UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(cid:0)
(cid:2)
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
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
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
No
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Act. Yes
No
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
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subject to such filing requirements for the past 90 days. Yes
No
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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
No
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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
No
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Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruler 12b-2 of the Exchange
Act. (Check one):
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Large accelerated filer
Non-accelerated filer
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(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act). Yes
No
At February 17, 2012, 21,092,278 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, 2011, 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 $866,457,211
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
(cid:2)
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Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
No
Documents incorporated by reference are as follows:
Loral Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of
Stockholders to be held May 22, 2012
Document
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, 2011
PART I
Item 1: Business
Item 1A: Risk Factors
Item 1B: Unresolved Staff Comments
Item 2: Properties
Item 3: Legal Proceedings
Item 4: Mine Safety Disclosures
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity 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
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
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
PART IV
Item 15: Exhibits and Financial Statement Schedules
Signatures
1
16
39
39
40
40
41
43
44
71
72
72
72
75
75
75
75
75
75
76
82
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 engaged in satellite manufacturing with ownership interests in
satellite-based communications services. The term “Parent Company” is a reference to Loral Space &
Communications Inc., excluding its subsidiaries.
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% economic interest in
Telesat Holdings Inc. (“Telesat Holdco”), which owns Telesat Canada (“Telesat”), a leading global 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 is a designer, manufacturer and integrator of powerful satellites and satellite systems for commercial and
government customers worldwide. SS/L’s design, engineering and manufacturing capabilities have allowed it to
develop a large portfolio of highly engineered, mission-critical satellites and secure a strong industry presence. This
position provides SS/L with the ability to produce satellites that meet a broad range of customer requirements for
broadband internet service to the home, mobile video and internet service, broadcast feeds for television and radio
distribution, phone service, civil and defense communications, direct-to-home television broadcast, satellite radio,
telecommunications backhaul and trunking, weather and environment monitoring and air traffic control. In addition,
SS/L has applied its design and manufacturing expertise to produce spacecraft subsystems, such as batteries for the
International Space Station, and to integrate government and other add-on missions on commercial satellites, which
are referred to as hosted payloads.
As of December 31, 2011, SS/L had $1.4 billion in backlog for 22 satellites for customers including, among
others, Intelsat Global S.A., SES S.A., Telesat Holdings Inc., Hispasat, S.A., EchoStar Corporation, Sirius-XM
Satellite Radio, TerreStar Networks, Inc., Asia Satellite Telecommunications Co. Ltd., Hughes Network Systems,
LLC, Eutelsat/ictQatar, DIRECTV, SingTel Optus, Satélites Mexicanos, S.A. de C.V., Asia Broadcast Satellite and
Telenor Satellite Broadcasting. From January 1, 2012 to February 15, 2012, SS/L was awarded contracts for three
satellites, including two satellites for NBN Co. Limited.
Since SS/L’s inception, it has delivered more than 240 satellites, which have achieved more than 1,850 years
of cumulative on-orbit service. SS/L’s satellite platform accommodates some of the world’s highest-power payloads
for television, radio and multimedia broadcast. SS/L is the only manufacturer to have produced to date high-power
commercial satellites greater than 18-kW at end-of-life, or EOL. In addition, SS/L is the first manufacturer to utilize
a commercial ground-based beam forming, or GBBF, system, which allows ground system upgrades to adjust for
changes in service usage.
1
Satellite demand is driven by fleet replacement cycles, increased video, internet and data bandwidth demand
and new satellite applications. SS/L expects its future success to be derived from maintaining and expanding its
share of satellite construction contract awards based on engineering, technical and manufacturing leadership; its
value proposition and record of reliability; the increased demand for new applications requiring high power and
capacity satellites such as HDTV, 3-D TV and broadband; and SS/L’s expansion of governmental contracts based on
its record of reliability and experience with fixed-price contract manufacturing. We also expect SS/L to benefit from
the increased revenues from larger and more complex satellites.
SS/L products span the entire commercial market segment and SS/L’s customers include satellite service
operators across all satellite-based applications. SS/L’s highly flexible satellite platform accommodates a broad
range of applications such as regional and spot-beam technology and hybrid systems that maximize the value of
orbital slot locations. As a result, SS/L is well-positioned for the next stage of growth, including (i) additional
satellites for existing customers, (ii) satellites for new customers, both established and those developing new
services and (iii) government satellites, both U.S. government, or USG, and non-USG, as well as government-hosted
payloads and space subsystems.
Market and Competition
SS/L participates in the highly competitive commercial satellite manufacturing industry principally on the
basis of its technical capabilities and engineering expertise, perceived product reliability, customer relationships,
cost and the ability to meet delivery schedules. Its primary competitors for satellite manufacturing contracts are
Boeing and Lockheed Martin in the U.S., Thales Alenia Space and EADS Astrium in Europe and Mitsubishi
Electric Corporation in Japan. SS/L also sometimes competes with Orbital Sciences, another U.S. manufacturer,
which provides satellites that are generally at the lower end of the power range SS/L offers. 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 18 and 17 contracts awarded in 2011 and 2010,
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 markets, 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(1)
2011
2009
Year ended December 31,
2010
(In millions)
$ 1,165
(6)
$ 1,159
143
$
$
$
$ 1,008
(15)
993
91
$ 1,108
(1)
$ 1,107
Total segment revenues
Eliminations
Revenues from satellite manufacturing as reported
Segment Adjusted EBITDA before eliminations
$
138
(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
16 to the Loral consolidated financial statements for the definition of Adjusted EBITDA).
Total SS/L assets, located primarily in California, were $929 million, $921 million and $864 million as of
December 31, 2011, 2010 and 2009, respectively. The increase between 2009 and 2010 was primarily due to growth
in gross orbital receivables of $71 million. Backlog at December 31, 2011 was $1.4 billion. This included $69
million of backlog for the construction of Nimiq 6 and Anik G1 for Telesat. Backlog at December 31, 2010 was $1.6
billion. This included $219 million of backlog for the construction of Telstar 14R and Nimiq 6 for Telesat and the
intercompany portion of ViaSat-1. It is expected that approximately 62% of the backlog as of December 31, 2011,
will be recognized as revenues during 2012. During 2011, revenues from Telesat Holdings Inc., Intelsat Global S.A.
and Hispasat, S.A. were each individually greater than 10% of our total revenues.
