease amendments
Under Canadian GAAP, when amendments to the provisions of a capital lease agreement result in a change in lease
classification from a capital lease to an operating lease, the gain or loss that results from removing the capital lease
from the balance sheet is immediately recognized in the statement of earnings. Under U.S. GAAP, if removing the
capital lease from the balance sheet results in a gain or loss it is recognized over the remaining term of the lease.
Therefore, an adjustment has been made to defer the gain that has been recognized under Canadian GAAP.
(d) Senior preferred shares
In accordance with U.S. GAAP, the senior preferred shares are classified outside of permanent equity as they are
redeemable at the option of the holder. These senior preferred shares are classified as liabilities under Canadian
GAAP. This results in a U.S. GAAP reconciling item to reflect the different classification. As a result of this change in
classification, the amounts are treated as dividends for U.S. GAAP and interest expense for Canadian GAAP.
(e) Income taxes
The income tax adjustment reflects the impact the U.S. GAAP adjustments described above have on income taxes.
Included in the figures presented in the table above is the effect of tax rate changes applied to the accumulated gains
and losses on embedded derivatives and to certain lease transactions classified as operating leases as discussed above.
The impact on the statement of operations of the tax rate changes for the year ended December 31, 2009 was a
recovery of $1.8 million (2008 — expense of $0.6 million; the two month period ended December 31, 2007 —
recovery of $1.3 million; the ten month period ended October 30, 2007 — recovery of $0.2 million).
(f) Uncertainty in income taxes
Effective January 1, 2007 the Company adopted the recognition requirements of the Financial Accounting Standards
Board (“FASB”) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes , an interpretation
of FAS 109. FIN 48, which has been primarily codified into FASB Accounting Standards Codification (“ASC”) Topic
740, Income Taxes , provides specific guidance on the recognition, de-recognition and measurement of income tax
positions in financial statements, including the accrual of related interest and penalties recorded in interest expense. An
income tax position is recognized when it is more likely than not that it will be sustained upon examination based on
its technical merits, and is measured as the largest amount that is greater than 50% likely of being realized upon
ultimate settlement. Under Canadian GAAP, significant differences may arise as Telesat recognizes and measures
income tax positions, based on the best estimate of the amount that is more likely than not of being realized.
F-105
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP — (continued)
(g) Net benefit plans cost
Effective December 31, 2006, the Company adopted the recognition requirements of Statement of Financial
Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post
Retirement Plans , on a prospective basis. SFAS No. 158 has been primarily codified into ASC 715, Compensation .
This standard requires that the Company recognize the funded status of benefit plans on the balance sheet as well as
recognize as a component of other comprehensive income, net of tax, the actuarial losses and transitional asset and
obligation. Amounts recognized in accumulated other comprehensive income are adjusted as they are subsequently
recognized as components of net periodic benefit cost.
At December 31, 2009, the balance sheet was adjusted such that actuarial losses and the transitional asset and
obligation that have not yet been included in net benefit plans cost at December 31, 2009 were recognized as
components of accumulated other comprehensive loss, net of tax. The adjustment at December 31, 2009 resulted in an
increase of $9.4 million in accumulated other comprehensive loss, net of tax of $3.0 million (December 31, 2008 — an
increase of $1.2 million in accumulated other comprehensive loss, net of tax of $0.4 million).
Transaction costs on long-term debt
Under Canadian GAAP, transaction costs of $73.1 million (December 31, 2008 — $83.6 million) related to the issuance of
long-term debt are netted against the long-term debt. Under U.S. GAAP these costs are recognized as deferred charges. This
results in a U.S. GAAP reconciling item to reflect the different classification on the balance sheet.
Reporting disposal gains or losses of long-lived assets
Under Canadian GAAP, gains or losses on disposal of long-lived assets were included in Other expense (income). Under
U.S. GAAP a gain or loss recognized on the sale of a long-lived asset shall be included in income from operations, which would
result in an increase of earnings from operations and a decrease in non-operating earnings of $33.4 million for the year ended
December 31, 2009 (2008 — an increase of $0.2 million; the two month period ended December 31, 2007 — nominal; the ten
month period ended October 30, 2007 — a decrease of $0.1 million).
Statement of cash flows
There are no material differences in the consolidated statement of cash flows under U.S. GAAP other than the impact of the
items identified above.
Recent Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles , which was primarily codified into ASC Topic
105, Generally Accepted Accounting Standards and supersedes SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles , which was issued in May 2008. ASC Topic 105 has become the single source of authoritative non governmental
U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and
related accounting literature. This standard reorganizes the U.S. GAAP pronouncements into accounting topics and displays
them using a consistent structure. ASC Topic 105 impacts the Company’s financial statements and related disclosures as all
references to authoritative accounting literature reflect the newly adopted codification. This standard applies to the Company’s
consolidated financial statements for the fiscal year ended December 31, 2009.
F-106
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP — (continued)
In December 2007, the FASB issued SFAS 141(R), Business Combinations , which broadens the guidance of SFAS 141,
extending its applicability to all transactions and other events in which one entity obtains control over one or more other
businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests
transferred as a result of business combinations. SFAS 141(R) expands on required disclosures to improve the statement users’
abilities to evaluate the nature and financial effects of business combinations. It requires the acquirer to recognize as an
adjustment to income tax expense changes in the valuation allowance for acquired deferred assets. SFAS 141(R), which was
primarily codified into FASB ASC Topic 805, Business Combinations, became effective for the Company on January 1, 2009
and did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS 160, Non-controlling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51 , which was primarily codified into FASB ASC Topic 810, Consolidation . SFAS 160 requires that a
non-controlling interest in a subsidiary be reported as equity and the amount of consolidated net earnings specifically attributable
to the non-controlling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of
reporting changes in the parent’s ownership interest and requires fair value measurement of any non-controlling equity
investment retained in a deconsolidation. SFAS is effective for the Company on January 1, 2009. The adoption of this FSP did
not have a material impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities , which
requires specific disclosures regarding the location and amounts of derivative instruments in the financial statements; how
derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items
affect financial position, financial performance and cash flows. SFAS 161, which was primarily codified into FASB ASC Topic
815, Derivatives and Hedging , became effective for the Company on January 1, 2009 and did not have a material impact on the
Company’s consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets , which amends the
factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets . It is intended to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3, which was primarily
codified into FASB ASC Topic 350, Intangibles — Goodwill and Other, became effective for the Company on January 1, 2009
and did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies , which clarifies and amends SFAS 141, Business Combinations , to address
application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. SFAS 141(R)-1, which was primarily codified into ASC 805,
Business Combinations , applied to the Company’s consolidated financial statements for the fiscal year ended December 31,
2009, and did not have a material impact on the Company’s consolidated financial statements.
In May 2009, the FASB issued SFAS 165, Subsequent Events , which was primarily codified into FASB ASC Topic 855,
Subsequent Events . SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued, depending on the Company’s
expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users.