2
Satellite Services
As of December 31, 2011, Telesat had 12 in-orbit satellites and two satellites under construction, one of which
is 100% leased to a customer for at least the design life of the satellite. In addition, Telesat owns the Canadian Ka-
band payload on the ViaSat-1 satellite which was launched in October 2011. Telesat provides video distribution and
DTH video, as well as end-to-end communications services using both satellite and hybrid satellite-ground
networks.
Telesat Services
Telesat earns the majority of its revenues by providing satellite-based services to customers, who use these
services for their own communications requirements or to provide services to customers further down the
distribution chain for video and data services. Telesat also earns revenue by providing ground-based transmit and
receive services, selling equipment, installing, managing and maintaining satellite networks, and providing
consulting services in the field of satellite communications. Telesat categorizes its revenues into: Broadcast,
Enterprise Services and Consulting & Other.
Broadcast
Telesat’s broadcast services business provided approximately 54% of its revenue for the year ended
December 31, 2011. These services included:
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.
Video Distribution and Contribution. Major broadcasters, cable networks and DTH service providers
use Telesat satellites for the full-time transmission of television programming. Additionally, Telesat provides
certain broadcasters and DTH service providers bundled 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 in 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 14R/Estrela do Sul 2.
Occasional Use Services. Occasional use services consist of satellite transmission services for the timely
broadcast of video news, sports and live event coverage on a short-term basis enabling broadcasters to conduct
on-the-scene transmissions using small, portable antennas.
Enterprise Services
Telesat’s enterprise services provided approximately 42% of its revenue for the year ended December 31,
2011. These services include:
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. For other customers, Telesat may provide 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’s global IP-based network service infrastructure allows it to
provide worldwide IP-based terrestrial extension services that permit enterprises to reach all of their locations
worldwide — many of which cannot be connected via terrestrial means. In addition, these managed service
solutions enable multi-cast and broadcast functionality, as with traditional video broadcast distribution, which
take 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 both through terrestrial partners and directly.
3
Ka-band Internet Services. Telesat provides Ka-band satellite capacity to Xplornet Communications Inc.
and other resellers in Canada who use it to provide two-way broadband Internet services in Canada. Telesat
also provides Ka-band satellite capacity to WildBlue, which uses it to provide similar 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 GSM backhaul in developing
countries that lack terrestrial infrastructure and for maritime and aeronautical sectors where the need to stay
connected cannot be met by terrestrial networks.
Government Services. The U.S. 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
U.S. government agencies. Telesat is also a significant provider of satellite services to the Canadian
Government.
Consulting & Other
Telesat’s consulting & other category provided approximately 4% of its revenues for the year ended
December 31, 2011. Telesat’s consulting operations allow it to realize operating efficiencies by leveraging Telesat’s
existing employees and the facility base dedicated to its core satellite communication business. With over 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 40 countries across six
continents. In 2011, the international consulting business provided satellite-related services in approximately 21
countries.
Competitive Strengths
Telesat’s business is characterized by the following key competitive strengths:
Leading Global FSS Operator
Telesat is the fourth largest FSS operator in the world and the largest in Canada, with a strong and growing
business. It has a leading position as a provider of satellite services in the North American video distribution market.
Telesat provides services to both of the major DTH providers in Canada, Bell TV and Shaw Direct, which together
have approximately 2.9 million subscribers, as well as to EchoStar (Dish Network) in the United States, which has
approximately 14 million subscribers. Its international satellites are well positioned in emerging, high growth
markets and serve high value customers in those markets. Telstar 11N provides service to American, European and
African regions and aeronautical and maritime markets of the Atlantic Ocean Region. Telstar 12 provides
intercontinental connectivity from the Americas to the Middle East. Telstar 14R/Estrela do Sul 2 offers high
powered coverage of the Americas, the Gulf of Mexico, the Caribbean and the North Atlantic Ocean Region
(“NAOR”). Telstar 18 delivers video distribution and contribution throughout Asia and offers connectivity to the US
mainland via Hawaiian teleport facilities. Telesat’s current enterprise services customers include leading
telecommunications service providers as well as a range of network service providers and integrators, which provide
services to enterprises, governments and international agencies and multiple ISPs.
Blue Chip Customer Base
leading
the world’s
television broadcasters, cable programmers, DTH service providers,
Telesat offers its broad suite of satellite services to more than 400 customers worldwide, which include some
ISPs,
of
telecommunications carriers, corporations and government agencies. Over 40 years of operation, Telesat has
established long-term, collaborative relationships with its customers and has developed a reputation for creating
innovative solutions and providing services essential for its customers to reach their end users. Telesat’s customers
represent some of the strongest and most financially stable companies in their respective industries. These customers
frequently commit to long-term contracts for Telesat’s services, which enhances the predictability of its future
revenues and cash flows and supports its future growth.
4
Large Contracted Backlog and Young Satellite Fleet Underpin Anticipated Growth and High Revenue
Visibility
Historically, Telesat has been able to generate strong cash flows from its operating activities due to the high
operating margins in the satellite industry and its disciplined control of expenses. The stability of Telesat’s cash
flows is underpinned by its large revenue backlog. Telesat has been able to generate significant backlog by entering
into long-term contracts with its customers, in some cases for all or substantially all of a satellite’s orbital maneuver
life.
This revenue backlog supports Telesat’s anticipated growth. A significant proportion of Telesat’s expected
revenue growth is based on currently contracted business with its DTH provider customers for satellites in orbit and
satellites that will be launched in the coming years. In addition to this backlog, Telesat has historically experienced a
high proportion of contract renewals with existing customers. Together, these two factors have produced ongoing,
stable cash flows.
The high quality and young age of Telesat’s satellite fleet also positively impact Telesat’s cash flows as it
manages capital expenditures. Two additional satellites, Nimiq 6 and Anik G1, are presently under construction.
Portfolio of Orbital Real Estate
Telesat’s satellites occupy attractive orbital locations that provide it with a leading position in many of the
markets in which it operates due to the scarcity of available satellite spectrum and the strong neighborhoods Telesat
has developed at these locations. Telesat is licensed by Industry Canada to occupy a number of key orbital positions
that are well-suited to serve the Americas and maintain its leading position in North America. Telesat’s international
satellites also occupy highly desirable orbital locations that enable broad pan-regional service with interconnectivity
between regions, making them attractive for both intra- and inter-regional services. Telesat has rights to additional
spectrum, including Ka-band and reverse DBS band at certain existing orbital locations, including existing DBS
locations.
Global Operations Provides Revenue Diversification and Economies of Scale
The combination of Telesat’s North American broadcast and enterprise services businesses and the company’s
international business offers diversity in terms of both the customers and regions served as well as the services
provided. Telesat continues to benefit from growth in both the broadcast and enterprise services markets, including
government services, due to its strong presence in each. Telesat’s global satellite footprint allows it to meet the
global requirements of broadcasters, carriers and government users around the world.
Moreover, as the operator of a fleet of 12 satellites plus multiple other satellites for third parties, Telesat has
attained scale that allows it to effectively leverage its relatively fixed cost base to achieve substantial operating
margins.
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.
Market and Competition
Telesat is one of three global FSS operators. Telesat competes against other global, regional and national FSS
operators and, for certain services and in certain regions, with providers of terrestrial-based communications
services.
Fixed Satellite Operators
The other two global FSS operators are Intelsat Global S.A. (“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 50 satellites, that SES and its subsidiaries have a fleet of approximately 50 satellites, and that Eutelsat
and its subsidiaries have a fleet of over 20 satellites and additional capacity on another four satellites. Due to their
5
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 North America: Ciel, ViaSat/WildBlue, HNS/EchoStar, Satmex and Hispamar;
in Europe, Middle East, Africa: Eutelsat, Arabsat, Nilesat, HellasSat, RSCC, Yahsat, Turksat and
Spacecom;
in Asia: AsiaSat, Measat, Thaicom, APT, PT Telkom, Optus and Asia Broadcast Satellite; and
in Latin America: Satmex, Star One, Arsat, HispaSat and Hispamar.
A number of other countries have domestic satellite systems against which Telesat competes in those markets.
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
2012, approximately 75 non-Canadian FSS satellites are listed as having been approved by Industry Canada for use
in Canada. Three of these are Telesat satellites licensed by other administrations. The growth in satellite service
providers using or planning to use Ka-band, including Avanti Communications, O3b, ViaSat/WildBlue, Eutelsat,
HNS/EchoStar, Inmarsat, Yahsat and others, will result in increased competition.
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.
Ka-band Satellites
Today’s high-throughput Ka-band satellites have the potential to provide competitive alternatives to certain
satellite services.
Satellite Fleet & Ground Resources
As of December 31, 2011, Telesat had 12 in-orbit satellites and two satellites under construction, one of which
is 100% leased to a customer for at least the design life of the satellite. In addition, Telesat owns the Canadian Ka-
band payload on the ViaSat-1 satellite which was launched in October 2011.
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. Telesat’s primary satellite
control center (“SCC”) is located at its headquarters in Ottawa, Ontario, with a second SCC located in Allan Park,
Ontario. A third SCC, in Rio de Janeiro, Brazil is used to operate Telstar 14R/Estrela do Sul 2. 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 FSS satellites (Anik F1R, Anik F2 and Anik F3),
plus the Canadian beams on ViaSat-1 and four direct broadcast services (“DBS”) satellites (Nimiq 1, Nimiq 2,
Nimiq 4 and Nimiq 5). Telesat’s international fleet is comprised of five FSS satellites (Anik F1, Telstar 11N, Telstar
12, Telstar 14R/Estrela do Sul 2 and Telstar 18).
6
The table below summarizes selected data relating to Telesat’s owned in-orbit satellites as of December 31, 2011:
Orbital Location
Regions
Covered
Launch
Date
Manufacturer’s
End-of-Service
Life
Expected
End-of-
Orbital
Maneuver Life (1) C-band(2)
Transponders
Ku-band(2) Ka-band L-band(3)
Model
Nimiq 1
Nimiq 2
Nimiq 4
Nimiq 5
Anik F1
Anik F2
Anik F1R(3)
Anik F3
Telstar 11N
Telstar 12(4)
Telstar 14R/Estrela
do Sul 2(5)
Telstar 18(6)(7)
91.1°WL Canada, Continental United States May 1999
91.1°WL Canada, Continental United States December 2002
82° WL Canada
September 2008
72.7° WL Canada, Continental United States September 2009
107.3°WL South America
November 2000
July 2004
111.1° WL Canada, Continental United States
107.3° WL North America
September 2005
118.7°WL Canada, Continental United States April 2007
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
February 2009
October 1999
June 2004
May 2011
2011
2015
2023
2024
2016
2019
2020
2022
2024
2012
2026
2017
2024
2021
2027
2035
2022
2027
2023
2026
2026
2016
2024
2018
No
No
No
No
Yes
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
No
No
Yes
No
Yes
No
No
No
No
No
No
No
No
No
No
Yes
No
No
A2100 AX (Lockheed Martin)
A2100 AX (Lockheed Martin)
E3000 (EADS Astrium)
SS/L 1300
BSS702 (Boeing)
BSS702 (Boeing)
E3000 (EADS Astrium)
E3000 (EADS Astrium)
SS/L 1300
No
SS/L 1300
No
No
SS/L 1300
SS/L 1300
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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 prior to the end of commercial service life, as a result of further degradation in available
power.
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.
Four of Telstar 12’s transponders are leased to Eutelsat to settle coordination issues, and Telesat leases back three of these transponders.
Telstar 14R/Estrela do Sul 2 experienced a solar array anomaly upon deployment.
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”), 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.
7
In addition, Telesat has the rights to the following satellite capacity to end of service life of these satellites:
•
•
•
•
Satmex 5: Three 36MHz Ku-band transponders;
Satmex 6: Two 36MHz C-band transponders; Two-36MHz Ku-band transponders; and
ABS-3 (Formerly Agila 2): Two 36MHz C-band transponders and five and one half 36 MHz Ku-band
transponders; and
ViaSat-1: Ka-band Canadian payload consisting of nine user beams of 500/1000 MHz bandwidth
As of December 31, 2011, Telesat had entered into contractual arrangements with SS/L for the construction
of:
•
•
Nimiq 6: which Telesat anticipates will be launched in the first half of 2012. Nimiq 6 will have 32 high
powered Ku-band transponders, and Bell TV has contracted for the use of this new satellite for its
lifetime to serve Bell TV subscribers across Canada. This satellite will be located at the 91.1º WL
orbital location and provide coverage of Canada; and
Anik G1: which Telesat anticipates will be launched in the second half of 2012. Anik G1’s 16 extended
Ku-band transponders have been contracted to Shaw Direct to support Shaw’s DTH services in Canada,
and its three X-band transponders have been contracted to Paradigm Services, in both cases for the life
of the satellite. Anik G1 will be co-located with Telesat’s Anik F1 satellite at the 107.3º WL orbital
location, doubling both the Ku-band and C-band transponders serving South America from this location.