SFAS 165 has been applied for the fiscal year ended December 31, 2009 and did not have a material impact on the Company’s
consolidated financial statements.
F-107
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
24. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP — (continued)
In June 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets — an amendment of FASB
Statement No. 140 , which was primarily codified into FASB ASC Topic 860, Transfers and Servicing . ASU 2009-16 improves
the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial
statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash
flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 will be effective for the
Company’s interim and annual reporting beginning January 1, 2010. ASU 2009-16 is not expected to have any impact on the
Company’s consolidated financial statements.
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 11.0% Senior notes and the 12.5% Senior subordinated notes were co-issued by Telesat LLC and Telesat Canada (the
“Issuers”), which are 100% owned subsidiaries of Telesat Holdings, and were guaranteed fully and unconditionally, on a joint
and several basis, by Telesat Holdings and certain of its subsidiaries.
The condensed consolidating financial information below for the year ended December 31, 2009 and the year ended
December 31, 2008 is presented pursuant to Article 3-10(d) of Regulation S-X. The information presented consists of the
operations of Telesat Holdings. Telesat Holdings primarily holds investments in subsidiaries and equity. Telesat LLC is a
financing subsidiary that has no assets, liabilities or operations.
The condensed consolidating financial information reflects the investments of Telesat Holdings in the Issuers, of the Issuers
in their respective Guarantor and Non-Guarantor subsidiaries and of the Guarantors in their Non-Guarantor subsidiaries using the
equity method.
F-108
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Balance Sheet
As of December 31, 2009
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
Guarantor
Subsidiaries Adjustments Consolidated
Non-
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Current future tax asset
Intercompany receivable
Other current assets
Total current assets
Satellites, property, and other
equipment, net
Other long-term assets
Intangible assets, net
Investment in affiliates
Goodwill
Total assets
Liabilities
Current liabilities
Accounts payable and accrued
liabilities
Other current liabilities
Intercompany payable
Debt due within one year
Total current liabilities
Debt financing
Future tax liability
Other long-term liabilities
Senior preferred shares
Total liabilities
Shareholders’ equity
Common shares
Preferred shares
Accumulated deficit
Accumulated other comprehensive
loss
Contributed surplus
Total shareholders’ equity
Total liabilities and shareholders’
—
—
—
—
—
—
—
—
—
1,055,989
—
1,055,989
—
—
—
—
—
—
—
25,090
141,435
166,525
756,414
541,764
(412,389 )
(7,422 )
11,097
889,464
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
137,623
51,447
1,703
249,103
13,758
453,634
1,446,613
34,101
492,435
1,339,308
2,005,842
5,771,933
32,059
121,140
108,139
23,601
284,939
3,013,738
262,913
611,776
—
4,173,366
14,232
15,591
350
150,490
8,234
188,897
457,595
6,249
17,854
1,477,582
343,876
2,492,053
2,334
3,165
131
120,038
7.026
132,694
21,982
660
386
261
96.885
252,868
—
—
—
(519,631 )
—
(519,631 )
—
—
—
(3,873,140 )
—
(4,392,771 )
6,798
2,397
411,285
1
420,481
—
86
16,370
—
436,937
4,556
4,167
—
—
8,723
—
6,194
18,495
—
33,412
—
—
(519,424 )
—
(519,424 )
—
—
(208 )
—
(519,632 )
2,320,730
—
(794,300 )
1,896,596
—
230,623
104,434
—
111,380
(4,321,760 )
—
452,297
63
72,074
1,598,567
(11,028 )
(61,075 )
2,055,116
3,544
98
219,456
7,421
(11,097 )
(3,873,139 )
154,189
70,203
2,184
—
29,018
255,594
1,926,190
41,010
510,675
—
2,446,603
5,180,072
43,413
127,704
—
23,602
194,719
3,013,738
269,193
671,523
141,435
4,290,608
756,414
541,764
(412,389 )
(7,422 )
11,097
889,464
equity
1,055,989
—
5,771,933
2,492,053
252,868
(4,392,771 )
5,180,072
Reconciliation to US GAAP of
total shareholders’ equity is as
follows:
Canadian GAAP
Income (loss) from equity
investments
Gains (losses) on embedded
derivatives
Net actuarial losses
Sales type lease — operating lease
for U.S. GAAP
Capital lease — operating lease for
U.S. GAAP
Lease amendments
Tax effect of above adjustments
Uncertainty in income taxes
US GAAP
889,464
—
1,598,567
2,055,116
219,456
(3,873,139 )
889,464
(27,459 )
—
—
—
—
—
—
—
862,005
—
—
—
—
—
—
—
—
—
(372 )
(372 )
(14,588 )
(10,541 )
23,070
—
—
—
—
—
—
—
—
—
—
28,203
—
(9,229 )
—
1,777
(17,576 )
1,571,108
—
—
—
—
2,054,744
—
(619 )
247
—
219,084
—
—
—
—
(3,844,936 )
(14,588 )
(10,541 )
23,070
(9,229 )
(619 )
2,024
(17,576 )
862,005
F-109
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Earnings (Loss)
For the Year Ended December 31, 2009
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
Guarantor
Subsidiaries Adjustments Consolidated
Non-
Operating revenues
Service revenues
Equipment sales revenues
Operating revenues
Amortization
Operations and administration
Cost of equipment sales
Total operating expenses
Earnings from operations
Income (loss) from equity
—
—
—
—
—
—
—
—
investments
Interest expense
(Loss) gain on financial instruments
Gain (loss) on foreign exchange
Other (expense) income
(Loss) earnings before income
taxes
Income tax (expense) recovery
Net (loss) earnings
Reconciliation to US GAAP is as
427,603
(13,540 )
—
—
—
414,063
—
414,063
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
704,397
6,696
711,093
198,676
176,085
5,828
380,589
330,504
(3,153 )
(256,458 )
(134,402 )
488,003
8,192
432,686
(5,083 )
427,603
follows:
Income (loss) from equity
investments
Gains (losses) on embedded
derivatives
Sales type lease — operating lease
for U.S. GAAP
Capital lease — operating lease for
U.S. GAAP
Lease amendments
Dividends on senior preferred shares
Tax effect of above adjustments
Uncertainty in income taxes
US GAAP net (loss) earnings
(32,357 )
—
475
—
—
—
—
13,540
—
—
395,246
—
(35,480 )
—
—
—
—
—
—
—
1,514
(1,567 )
—
—
10,754
(8,053 )
395,246
78,559
13,570
92,129
47,055
80,554
10,552
138,161
(46,032 )
(5,047 )
(1,318 )
—
29,869
1,321
(21,207 )
(1,458 )
(22,665 )
475
—
—
—
—
—
—
—
(22,190 )
46,216
—
46,216
11,136
28,004
—
39,140
7,076
—
(2,252 )
—
(17,010 )
25,059
12,873
1,592
14,465
—
—
—
—
719
—
(244 )
—
14,940
(62,034 )
(206 )
(62,240 )
—
(64,953 )
—
(64,953 )
2,713
(419,403 )
—
—
—
(2,713 )
(419,403 )
—
(419,403 )
767,138
20,060
787,198
256,867
219,690
16,380
492,937
294,261
—
(273,568 )
(134,402 )
500,862
31,859
419,012
(4,949 )
414,063
31,407
—
—
—
—
—
—
—
—
(387,996 )
(35,480 )
1,514
(1,567 )
719
13,540
10,510
(8,053 )
395,246
F-110
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidated Statement of Cash Flows
For the Year Ended December 31, 2009
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
Guarantor
Subsidiaries Adjustments Consolidated
Non-
414,063
—
427,603
(22,665 )
14,465
(419,403 )
414,063
Cash flows from operating
activities
Net earnings (loss)
Adjustments to reconcile net
earnings (loss) to cash flows
from operating activities:
Amortization
Future income taxes
Unrealized foreign exchange loss
Unrealized gain on derivatives
Dividends on preferred shares
Stock-based compensation expense
Loss (income) from equity
investments
(Gain) Loss on disposal of assets
Other
Customer prepayments on future
satellite services
Customer refunds
Operating assets and liabilities
Cash flows from investing
activities
Satellite programs
Property additions
Business acquisitions
Proceeds on disposal of assets
Cash flows from financing
activities
Debt financing and bank loans
Repayment of bank loans and debt
financing
Capitalized debt issuance costs
Capital lease payments
Satellite performance incentive
payments
Effect of changes in exchange rates
on cash and cash equivalents
Increase (decrease) in cash and cash
equivalents
Cash and cash equivalents,
beginning of period
Cash and cash equivalents, end of
period
—
—
—
—
13,540
—
(427,603 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
198,676
6,245
(509,995 )
134,402
—
4,696
3,153
(8,013 )
(48,972 )
82,066
(17,459 )
22,272
294,674
(258,083 )
(5,130 )
(1,128 )
70,942
(193,399 )
—
23,880
(53,844 )
—
(11,359 )
(5,418 )
(46,741 )
—
—
—
—
—
—
47,055
271
(12,769 )
—
—
854
5,047
590
3,267
900
(107 )
(21,884 )
559
—
(722 )
1,128
458
864
—
(11 )
—
—
—
(11 )
11,136
(1,918 )
(1,368 )
—
—
99
—
(26,007 )
(310 )
—
—
6,815
2,912
—
(266 )
—
—
(266 )
—
—
—
(3,261 )
—
(3,261 )
—
764
(445 )
—
54,534
2,176
(1,060 )
—
83,089
12,056
3,394
—
137,623
14,232
2,334
F-111
—
—
—
—
—
—
419,403
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
256,867
4,598
(524,132 )
134,402
13,540
5,649
—
(33,430 )
(46,015 )
82,966
(17,566 )
7,203
298,145
(258,083 )
(6,118 )
—
71,400
(192,801 )
23,880
(53,855 )
—
(14,620 )
(5,418 )
(50,013 )
319
55,650
98,539
154,189
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
The reconciliation of the condensed consolidating balance sheet captions is as follows:
December 31, 2009
Telesat Canada
Canadian
Current assets
Other assets
Goodwill
Current liabilities
Debt financing
Future tax liability
Other long-term liabilities
Accumulated deficit
Accumulated other comprehensive income (loss)
Current liabilities
Future tax liability
Other long-term liabilities
Accumulated earnings
Accumulated other comprehensive income
GAAP
453,634
34,101
2,005,842
284,939
3,013,738
262,913
611,776
(794,300 )
63
Adjustments US GAAP
462,997
117,759
1,993,150
296,401
3,075,331
263,973
644,583
(810,352 )
(10,478 )
9,363
83,658
(12,692 )
11,462
61,593
1,060
32,807
(16,052 )
(10,541 )
Non-guarantor subsidiaries
Canadian
GAAP
Adjustments US GAAP
8,853
130
6,441
247
18,984
489
110,620
(760 )
3,438
(106 )
8,723
6,194
18,495
111,380
3,544
F-112
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Balance Sheet
As at December 31, 2008
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Current future tax asset
Intercompany receivable
Other current assets
Total current assets
Satellites, property, and other
equipment, net
Other long-term assets
Intangible assets, net
Investment in affiliates
Goodwill
Total assets
Liabilities
Current liabilities
Accounts payable and accrued
liabilities
Other current liabilities
Intercompany payable
Debt due within one year
Total current liabilities
Debt financing
Future tax liability
Other long-term liabilities
Senior preferred shares
Total liabilities
Shareholders’ equity
Common shares
Preferred shares
Accumulated deficit
Accumulated other comprehensive
loss
Contributed surplus
Total shareholders’ equity
Total liabilities and shareholders’
—
—
—
—
—
—
—
—
—
622,417
—
622,417
—
—
—
—
—
—
—
11,550
141,435
152,985
756,414
541,764
(826,452 )
(7,742 )
5,448
469,432
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
83,089
39,153
928
605,331
31,283
759,784
1,437,490
39,176
562,434
1,668,986
2,005,842
6,473,712
24,661
123,740
518,247
23,260
689,908
3,513,223
255,893
505,328
—
4,964,352
12,056
19,680
596
59,234
9,202
100,768
374,436
2,325
18,967
1,476,399
343,876
2,316,771
3,393
3,100
1,057
103,133
8,983
119,666
71,650
755
635
261
96,885
289,852
1
—
—
(767,698 )
(281 )
(767,978 )
—
47
(1 )
(3,768,063 )
—
(4,535,995 )
15,940
14,766
211,174
11
241,891
—
267
24,099
—
266,257
3,840
4,163
38,317
—
46,320
—
10,212
25,159
—
81,691
14
(237 )
(767,738 )
1
(767,960 )
—
—
—
—
(767,960 )
2,320,730
—
(816,679 )
1,823,370
—
241,559
104,434
—
96,915
(4,248,534 )
—
478,205
63
5,246
1,509,360
(14,617 )
202
2,050,514
6,812
—
208,161
7,742
(5,448 )
(3,768,035 )
98,539
61,933
2,581
—
49,187
212,240
1,883,576
42,303
582,035
—
2,446,603
5,166,757
44,455
142,432
—
23,272
210,159
3,513,223
266,372
566,136
141,435
4,697,325
756,414
541,764
(826,452 )
(7,742 )
5,448
469,432
equity
622,417
—
6,473,712
2,316,771
289,852
(4,535,995 )
5,166,757
F-113
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
Reconciliation to US GAAP of