Satellite Services Performance(1)
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 then 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. We refer to this acquisition and transfer of assets and liabilities of Loral
Skynet as the Telesat transaction. Loral holds a 64% economic interest and a 331/3% voting interest in Telesat
Holdco (see Note 7 to the Loral consolidated financial statements). We use the equity method of accounting for our
investment in Telesat Holdco.
Revenue:
Total segment revenues
Affiliate eliminations(2)
Revenues from satellite services as reported
Adjusted EBITDA:
Total segment Adjusted EBITDA
Affiliate eliminations(2)
Adjusted EBITDA from satellite services after eliminations
2011
Year ended December 31,
2010
(In millions)
2009
$
817 $
(817)
692
(692)
$ — $ — $ —
797 $
(797)
$
629 $
(629)
488
(488)
$ — $ — $ —
607 $
(607)
(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
16 to the consolidated financial statements for the definition of Adjusted EBITDA).
(2) Affiliate eliminations represent the elimination of amounts attributable to Telesat.
8
Total Telesat assets were $5.3 billion, $5.3 billion and $5.0 billion as of December 31, 2011, 2010 and 2009,
respectively. Backlog was approximately $5.3 billion and $5.5 billion as of December 31, 2011 and 2010,
respectively. The decrease in backlog is due to revenues recognized and exchange rate changes, partially offset by
new orders. It is expected that approximately 11% of the backlog at December 31, 2011 will be recognized as
revenue in 2012.
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 of affiliates in our consolidated statements of operations and our investment is
included in investments in affiliates in our consolidated balance sheet.
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 29o E.L.,
which entered service in March 2005. The satellite is designed to provide X-band communications services
exclusively to United States, Spanish and allied government users throughout the 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 30o W.L. owned by Hisdesat, which entered commercial service in
April 2006. These transponders, designated as XTAR-LANT, allow XTAR to provide its customers in the U.S. and
abroad with additional X-band services and greater flexibility. XTAR currently has contracts to provide X-band
services to the U.S. Department of Defense, U.S. Department of State, various agencies of the Spanish Government,
the Belgium Ministry of Defense, the Norwegian Ministry of Defense and the Danish armed forces. For more
information on XTAR see Note 7 to the Loral consolidated financial statements.
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 (“ITAR”). 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.”
9
Satellite Services
As an operator of a global satellite system, Telesat is subject to regulation by government authorities in
Canada, the United States and other countries in which it operates and is subject to the frequency and orbital
location 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 including as it applies to securing landing rights and licensing
requirements.
Canadian Regulatory Environment
Telesat was 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 Canadian government sold its shares in Telesat
Canada. The Telesat Divestiture Act provides that no legislation relating to the solvency or winding-up of a
corporation applies to Telesat Canada and that its affairs cannot be wound up unless authorized by an Act of
Parliament. In addition, Telesat and its shareholders and directors cannot apply for Telesat’s continuation in another
jurisdiction or dissolution unless authorized by an Act of Parliament.
Telesat is a Canadian carrier under the Telecommunications Act (Canada), or the Telecommunications Act.
The Telecommunications Act authorizes the Canadian Radio-Television and Telecommunications Commission
(“CRTC”) to regulate various aspects of the provision of telecommunications services by Telesat and other
telecommunications service providers. Under the current regulatory regime, Telesat has pricing flexibility subject to
a price ceiling on certain full period FSS services offered in Canada under minimum five-year arrangements, and
otherwise Telesat is not required to file tariffs for approvals. 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. Telesat
requires CRTC approval of customer agreements relating to the sale of all DBS capacity in Canada, 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. The exercise by the CRTC of its rights under
section 28(2) of the Telecommunications Act could affect Telesat’s relationship with existing customers, which
could have a material adverse effect on Telesat’s results of operations, business prospects and financial condition.
Telesat’s operations are also subject to regulation and licensing by Industry Canada pursuant to the
Radiocommunication 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 and Nimiq satellites require it to comply with
research and development and other industrial and public benefit commitments, to pay annual radio authorization
fees and to provide all-Canada satellite coverage.
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 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 satellite operators as part of its 1998
World Trade Organization (“WTO”) commitments to liberalize trade in basic telecommunications services, with the
exception of DTH television services provided through FSS or DBS facilities. Satellite digital audio radio service
markets were also closed to foreign entry until 2005. 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.
10
Since November 2000, pursuant to the CRTC’s Decision CRTC 2000-745, virtually all telecommunications
service providers are required to pay contribution charges based on their Canadian telecommunications service
revenues, minus certain deductions (e.g., retail Internet and paging revenues, terminal equipment sales and inter-
carrier payments). The contribution rate varies from year to year. It was initially set at 4.5% of eligible revenues but
was significantly reduced in subsequent years. The rate for 2011 was 0.66%.
United States Regulatory Environment
The Federal Communications Commission (“FCC”) regulates the provision of satellite services to, from, or
within the United States.
Telesat has chosen to operate its U.S.-authorized satellites on a non-common carrier basis. Consequently, it is
not subject to rate regulation or other common carrier regulations enacted under the 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 contribution charges to the FCC’s Universal Service Fund (“USF”)
based on eligible United States telecom revenues are paid on a quarterly and annual basis. The USF contribution rate
is adjusted quarterly and is currently set at 17.9% for the first quarter of 2012. At the present time, the FCC does not
assess USF contributions with respect to bare transponder capacity (i.e. agreements for space segment only).
Telesat’s United States telecom revenues that are USF eligible are currently de minimis and USF payments are not
required.
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 that the public interest will be served by
the grant. 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 a failure to meet any of the milestones for
satellite contracting, design, construction, launch and commencement of operations. According to 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.
To facilitate the provision of FSS satellite services in C-, Ku- and Ka-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 FlR, Anik F2, Anik F3 and Telstar 14R/Estrela do Sul 2 satellites are currently on this
list. Telstar 14/Estrela do Sul 1 was on the FCC’s Permitted Space Station List until November 7, 2011 when it was
removed from regular operation prior to it being deorbited on November 17, 2011.