total shareholders’ equity is as
follows:
Canadian GAAP
Underlying differences in the
income (loss) from equity
investments
Gains (losses) on embedded
derivatives
Net actuarial losses
Sales-type lease — operating lease
for U.S. GAAP
Capital lease — operating lease for
U.S. GAAP
Lease amendments
Tax effect of above adjustments
Uncertainty in income taxes
US GAAP
469,432
—
1,509,360
2,050,514
208,161
(3,768,035 )
469,432
(13,633 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,050,514
—
(1,233 )
491
—
207,419
—
—
—
—
(3,781,668 )
20,892
(1,169 )
21,556
(7,662 )
(1,233 )
(8,486 )
(9,523 )
483,807
14,375
—
—
—
—
—
—
—
483,807
—
—
—
—
—
—
—
—
—
(742 )
20,892
(1,169 )
21,556
(7,662 )
(8,977 )
(9,523 )
1,523,735
F-114
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Earnings (Loss)
For the Year Ended December 31, 2008
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
Operating revenues
Service revenues
Equipment sales revenues
Operating revenues
Amortization
Operations and administration
Cost of equipment sales
Impairment loss on long-lived assets
Impairment loss on intangible assets
Total operating expenses
Earnings from operations
Income (loss) from equity
investments
Interest expense
(Loss) gain on financial instruments
Gain (loss) on foreign exchange
Other (expense) income
(Loss) earnings before income
taxes
Income tax recovery (expense)
Net (loss) earnings
Reconciliation to US GAAP is as
follows:
Income (loss) from equity
investments
Gains (losses) on embedded
derivatives
Sales-type lease — operating lease
for U.S. GAAP
Capital lease — operating lease for
U.S. GAAP
Lease amendments
Dividends on senior preferred shares
Tax effect of above adjustments
Uncertainty in income taxes
US GAAP net (loss) earnings
—
—
—
—
—
—
—
—
—
—
(812,546 )
(9,855 )
—
—
—
(822,401 )
—
(822,401 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
613,419
12,459
625,878
179,100
197,506
9,944
2,373
465,900
854,823
(228,945 )
(60,468 )
(245,683 )
251,686
(693,723 )
(3,867 )
(981,000 )
168,454
(812,546 )
14,473
—
(742 )
—
—
—
—
9,855
—
—
(798,073 )
—
20,118
—
18,808
—
—
—
—
—
—
(7,584 )
—
—
(9,252 )
(6,875 )
(798,073 )
98,342
18,296
116,638
36,218
99,267
14,500
—
17,100
167,085
(50,447 )
(5,130 )
25
—
(17,103 )
913
(71,742 )
(2,730 )
(74,472 )
—
—
—
—
—
—
—
—
(74,472 )
26,700
—
26,700
20,322
8,438
104
—
—
28,864
(2,164 )
—
(2,128 )
—
12,770
1,242
9,720
(846 )
8,874
—
—
—
—
(1,233 )
—
491
—
8,132
(57,670 )
(171 )
(57,841 )
—
(57,661 )
(180 )
—
—
(57,841 )
—
878,144
—
—
—
(1 )
878,143
1
878,144
(13,731 )
—
—
—
—
—
—
—
864,413
680,791
30,584
711,375
235,640
247,550
24,368
2,373
483,000
992,931
(281,556 )
—
(257,641 )
251,686
(698,056 )
(1,713 )
(987,280 )
164,879
(822,401 )
—
—
20,118
18,808
(7,584 )
(1,233 )
9,855
(8,761 )
(6,875 )
(798,073 )
F-115
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2008
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
Cash flows from operating
activities
Net earnings (loss)
Adjustments to reconcile net
earnings (loss) to cash flows
from operating activities:
Amortization
Future income taxes
Unrealized foreign exchange loss
Unrealized gain on derivatives
Dividends on preferred shares
Stock-based compensation expense
(Gain) Loss on disposal of assets
Impairment losses
Loss (income) from equity
investments
Other
Customer prepayments on future
satellite services
Operating assets and liabilities
(822,401 )
(812,546 )
(74,472 )
8,874
878,144
(822,401 )
—
—
—
—
9,855
—
—
—
812,546
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
179,100
(175,744 )
698,675
(247,931 )
—
5,246
827
468,273
60,468
(41,489 )
88,473
(42,880 )
180,472
F-116
36,218
84
6,172
—
—
202
(575 )
17,100
5,130
(745 )
114
107,584
96,812
20,322
(291 )
(9,402 )
—
—
—
—
—
—
(842 )
—
(16,889 )
1,772
—
—
—
—
—
—
—
—
(878,144 )
(1,043 )
—
1,044
1
235,640
(175,951 )
695,445
(247,931 )
9,855
5,448
252
485,373
—
(44,119 )
88,587
48,859
279,057
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
Cash flows from investing
activities
Satellite programs
Property additions
Business acquisitions
Proceeds on disposal of assets
Insurance proceeds
Cash flows from financing
activities
Debt financing and bank loans
Repayment of bank loans and debt
financing
Capitalized debt issuance costs
Capital lease payments
Satellite performance incentive
payments
Preferred dividends paid
Effect of changes in exchange rates
on cash and cash equivalents
Increase (decrease) in cash and cash
equivalents
Cash and cash equivalents,
beginning of period
Cash and cash equivalents, end of
period
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(194,542 )
(6,505 )
7,477
566
4,006
(188,998 )
(69,221 )
(2,304 )
—
4,554
—
(66,971 )
—
(53 )
—
—
—
(53 )
—
186,687
—
—
—
—
—
—
—
—
—
(91,528 )
(19,131 )
(8,197 )
(3,524 )
—
64,307
(32 )
—
(19,816 )
—
(7,477 )
(27,325 )
—
(1,660 )
—
55,781
856
—
—
(2,941 )
—
—
(2,941 )
920
(302 )
—
27,308
11,200
3,695
—
83,089
12,056
3,393
—
—
(7,477 )
—
—
(7,477 )
—
—
—
—
—
7,477
7,477
—
1
—
1
(263,763 )
(8,862 )
—
5,120
4,006
(263,499 )
186,687
(91,560 )
(19,131 )
(30,954 )
(3,524 )
—
41,518
(740 )
56,336
42,203
98,539
F-117
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
The reconciliation of the condensed consolidating balance sheet captions is as follows:
December 31, 2008
Current assets
Other long-term assets
Goodwill
Current liabilities
Debt financing
Future tax liability
Other long-term liabilities
Accumulated deficit
Accumulated other comprehensive income (loss)
Current liabilities
Future tax liability
Other long-term liabilities
Accumulated earnings
F-118
Telesat Canada
Canadian GAAP Adjustments US GAAP
766,648
169,951
1,993,150
698,788
3,586,482
271,232
517,682
(800,395 )
(1,106 )
759,784
39,176
2,005,842
689,908
3,513,223
255,893
505,328
(816,679 )
63
6,864
130,775
(12,692 )
8,880
73,259
15,339
12,354
16,284
(1,169 )
Non-guarantor
Subsidiaries
Canadian
GAAP
Adjustments US GAAP
46,525
205
9,721
(491 )
26,186
1,027
96,174
(741 )
46,320
10,212
25,159
96,915