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. In cases involving Telesat, 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.
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.
The export of United States-manufactured satellites and technical information related to satellites, earth station
equipment and provision of services to certain countries are subject to State Department, Commerce Department and
Treasury Department regulations.
11
In 1999, the United States State Department published amendments to ITAR which included satellites on the
list of items requiring export licenses. These provisions have limited Telesat’s access to technical information and
have had a negative impact on Telesat’s international consulting revenues.
If Telesat does not maintain its existing authorizations or obtain necessary future authorizations under the
export control laws and regulations of the United States, Telesat may be unable to export technical information or
equipment to non-U.S. persons and companies, including to its own non-U.S. employees, as required to fulfill
existing contracts. If Telesat does not maintain its existing authorizations or obtain necessary future authorizations
under the trade sanctions laws and regulations of the United States, Telesat may not be able to provide satellite
capacity and related administrative services to certain countries subject to U.S. sanctions. Telesat’s ability to acquire
new United States-manufactured satellites, procure launch services and launch new satellites, operate existing
satellites, obtain insurance and pursue its rights under insurance policies or conduct its satellite-related operations
and consulting activities could also be negatively affected if Telesat and its suppliers are not able to obtain and
maintain required U.S. export authorizations.
Regulation Outside Canada and the United States
The Brazilian national telecommunications agency, ANATEL, has authorized Telesat, through its subsidiary,
Telesat Brasil Capacidade de Satélites 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 bandwidth to serve only Brazil until May 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 the Tonga 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.
Telesat owns and operates the portion of the ViaSat-1 satellite (115° WL) payload that is capable of providing
service within Canada. ViaSat-1 operates in accordance with a license granted by the United Kingdom regulatory
agency (“OFCOM”), to ManSat Limited. ManSat Limited has been granted exclusive rights by the Isle of Man
government to manage all aspects of Isle of Man satellite orbital filings. The Isle of Man is a British Crown
Dependency and Isle of Man satellite orbital filings are filed with the ITU-BR by OFCOM. Both Telesat and ViaSat
have a commercial relationship with ManSat. ViaSat and Telesat have agreed to cooperate in their dealings with
ManSat with respect to the ViaSat-1 satellite for OFCOM and ITU purposes.
Landing Rights and Other Regulatory Requirements
In addition to regulatory requirements governing the use of orbital locations, most countries regulate
transmission signals to, and for uplink signals from, their territory. Telesat has landing rights in more than 140
countries worldwide. In many jurisdictions, landing rights are granted on a per satellite basis and applications must
be made to secure landing rights on replacement satellites.
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 secure rights to use orbital locations and the obligations and
restrictions that govern such use. The process includes, for example, a “first in time, first in right” system for
allocating most orbital locations and time limits for bringing orbital locations into use.
12
The Canadian, United States and other governments have rights to use certain orbital locations and
frequencies. Telesat has been authorized to use certain orbital locations and frequencies in addition to those used by
its current satellites. Under the ITU Radio Regulations, the filing government (through the satellite operator the
government in question has authorized) must begin using these orbital locations and frequencies within a fixed
period of time, or lose their priority rights. As a result, the orbital location and frequencies likely would become
available for use by another government and satellite operator.
The ITU Radio Regulations also govern the process used by satellite operators to coordinate their operations
with other satellites, so as to avoid harmful interference. Each member state is required to give notice of, coordinate,
and register its proposed use of radiofrequency assignments and associated orbital locations with the ITU
Radiocommunications Bureau (the “ITU-BR”).
Once a member state has filed with the ITU-BR its proposed use of 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 notify the ITU-BR that coordination has been successfully completed, which is a requirement for the
frequency use to be entered into the ITU’s Master Register (“MIFR”). 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 process.
Under the ITU Radio Regulations, a country that places a satellite or any ground station into operation without
completing coordination and notification would be vulnerable to interference from other systems and might have to
alter the operating parameters of its satellite network if the ITU found that the satellite caused harmful interference
to other users already entered in the MIFR or with a network that had been earlier-filed with the ITU-BR.
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. In some of the cases where entry into the MIFR is pending, there are operators that maintain that they have
priority over Telesat’s satellites and Telesat continues to discuss coordination issues with these and other operators
and may need to make additional concessions in connection with future coordination efforts which, in turn, could
have a material adverse impact on Telesat’s financial condition, as well as on the value of Telesat’s business. The
failure to reach an appropriate arrangement with such satellite operators may render it impossible to secure entry
into the MIFR and result in substantial restrictions on the use and operations of Telesat’s existing satellites at their
orbital locations. In the event disputes arise during the coordination process or thereafter, the ITU Radio Regulations
set forth procedures for resolving disputes but 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.
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, the United Kingdom and the Kingdom of Tonga to represent its interests in those
jurisdictions, including filing and coordinating Telesat’s orbital locations within the ITU process and 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 164 patents in the United States and has applications for 31 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 2012 and 2029.
13
Satellite Services
As of December 31, 2011, Telesat had seven patents, all in the United States. These patents expire between
2018 and 2027. Telesat also has several pending domestic and international patent applications.
General
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 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 may
infringe. In such event, we may be restricted from continuing the infringing activities, which could adversely affect
our business, or we may be required to obtain a license from a patent holder, and pay royalties, which would
increase the cost of doing business. Moreover, in the case of SS/L, it may 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. See Item 1A – “Segment Risk Factors – SS/L relies on patents, and infringement by SS/L of third
party patents would increase its costs, and third parties may challenge its patents.”
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 $34 million for 2011, $20 million for 2010 and $23 million for 2009 and are included in
selling, general and administrative expenses in our consolidated statements of operations.
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 support 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.
FOREIGN OPERATIONS
Loral’s revenues from foreign customers, primarily in Europe, Canada and Asia represented 64%, 44% and
46% of our consolidated revenues for the years ended December 31, 2011, 2010 and 2009, respectively.
Satellite Manufacturing
SS/L’s revenues from foreign customers, primarily in Europe, Canada and Asia represented 64%, 44% and
46% of SS/L revenues for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31,
2011, 2010 and 2009, substantially all of SS/L’s 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 16 to the Loral
consolidated financial statements for detail on SS/L’s domestic and foreign sales.