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Earnings (Loss)
For the Period October 31, 2007 to December 31, 2007
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
Operating revenues
Service revenues
Equipment sales revenues
Operating revenues
Amortization
Operations and administration
Cost of equipment sales
Total operating expenses
Earnings from operations
Income (loss) from equity
investments
Interest expense
(Loss) gain on financial instruments
Gain (loss) on foreign exchange
Other (expense) income
(Loss) earnings before income
taxes
Income tax recovery/(expense)
Net (loss) earnings
Reconciliation to US GAAP is as
follows:
Income (loss) from equity
investments
Gains (losses) on embedded
derivatives
Sales-type lease — operating lease
for U.S. GAAP
Capital lease — operating lease for
U.S. GAAP
Dividends on senior preferred shares
Tax effect of above adjustments
Uncertainty in income taxes
US GAAP net (loss) earnings
—
—
—
—
—
—
—
—
(2,356 )
(1,695 )
—
—
—
(4,051 )
—
(4,051 )
1,071
—
—
—
1,695
—
—
(1,285 )
13,395
7,416
20,811
6,909
19,968
5,922
32,799
(11,988 )
(751 )
(9 )
—
(708 )
13
(13,443 )
286
(13,157 )
—
—
—
—
—
—
—
(13,157 )
3,396
—
3,396
4,152
(1,776 )
68
2,444
952
—
(615 )
—
896
68
1,301
(166 )
1,135
—
—
—
—
—
—
—
1,135
(6,164 )
(53 )
(6,217 )
(1 )
(6,163 )
(53 )
(6,217 )
—
14,378
—
—
—
14,378
—
14,378
(1,071 )
—
—
—
—
—
—
13,307
103,509
7,907
111,416
40,046
43,276
6,485
89,807
21,609
—
(43,861 )
75,098
(118,034 )
(1,033 )
(66,221 )
62,170
(4,051 )
—
774
2,748
(78 )
1,695
275
(2,648 )
(1,285 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
92,882
544
93,426
28,986
31,247
548
60,781
32,645
(11,271 )
(41,542 )
75,098
(118,222 )
(1,114 )
(64,406 )
62,050
(2,356 )
—
774
2,748
(78 )
—
275
(2,648 )
(1,285 )
F-119
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Earnings (Loss)
For the Period January 1, 2007 to October 30, 2007
Telesat
Canada
Guarantor
Subsidiaries Subsidiaries Adjustments Consolidated
guarantor
Non-
Operating revenues
Service revenues
Equipment sales revenues
Sales-type lease revenues
Operating revenues
Amortization
Operations and administration
Cost of equipment sales
Cost of sales-type lease
Impairment loss on long-lived assets
Total operating expenses
Earnings from operations
Income (loss) from equity investments
Interest expense
(Loss) gain on financial instruments
Gain (loss) on foreign exchange
Other (expense) income
(Loss) earnings before income taxes
Income tax recovery (expense)
Net (loss) earnings
Reconciliation to US GAAP is as
follows:
Gains (losses) on embedded
derivatives
Losses on derivatives designated as
cash flow hedges under Canadian
GAAP
Sales-type lease — operating lease for
U.S. GAAP
Capital lease — operating lease for
U.S. GAAP
Tax effect of above adjustments
Uncertainty in income taxes
US GAAP net (loss) earnings
344,191
20,015
32,089
396,295
97,630
113,716
18,190
14,953
2,116
246,605
149,690
13,241
(4,679 )
(6,653 )
(1,190 )
(13,645 )
136,764
(55,022 )
81,742
(5,051 )
(10,361 )
(23,617 )
9,436
9,606
3,234
64,989
29,211
23,600
510
53,321
1,967
26,862
19,385
566
—
48,780
4,541
—
—
—
(738 )
13,111
16,914
(3,089 )
13,825
—
—
—
—
—
—
13,825
F-120
20,870
—
—
20,870
6,204
13,563
—
—
—
19,767
1,103
—
(3,869 )
—
993
155
(1,618 )
1,034
(584 )
—
—
—
—
—
—
(584 )
(9,844 )
(2,855 )
—
(12,699 )
(13 )
(9,834 )
(2,852 )
—
—
(12,699 )
—
(13,241 )
—
—
—
—
(13,241 )
—
(13,241 )
384,428
40,760
32,599
457,787
105,788
144,307
34,723
15,519
2,116
302,453
155,334
—
(8,548 )
(6,653 )
(935 )
(379 )
138,819
(57,077 )
81,742
—
(5,051 )
—
—
—
—
—
(13,241 )
(10,361 )
(23,617 )
9,436
9,606
3,234
64,989
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Cash Flows
For the Period October 31, 2007 to December 31, 2007
Cash flows from operating
activities
Net earnings (loss)
Adjustments to reconcile net
earnings (loss) to cash flows
from operating activities:
Amortization
Future income taxes
Unrealized foreign exchange
loss
Unrealized loss (gain) on
derivatives
Dividends on preferred shares
(Gain) Loss on disposal of
assets
Loss (income) from equity
investments
Other
Operating assets and liabilities
Cash flows from investing
activities
Satellite programs
Property additions
Business acquisitions
Proceeds on disposal of assets
Telesat
Holdings
Telesat
LLC
Telesat
Canada
Guarantor
Subsidiaries
guarantor
Subsidiaries Adjustments Consolidated
Non-
(4,051 )
—
(2,356 )
(13,157 )
1,135
14,378
(4,051 )
—
—
—
—
1,695
—
2,356
—
—
—
—
—
(569,957 )
—
(569,957 )
—
—
28,986
(60,761 )
6,909
110
4,152
(3 )
—
—
—
19
751
(366 )
14,502
8,768
—
(6,392 )
7,713
24
1,345
—
—
—
—
—
—
(5,837 )
(553 )
—
(26 )
4,370
—
4,344
—
105,819
—
—
—
—
—
—
—
—
—
—
—
(62,754 )
—
8
11,271
(1,727 )
198,192
216,678
(15,496 )
(7,600 )
(2,671,335 )
1
(2,694,430 )
F-121
(1 )
1
1
—
—
—
(14,378 )
1,749
(1,367 )
383
40,046
(60,653 )
105,820
(62,754 )
1,695
27
—
(344 )
205,490
225,276
—
(1 )
15
—
14
(15,496 )
(14,019 )
(3,229,194 )
25
(3,258,684 )
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Non-
Telesat Telesat
Holdings LLC Canada Subsidiaries Subsidiaries Adjustments Consolidated
Telesat Guarantor
guarantor
Cash flows from financing
activities
Debt financing and bank loans
Repayment of bank loans and
debt financing
Capitalized debt issuance costs
Note repayment
Common shares issued
Preferred shares issued
(repurchased)
Capital lease payments
Satellite performance incentive
payments
Effect of changes in exchange
rates on cash and cash
equivalents
Increase (decrease) in cash and
cash equivalents
Cash and cash equivalents,
beginning of period
Cash and cash equivalents, end
of period
—
—
2,767,716
—
—
—
311,124
—
—
—
—
(44,887 )
(83,585 )
(129,334 )
—
258,833
—
—
—
—
(654 )
—
569,957
—
—
(4,196 )
2,505,060
—
(12 )
—
—
—
—
(14 )
—
(26 )
—
—
—
—
—
—
(639 )
—
(639 )
—
—
—
—
—
—
1
—
1
2,767,716
(44,899 )
(83,585 )
(129,334 )
311,124
258,833
(1,306 )
(4,196 )
3,074,353
—
—
—
1,113
543
(398 )
1,258
—
—
27,308
11,200
3,695
—
—
—
—
—
—
—
27,308
11,200
3,695
—
—
—
42,203
—
42,203
F-122
Table of Contents
Telesat Holdings Inc.