Satellite Services
Telesat’s revenues from non-U.S. customers, primarily in Canada, Asia, Europe and Latin America
represented 69% of its consolidated revenues for the year ended December 31, 2011 and 68% of its consolidated
revenues for each of the years ended December 31, 2010 and 2009. At December 31, 2011, 2010 and 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.
14
Satellite Manufacturing
EMPLOYEES
As of December 31, 2011, Loral had approximately 2,900 full-time employees and approximately 280
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.
Satellite Services
As of December 31, 2011, Telesat and its subsidiaries had approximately 470 full and part time employees,
approximately 2.5% of whom are subject to collective bargaining agreements. Telesat’s employee body is primarily
comprised of professional engineering, sales and marketing staff, administrative staff and skilled technical workers.
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.
15
Item 1A. Risk Factors
I. Financial and Telesat Investment Risk Factors
Our revenues and profitability may be adversely affected by swings in the global financial markets, which
may have a material adverse effect on our customers and suppliers.
Swings in the global financial markets that include illiquidity, market volatility, changes in interest rates and
currency exchange fluctuations can be difficult to predict and negatively affect the ability of certain customers to
make payments when due. Such swings may materially and adversely affect us due to the potential insolvency of
suppliers and customers, inability of customers to obtain financing for their satellites and transponder leases,
decreased customer demand, delays in supplier performance and contract terminations. Our customers may not have
access to capital or a willingness to spend capital on our satellites and transponder leases, or their levels of cash
liquidity with which to pay for satellites they have ordered from us and transponder leases may be adversely
affected. Our suppliers’ access to capital and liquidity with which to maintain their inventories, production levels or
product quality may be adversely affected, which could cause them to raise prices or cease operations. As a result,
we may experience a material adverse effect on our business, results of operations and financial condition. These
potential effects of swings in the global financial markets are difficult to forecast and mitigate.
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 December 20, 2010, SS/L entered into an amended and restated credit agreement with several banks and
other financial institutions. The SS/L credit agreement provides for a $150 million senior secured revolving credit
facility. The revolver matures on January 24, 2014. 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. On December 8, 2011, this agreement was amended to increase the Letter of Credit Commitment to
$100 million from $50 million. 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.
Our potential indebtedness makes us vulnerable to adverse developments.
There are certain restrictions in SS/L’s credit agreement on SS/L incurring indebtedness from sources other
than the existing SS/L credit agreement. If new debt is added, such indebtedness could impose additional restrictive
covenants. The incurrence of debt under the SS/L credit agreement 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.
Increases in interest rates could increase interest costs under SS/L’s credit facility.
Borrowings under SS/L’s credit facility are limited to Eurodollar Loans for periods ending in one, two, three
or six months or daily loans for which the interest rate is adjusted daily based upon changes in the Prime Rate,
Federal Funds Rate or one month Eurodollar 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 $150 million credit facility, if it were
fully borrowed, a 1% change in interest rates would affect annual interest expense by $1.5 million.
Instability in financial markets could adversely affect our ability to access additional capital.
In recent years, the volatility and disruption in the capital and credit markets have reached unprecedented
levels. If these conditions continue or worsen, there can be no assurance that we will not experience a material
adverse effect on SS/L’s ability to borrow money, including under SS/L’s senior secured revolving credit facility, or
have access to capital, if needed. Although our lenders have made commitments to make funds available to SS/L in
a timely fashion, SS/L’s lenders may be unable or unwilling to lend money. In addition, if we determine that it is
appropriate or necessary to raise capital in the future, the future cost of raising funds through the debt or equity
markets may be more expensive or those markets may be unavailable. If we were unable to raise funds through debt
or equity markets, it could have a material adverse effect on our business, results of operations and financial
condition.
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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 three primary assets, its equity interest in its wholly-owned
subsidiary, SS/L, and its equity interests in its affiliates, Telesat and XTAR. The parent company has no independent
operations or operating assets and has ongoing cash requirements. 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 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 331/3% of its voting stock and therefore do not have the right to elect or appoint a majority of its Board
of Directors.” Likewise, any dividend payments by XTAR would require the prior consent of our Spanish partner in
the joint venture.
The parent company earns a management fee of $5 million a year from Telesat. 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. Whether Telesat meets the financial performance criteria to enable payment is dependent upon
foreign exchange rates which are constantly fluctuating. During 2011, Telesat made two quarterly cash payments,
each in the amount of $1.25 million plus interest, on June 30, 2011 and September 30, 2011. It is uncertain at this
time whether Telesat will be permitted to pay the management fee in 2012.
SS/L made a $50 million dividend payment to the parent company in January 2011 as permitted under SS/L’s
credit agreement which SS/L amended and restated in December 2010. 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 2011. 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.
In connection with our assignment in March 2011 to Telesat of our interest in the Canadian payload on the
Viasat-1 satellite, Telesat agreed that, if it obtains certain supplemental capacity on the payload, Loral will be
entitled to receive one-half of any net revenue actually earned by Telesat in connection with the leasing of such
supplemental capacity to its customers during the first four years after the commencement of service using the
supplemental capacity. There can be no assurance that Loral will receive any revenues under this agreement.
While we own 64% of Telesat on an economic basis, we own only 331/3% of its voting stock and therefore do
not have the right to elect or appoint a majority of its Board of Directors.
While we own 64% of the economic interests in Telesat, we hold only 331/ 3% of its voting interests. Although
the restrictions on foreign ownership of Canadian satellites have been removed by the government of Canada, we
are still subject to our shareholders agreement with PSP and the articles of incorporation of Telesat Holdco, which
do not allow us to own more voting stock of Telesat Holdco than we currently own. Also, 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 62/3% 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 662 /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
17
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, 2011, Telesat had outstanding indebtedness of CAD 2.9 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 1.0213. Approximately CAD 2.0 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, 2011, Telesat had indebtedness of CAD 2.0 billion which bears interest at variable rates.
If market interest rates were to rise, this would result in higher debt service requirements. To alleviate a portion of
this risk, in 2007, Telesat 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 to October 2014 the maturity of the existing CAD 630 million
floating to fixed interest rate swaps and entered into an additional delayed-start floating to fixed CAD 300 million
interest rate swap maturing in October 2014. Telsat’s use of hedges, however, may not be successful and does not
fully protect it from foreign exchange risk with respect to all of its indebtedness. Also, Telesat is exposed to risk,
including credit risk resulting from many of the transactions its executes in connection with its hedging activities, in
the event that any of its lenders or counterparties, including its insurance providers, are unable to honor their
commitments or otherwise default under their agreements with Telesat.