Notes to the 2009 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share
amounts and where otherwise noted)
25. CONDENSED CONSOLIDATING FINANCIAL INFORMATION — (continued)
Condensed Consolidating Statement of Cash Flows
For the Period January 1, 2007 to October 30, 2007
Cash flows from operating activities
Net earnings (loss)
Adjustments to reconcile net earnings
(loss) to cash flows from operating
activities:
Gross profit on sales-type lease
Amortization
Future income taxes
Unrealized foreign exchange
(gain) loss
Unrealized loss (gain) on derivatives
(Gain) Loss on disposal of assets
Loss (income) from equity
investments
Other
Customer prepayments on future
satellite services
Operating assets and liabilities
Cash flows from investing activities
Satellite programs
Property additions
Maturity of short-term investments
Business acquisitions
Proceeds on disposal of assets
Cash flows from financing activities
Debt financing and bank loans
Repayment of bank loans and debt
financing
Success fee payments
Capital lease payments
Satellite performance incentive
payments
Effect of changes in exchange rates on
cash and cash equivalents
Increase (decrease) in cash and cash
equivalents
Cash and cash equivalents, beginning
of period
Cash and cash equivalents, end of
period
Telesat
Canada
Guarantor
Subsidiaries Subsidiaries Adjustments Consolidated
guarantor
Non-
81,742
13,825
(584 )
(13,241 )
81,742
(5,936 )
97,630
25,549
(10,396 )
8,907
(153 )
(13,241 )
15,186
17,721
25,890
242,899
(183,494 )
(5,026 )
251
11,243
153
(176,873 )
73,000
(84,041 )
(23,620 )
(4,275 )
(2,022 )
(40,958 )
55
1,967
(224 )
—
—
45
—
(11,868 )
—
(925 )
2,875
—
(743 )
2,061
(9,180 )
—
(7,862 )
—
(49 )
(380 )
—
—
(429 )
—
6,204
(1,033 )
—
—
—
—
—
—
2,279
6,866
—
(68 )
—
(2,243 )
—
(2,311 )
—
—
—
(3,438 )
—
(3,438 )
—
147
(1,823 )
25,068
(5,269 )
(706 )
24,544
9,004
5,113
49,612
3,735
4,407
F-123
—
(13 )
—
—
—
—
13,241
—
—
—
(13 )
—
7
—
—
6
13
—
—
—
—
—
—
—
—
—
—
(5,881 )
105,788
24,292
(10,396 )
8,907
(108 )
—
3,318
17,721
27,244
252,627
(183,494 )
(5,830 )
2,312
(180 )
159
(187,033 )
73,000
(84,090 )
(24,000 )
(7,713 )
(2,022 )
(44,825 )
(1,676 )
19,093
38,661
57,754
Exhibit 10.23
[DEFERRED SETTLEMENT]
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE
LORAL SPACE & COMMUNICATIONS INC.
2005 STOCK INCENTIVE PLAN
THIS AGREEMENT (the “Agreement”) is made as of the 5th day of March, 2010 (the “Grant Date”), by and between
LORAL SPACE & COMMUNICATIONS INC. (the “Company”) and Michael B. Targoff (the “Grantee”).
W I T N E S S E T H :
WHEREAS, on March 5, 2009, the Company entered into a Restricted Stock Unit Agreement with Grantee (the “2009 RSU
Agreement”), pursuant to which the Company agreed to grant to Grantee 50,000 restricted stock units on the Grant Date, subject
to Grantee’s continued employment with the Company through the Grant Date, or as otherwise provided in the 2009 RSU
Agreement;
WHEREAS, Grantee has satisfied the continued service requirements under the 2009 RSU Agreement and remains
currently employed by the Company in a key capacity, and the Company wishes to fulfill its current obligations under the 2009
RSU Agreement to grant the Grantee a notional interest in 50,000 shares of the Company’s common stock, par value $0.01 per
share (the “Stock”), in the form of restricted stock units, subject to certain restrictions and on the terms and conditions set forth
herein; and
WHEREAS, through the grant of these restricted stock units, the Company hopes to incentivise and retain the services of
Grantee and encourage stock ownership by Grantee in order to give Grantee a proprietary interest in the Company’s success and
align Grantee’s interest with those of the stockholders of the Company;
NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as
follows:
1. Grant of Restricted Stock Units . Pursuant to the 2009 RSU Agreement and subject to the restrictions, terms and
conditions set forth herein and in the Company’s 2005 Stock Incentive Plan, as amended from time to time (the “Plan”), the
Company hereby grants to the Grantee 50,000 restricted stock units (the restricted stock units granted hereunder are hereafter
referred to as the “Restricted Stock Units”). Each Restricted Stock Unit shall represent the right to receive upon settlement
(i) one share of Stock or (ii) cash equal to the fair market value of one share of Stock on the settlement date, subject to the terms
and conditions set forth herein. Capitalized terms not defined herein shall have the meaning ascribed to them in the Plan. For the
sake of clarity, the Grant of Restricted Stock Units hereby is pursuant to and consistent with the 2009 RSU Agreement and not in
addition to the restricted stock units referenced in the 2009 RSU Agreement.
2. Vesting. The Restricted Stock Units granted hereunder are fully vested as of the Grant Date.
3. Settlement of Restricted Stock Units .
(a) All outstanding vested Restricted Stock Units shall be settled on the earlier of (a) March 31, 2013, (b) the date of
the Grantee’s death or Disability, (c) the date the Grantee undergoes a Separation from Service (as defined below), and (d) the
date of consummation of a Change in Control that also constitutes a “change in control event” within the meaning of Treasury
Regulation Section 1.409A-3(i)(5) (the first of (a), (b), (c) and (d) to occur shall be the “Settlement Date”); provided , however ,
that to the extent that the Grantee is a “specified employee” within the meaning of Treasury Regulation 1.409A-1(i) any
settlement of the Restricted Stock Units on account of the Grantee’s Separation from Service from the Company shall be delayed
for such period of time as may be necessary to meet the requirements of Treasury Regulation Section 1.409A-3(i)(2) (the “Delay
Period”) and on the first business day following the expiration of the Delay Period, all vested Restricted Stock Units shall be
settled. On the Settlement Date, the Company shall deliver to the Grantee (or the Grantee’s estate in the event of Grantee’s
death) (x) a certificate or certificates representing the number of shares of Stock equal to the number of vested Restricted Stock
Units or (y) a lump sum payment of cash having a value equal to the fair market value of one share of Stock as of the Settlement
Date multiplied by the number of vested Restricted Stock Units. The determination as to whether the Restricted Stock Units will
be settled in Stock or cash shall be within the sole discretion of the Company.
(b) For purposes of this Agreement, a “Separation from Service” will be deemed to occur on the date as of which the
Grantee has undergone a “termination of employment” (as that term is specifically defined in Treas. Reg. §1.409A-1(h)(ii)
applying the rules set forth therein) with the Loral Controlled Group (as defined below); provided , however , that the Grantee
will be deemed to undergo a termination of employment (and thus a Separation from Service) on the date that such Grantee’s
level of bona fide services performed decreases to a level less than 50 percent of the average level of services performed by the
Grantee during the immediately preceding 36-month period. For purposes of this Agreement the Loral Controlled Group means
Loral and all persons and entities with respect to which Loral would be considered a single employer under Code §414(b) and
(c), provided , however , that in applying Code §1563(a)(1), (2) and (3) for purposes of determining a controlled group of
corporations and in applying Treas. Reg. §1.414(c)-2 for purposes of determining trades or businesses that are under common
control, as provided in Treas. Reg. §1.409A-1(h)(3), the language “at least 80 percent” is used, instead of the default language
“at least 50 percent” as set forth in Treas. Reg. §1.409A-1(h)(3), each place it appears.
4. Dividends and Dividend Equivalents. No dividends or dividend equivalents shall accrue or be paid with respect to any
outstanding Restricted Stock Units.
2
5. Rights of Stockholder. The Grantee will not have any rights as a Stockholder with respect to any Restricted Stock Units
until the Grantee becomes the holder of record of such shares.
6. No Right to Continued Employment. This Agreement does not confer upon the Grantee any right to continuance of
employment with the Company, nor shall it interfere in any way with the right of the Company to terminate his or her
employment at any time.
7. Transferability. The Restricted Stock Units may not, at any time prior to settlement, be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by the Grantee other than by will or the laws of descent and distribution
and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable.
8. Tax Withholding. The Grantee agrees as a condition of this Agreement, to pay to the Company, or make arrangements
satisfactory to the Company regarding payment to the Company of, the aggregate amount of federal, state and local income and
payroll taxes that the Company is required to withhold in connection with the vesting and settlement of the Restricted Stock
Units. Alternatively, the Company may, in its sole discretion, withhold cash and/or shares of Stock having a value equal to all or
a portion of the aggregate minimum amount of federal, state and local income and payroll taxes that the Company is required to
withhold, and, if only a portion of the required amount is withheld, the Grantee agrees to pay to the Company, or make
arrangements satisfactory to the Company regarding payment to the Company of, the amount of tax withholding not covered by
the withholding of cash and/or shares of Stock.
9. 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 Grantee to the Company shall be mailed or delivered to the Company at its New York office and all
notices or communications by the Company to the Grantee may be given to the Grantee personally or may be mailed to the
Grantee’s home address as reflected on the books of the Company.
10. Arbitration. All disputes between the parties arising out of, or in connection with the validity, interpretation,
construction, meaning or execution of the Plan or of this Agreement or any settlement thereof, shall be finally settled by
arbitration to be held in New York City and conducted in accordance with the Rules of the American Arbitration Association.
Judgment upon the award rendered may be entered in any court having jurisdiction or application may be made to such court for
judicial acceptance of the award and an order of enforcement, as the case may be.
3
11. Governing Law. The validity, interpretation and performance of this Agreement shall be controlled by and construed
under the laws of Delaware, without giving effect to the principles of conflicts of law.
12. Employment Agreement Superseded. This Agreement governs the terms and conditions of the Restricted Stock Units
and supersedes the Employment Agreement and all other agreements and arrangements as they may relate to the Restricted Stock
Units.
13. Signature in Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same instrument.
* * *
4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By: /s/ Avi Katz
Name: Avi Katz
Title: Senior Vice President, General Counsel and
Secretary
/s/ Michael B. Targoff
Grantee: Michael B. Targoff
Mailing Address of Grantee for Delivery of Stock Certificates:
Phone Number of Grantee:
Email Address of Grantee:
Social Security No.: — —
5
[NON-EMPLOYEE DIRECTOR GRANT]
Exhibit 10.31
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE
LORAL SPACE & COMMUNICATIONS INC.
2005 STOCK INCENTIVE PLAN
THIS AGREEMENT (the “Agreement”) is made as of the 19th day of May, 2009 (the “Grant Date”), by and between
LORAL SPACE & COMMUNICATIONS INC. (the “Company”) and (the “Grantee”).
W I T N E S S E T H :
WHEREAS, the Grantee is currently a non-employee member of the Board of Directors (the “Board”) of the Company and
the Company desires to have him remain in such capacity and grant to him a notional interest in shares of the Company’s
common stock, par value $0.01 per share (the “Stock”), in the form of restricted stock units, subject to certain restrictions and on
the terms and conditions set forth herein so that he may have a direct proprietary interest in the Company’s success.
NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as
follows:
1. Grant of Restricted Stock Units . Subject to the restrictions, terms and conditions set forth herein and in the
Company’s 2005 Stock Incentive Plan, as amended from time to time (the “Plan”), the Company hereby grants to the Grantee
2,000 restricted stock units (the restricted stock units granted hereunder are hereafter referred to as the “Restricted Stock Units”).
Each Restricted Stock Unit shall represent the right to receive upon settlement (i) one share of the Stock or (ii) cash equal to the
fair market value of one share of Stock on the settlement date, subject to the terms and conditions set forth herein. The
determination as to whether the Restricted Stock Units are settled in Stock or cash shall be at the sole discretion of the Company.
Capitalized terms not defined herein shall have the meaning ascribed to them in the Plan.
2. Satisfaction of Vesting Conditions.
(a) General . Except as provided in this Agreement, the Restricted Stock Units are subject to a substantial risk of
forfeiture until vested as set forth in Section 2(b) and are not transferable.
(b) Vesting Schedule . The Restricted Stock Units shall vest in two separate tranches (each, a “Tranche”) as follows.
Subject to earlier forfeiture as provided below, 1,000 Restricted Stock Units shall vest on the first anniversary of the Grant Date
and the remaining 1,000 Restricted Stock Units shall vest on the second anniversary of the Grant Date (each such anniversary, a
“Vesting Date,”), provided the Grantee has remained a member of the Board from the date hereof through each Vesting Date. If
the Grantee’s membership on the Board is terminated for any reason, the unvested portion of the Restricted Stock Units shall be
forfeited by the Grantee without consideration.