Telesat’s indebtedness includes $1.7 billion that is denominated in U.S. dollars and is unhedged with respect
to foreign exchange rates. Changes in exchange rates impact the amount that Telesat pays in interest and may
significantly increase the amount that Telesat is required to pay in Canadian dollar terms to redeem the indebtedness
either at maturity, or earlier if redemption rights are exercised or other events occur which require Telesat to offer to
purchase the indebtedness prior to maturity, and to repay funds drawn under its US-dollar denominated facility.
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 or refinance 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 and market conditions. Disruptions in the financial markets similar to those that occurred in 2008 could
make it more difficult to renew or extend Telesat’s facilities at current commitment levels on similar terms or at all.
In the event that Telesat is not able to service or refinance its indebtedness, there would be a material adverse effect
on the value of our equity investment in Telesat.
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.
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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 unaudited 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 unaudited 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. Telesat’s main currency exposures as at December 31, 2011 lies in
its U.S. dollar denominated cash and cash equivalents, accounts receivable, accounts payable and debt financing. As
of December 31, 2011, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have
increased (decreased) Telesat’s net income and increased (decreased) other comprehensive loss by approximately
CAD 158 million and CAD 1 million, respectively. This analysis assumes that all other variables, in particular
interest rates, remain constant.
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. During 2011, the exchange rate moved from US$1.00/CAD 0.9980 at December 31, 2010 to
US$1.00/CAD 1.0213 at December 31, 2011.
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 $24 million in 2011 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 2022. 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, 2011, $4 million was due to Loral
from XTAR.
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We have explored and are continuing to explore various strategic transactions; this process may have an
adverse effect on our financial condition and results of operations whether or not a transaction is ultimately
consummated.
We have previously explored and are currently considering certain potential strategic transactions, including a
recapitalization with respect to Telesat and a strategic transaction involving SS/L. In the future, we may pursue these
or other strategic alternatives with the goal of maximizing shareholder value. The process of pursuing a strategic
transaction will result in transaction costs and may result in the diversion of the attention of operating management
of Telesat and/or SS/L from business operations, the disclosure of confidential information to competitors or
potential customers as part of a due diligence process and an adverse perception of Telesat or SS/L in the
marketplace which could, among other things, adversely affect their ability to win new business. Any of such results
could have a material adverse effect on our financial condition and results of operations whether or not a strategic
transaction is consummated. In addition, consummation of a recapitalization could leave Telesat highly leveraged,
with the risks attendant to operating a highly leveraged entity, and a strategic transaction involving SS/L may expose
us to various liabilities, including indemnification claims and the risk of ongoing litigation. Potential claims arising
out of a strategic transaction involving SS/L could impair the price at which a change of control transaction
involving Loral could occur. There can be no assurance whether or when any transaction involving Loral, Telesat or
SS/L will occur, and, even if a transaction is consummated, there can be no assurance as to whether or to what
degree such a transaction will be successful in maximizing value to our shareholders.
As part of our business strategy, we may complete acquisitions or dispositions, undertake restructuring
efforts or engage in other strategic transactions. These actions could adversely affect our business, results of
operations and financial condition.
As part of our business strategy, we may engage in discussions with third parties regarding, or enter into
agreements relating to, acquisitions, dispositions, restructuring efforts or other strategic transactions in order to
manage our product and technology portfolios or further our strategic objectives. In order to pursue this strategy
successfully, we must identify suitable acquisition or alliance candidates and complete these transactions, some of
which may be large and complex. Any of these activities may result in disruptions to our business and may not
produce the full efficiency and cost reduction benefits anticipated.
II. Segment Risk Factors
•
Risk Factors Associated With Satellite Manufacturing
The satellite manufacturing market is highly competitive.
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. We also expect that in
the future SS/L will compete with emerging low-cost competitors in India, Russia and China. Many of SS/L’s
competitors are larger and have substantially greater resources than we do. Furthermore, it is possible that other
domestic or foreign companies or governments, some with greater experience in the space industry and many with
greater financial resources than we possess, could seek to produce satellites that could render SS/L’s satellites less
competitively viable. Some of SS/L’s foreign competitors currently benefit from, and others may in the future
benefit from, subsidies from or other protective measures by their home countries or government-supported
financing of customer purchases and the ability to avoid U.S. export controls. 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. This can be challenging and may fluctuate on an annual and quarterly basis as the number of
satellite construction contracts varies and is difficult to predict. Furthermore, the satellite manufacturing industry has
suffered from substantial overcapacity worldwide for a number of years, resulting in 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, including SS/L.
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The cyclicality of SS/L’s end-user markets could have a material adverse effect on our financial results.
Many of the end markets SS/L serves have historically been cyclical and have experienced periodic
downturns. The factors leading to, and the severity and length of, a downturn are difficult to predict and it is possible
that we will not appropriately anticipate changes in the underlying end markets SS/L serves. It is also difficult to
predict whether any increased levels of business activity will continue as a trend into the future. If we fail to
anticipate changes in the end markets SS/L serves, our business, results of operations and financial condition could
be materially adversely affected.
Many of SS/L’s customer contracts include performance incentives that subject us to risk.
Most of SS/L’s satellite construction contracts permit SS/L’s customers to pay a portion of the purchase price
(typically about 10%) for the satellite over the life of the satellite (typically 15 years), subject to the continued
performance of the satellite, referred to as orbital receivables. Since these orbital receivables could be affected by
future satellite performance, SS/L may not be able to collect all or a portion of these receivables. See “— SS/L’s
contracts are subject to adjustments, cost overruns and termination.” SS/L generally does not insure for these orbital
receivables and, in some cases, agrees with our customers not to insure them.
SS/L records the present value of orbital receivables as revenue during the construction of the satellite, which
is typically two to three years. SS/L generally receives the present value of these orbital receivables 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 SS/L’s own error. For example, in May 2011, following the launch of
Telstar 14R/Estrela do Sul2 (“T14R”), the satellite’s north solar array failed to fully deploy resulting in a loss of
power and reduced mission life. As a result of the failure, SS/L recorded a charge of approximately $8.5 million for
lost orbital incentives that would otherwise have been payable with respect to T14R.