3. Settlement of Restricted Stock Units .
(a) All outstanding vested Restricted Stock Units shall be settled on the earlier of (a) the date of the Grantee’s death,
(b) the date the Grantee undergoes a Separation from Service (as defined below), and (c) the date of consummation of a 409A
Change in Control (as defined below), (the first of (a), (b), and (c) to occur shall be the “Settlement Date”); provided , however ,
that to the extent that the Grantee is a “specified employee” within the meaning of Treasury Regulation 1.409A-1(i) any
settlement of the Restricted Stock Units on account of the Grantee’s Separation from Service from the Company shall be delayed
for such period of time as may be necessary to meet the requirements of Treasury Regulation Section 1.409A-3(i)(2) (the “Delay
Period”) and on the first business day following the expiration of the Delay Period, all vested Restricted Stock Units shall be
settled. On the Settlement Date, the Company shall deliver to the Grantee (or the Grantee’s estate in the event of Grantee’s
death) (x) a certificate or certificates representing the number of shares of Stock equal to the number of vested Restricted Stock
Units or (y) a lump sum payment of cash having a value equal to the fair market value of one share of Stock as of the Settlement
Date multiplied by the number of vested Restricted Stock Units. The determination as to whether the Restricted Stock Units will
be settled in Stock or cash shall be within the sole discretion of the Company.
(b) For purposes of this Agreement, a “Separation from Service” will be deemed to occur on the date as of which the
Grantee has undergone a “separation from service” (as that term is specifically defined in Treas. Reg. §1.409A-1(h), applying the
rules set forth therein) with the Loral Controlled Group (as defined below); provided , however , that to the extent that the
Grantee becomes employed with Loral or any member of the Loral Controlled Group the Grantee will be deemed to undergo a
termination of employment on the date that such Grantee’s level of bona fide services performed decreases to a level less than
50 percent of the average level of services performed by the Grantee during the immediately preceding 36-month period. For
purposes of this Agreement the Loral Controlled Group means Loral and all persons and entities with respect to which Loral
would be considered a single employer under Code §414(b) and (c), provided , however , that in applying Code §1563(a)(1),
(2) and (3) for purposes of determining a controlled group of corporations and in applying Treas. Reg. §1.414(c)-2 for purposes
of determining trades or businesses that are under common control, as provided in Treas. Reg. §1.409A-1(h)(3), the language “at
least 80 percent” is used, instead of the default language “at least 50 percent” as set forth in Treas. Reg. §1.409A-1(h)(3), each
place it appears.
(c) For purposes of this Agreement, a “409A Change in Control” shall mean a Change in Control that also constitutes
a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5).
2
4. Dividends and Dividend Equivalents. No dividends or dividend equivalents shall accrue or be paid with respect to any
outstanding Restricted Stock Units.
5. Rights of Stockholder. The Grantee will not have any rights as a Stockholder with respect to any Restricted Stock Units
unless and until the Restricted Stock Units are settled in shares of Stock and Grantee becomes the holder of record of such
shares.
6. No Right to Continued Board Membership. This Agreement does not confer upon the Grantee any right to
continuance of membership on the Board, nor shall it interfere in any way with the right of the Company to terminate his Board
membership at any time.
7. Transferability. The Restricted Stock Units may not, at any time prior to settlement, be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by the Grantee and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable.
8. 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 Grantee to the Company shall be mailed or delivered to the Company at its New York office and all
notices or communications by the Company to the Grantee may be given to the Grantee personally or may be mailed to the
Grantee’s home address as reflected on the books of the Company.
9. Arbitration. All disputes between the parties arising out of, or in connection with the validity, interpretation,
construction, meaning or execution of the Plan or of this Agreement or any settlement thereof, shall be finally settled by
arbitration to be held in New York City and conducted in accordance with the Rules of the American Arbitration Association.
Judgment upon the award rendered may be entered in any court having jurisdiction or application may be made to such court for
judicial acceptance of the award and an order of enforcement, as the case may be.
10. Governing Law. The validity, interpretation and performance of this Agreement shall be controlled by and construed
under the laws of Delaware, without giving effect to the principles of conflicts of law.
11. Signature in Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same instrument.
* * *
3
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
LORAL SPACE & COMMUNICATIONS INC.
By:
Name: Michael B. Targoff
Title: Vice Chairman, Chief Executive Officer
and President
Grantee:
Mailing Address of Grantee for Delivery of Stock Certificates:
Phone Number of Grantee:
Email Address of Grantee:
Social Security No.: — —
4
LORAL SPACE & COMMUNICATIONS INC.
SIGNIFICANT SUBSIDIARIES
Exhibit 21.1
The active subsidiaries owned directly or indirectly by Loral Space & Communications Inc. as of March 12, 2010 all 100%
owned (except as noted below) consist of the following:
Loral Space & Communications Holdings Corporation
Loral Skynet Corporation
Loral Satellite Broadband LLC
Loral Satmex LLC
Space Systems/Loral, Inc.
International Space Technology, Inc. (1)
Cosmotech (1)
SS/L Isle of Man Limited
Loral General Partner, Inc.
LGP (Bermuda) Ltd.
Loral Holdings LLC
Mexico Satellite, LLC (2)
Loral Global Services N.V.
Loral Global Services B.V.
Loral Holdings Corporation
4440480 Canada Inc.
4440498 Canada Inc.
Loral Canadian Gateway Corporation
NOTES
(1)
(2)
Only 57.1% voting and 47.7% economic interests owned directly or indirectly
Only 77.78% owned directly or indirectly
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Russian Federation
Isle of Man
Delaware
Bermuda
Delaware
Delaware
Netherlands Antilles
Netherlands
Delaware
Canada
Canada
Canada
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-132795 and 333-143274 on Form S-8 and
Registration Statement Nos. 333-159656 and 333-138652 on Form S-3 of our reports dated March 15, 2010, relating to the
consolidated financial statements and financial statement schedule of Loral Space & Communications Inc. and subsidiaries and
the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of
Loral Space & Communications Inc. for the year ended December 31, 2009.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
New York, NY
March 15, 2010
CONSENT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement Nos. 333-132795 and 333-143274 on Form S-8 and
Registration Statement Nos. 333-159656 and 333-138652 on Form S-3 of our report dated March 2, 2010, relating to the
consolidated financial statements of Telesat Holdings Inc. appearing in this Annual Report on Form 10-K of Loral Space &
Communications Inc. for the year ended December 31, 2009.
Exhibit 23.2
/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 12, 2010
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Michael B. Targoff, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Loral Space & Communications Inc.;
2.
3.
4.
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;
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;
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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
March 15, 2010
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Harvey B. Rein, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Loral Space & Communications Inc.;
2.
3.
4.
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;
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;
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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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/ HARVEY B. REIN
Harvey B. Rein
Senior Vice President and Chief Financial Officer
March 15, 2010
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Loral Space & Communications Inc. (the “Company”) on Form 10-K for the
period ending December 31, 2009 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.
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
March 15, 2010
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Loral Space & Communications Inc. (the “Company”) on Form 10-K for the
period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Harvey B. Rein, 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/ HARVEY B. REIN
Harvey B. Rein
Senior Vice President and Chief Financial Officer
March 15, 2010