In addition to performance of the satellite, there can be no assurance that a customer will not delay payment of
an orbital receivable to, or seek financial relief from, SS/L if such customer has financial difficulties. Nonpayment
of an orbital receivable by a customer for performance or other reasons could have an adverse effect on our cash
flows. In addition, if SS/L’s customers fall behind or default on payments to SS/L of orbital receivables, our
liquidity will be adversely affected.
Some of SS/L’s contracts provide for performance incentives to the customer in the form of warranty payback,
which means that in the event satellite anomalies develop after launch, SS/L would owe the customer a specified
penalty payment. SS/L does not insure these contingent liabilities. We have recorded reserves in our financial
statements based on current estimates of SS/L’s warranty liabilities. There is no assurance that our actual liabilities
to SS/L’s customers in respect of these warranty liabilities will not be greater than the amount reserved.
The satellite manufacturing industry is characterized by technological change, and if SS/L cannot continue to
develop, manufacture and market innovative satellite applications that meet customer requirements our sales
may suffer.
The satellite manufacturing industry is characterized by technological developments necessary to meet
changing customer demand for complex and reliable services. SS/L needs to invest in technology to meet its
customers’ changing needs. Technological development is expensive and requires long lead time. It is possible that
SS/L may not be successful in developing new technology or that the technology it is successful in developing may
not meet the needs of its customers or potential new customers. SS/L’s competitors may also develop technology
that better meets the needs of SS/L’s customers, which may cause those customers or potential new customers to
buy satellites from SS/L’s competitors rather than SS/L.
It is possible that SS/L’s satellites will not be successfully developed or manufactured.
The satellites SS/L develops and manufactures are technologically advanced and complex and sometimes
include novel systems that must function in highly demanding and harsh environments. From time to time, SS/L
experiences failures or cost overruns in developing and manufacturing its satellites, delays in delivery and other
operational problems. Some of SS/L’s satellite contracts impose monetary penalties on SS/L for delays and for
performance difficulties, which penalties could be significant and have a material adverse effect on our financial
condition. Failures with respect to any satellite may adversely affect our customers’ perception of the quality of our
satellites and may materially and adversely affect our ability to win new awards of satellite construction contracts.
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Certain of SS/L’s on-orbit satellites have known performance issues.
Component failure is not uncommon in complex satellites. Costs resulting from component failure may result
in warranty expenses, loss of orbital receivables and/or additional loss of revenues due to the postponement or
cancellation of subsequently scheduled operations or satellite deliveries and may have a material adverse effect on
our financial condition and results of operations. Negative publicity from satellite failures may also impair SS/L’s
ability to win new contracts from existing and new customers.
Some satellites SS/L has built have experienced minor losses of power from their solar arrays. Thirty-seven of
SS/L’s satellites currently on-orbit have experienced partial losses of power from their solar arrays. 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 such transponders
are being used. A partial or complete loss of a satellite could result in an incurrence of warranty payments by, or a
loss of orbital receivables to, SS/L.
SS/L’s major customers account for a sizable portion of SS/L’s revenues, and the loss of, or a reduction in,
orders from these customers could result in a decline in revenues.
A sizable portion of SS/L’s revenue is derived from a limited number of customers, and we expect that SS/L’s
results of operations in the foreseeable future will continue to depend on SS/L’s ability to continue to service such
customers. It is possible that any of SS/L’s major customers could cease entering into satellite construction contracts
with SS/L or could significantly reduce or delay the number of satellites that it orders and purchases from SS/L. The
loss of, or a reduction in, orders from any major customer could cause a decline in our overall revenue and have a
material adverse effect on our business, results of operations and financial condition.
SS/L’s future operating results are dependent on the growth in the businesses of SS/L’s customers and on
SS/L’s ability to sell to new customers.
SS/L’s growth is dependent on the growth in the sales of the services of SS/L’s customers as well as the
development by SS/L’s customers of new services. If we fail to anticipate changes in the businesses of SS/L’s
customers and their changing needs, or fail to successfully identify and enter new markets, our results of operations
and financial position could be adversely affected. The markets SS/L serves may not grow in the future and we may
not be able to maintain adequate gross margins or profits in these markets. A decline in demand in one or several
end-user markets of SS/L’s customers could have a material adverse effect on the demand for SS/L’s satellites and
have a material adverse effect on our business, results of operations and financial condition.
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 SS/L 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 customers for
schedule delays and other non-performance by its suppliers, which may be largely outside of SS/L’s control.
Non-performance may increase costs and subject SS/L to damage claims from customers and termination of
the contract for 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 aspect to, and contain a
small number of minor deviations from, the technical specifications. 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. SS/L’s failure 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 the subcontractors or
failure to obtain necessary governmental licenses for delivery, would also be harmful to us 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 incurrence of liquidated damages, which may be substantial, and
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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 SS/L’s 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 our business, results of operations and financial condition.
In addition, many of SS/L’s contracts may be terminated for convenience by the customer. 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; however, there is no guarantee that any such
recovery will be obtained.
A dispute could arise relating to a satellite in construction.
SS/L and one of its customers, EchoStar Corporation (“EchoStar”), have agreed to suspend final construction
of a satellite pending, among other things, further analysis relating to efforts to meet the satellite performance
criteria or confirmation that alternative performance criteria would be acceptable. In May 2010, SS/L provided
EchoStar, at its request, with a proposal to complete construction and prepare the satellite for launch under the
current specifications. In August 2010, SS/L provided EchoStar, at its request, additional proposal information.
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. Failure to resolve such dispute, or future
disputes with this or other customers, in a timely and cost-efficient manner could have a material adverse effect on
our financial condition.
Certain of SS/L’s customers are highly leveraged and may not fulfill their contractual payment obligations
with SS/L.
SS/L has certain commercial customers that are either highly leveraged or in the development stage that are
not fully funded. There is a risk that these customers will be unable to meet their payment obligations to SS/L under
their satellite construction contracts. This risk is increased due to current economic conditions. For example, certain
of SS/L’s customers, including most recently TerreStar Networks Inc. (“TerreStar”), have in the past filed for
protection under Chapter 11 of the Bankruptcy Code. In the event that any of our customers encounter financial
difficulties and fail to pay us, our cash flows and liquidity may be materially and adversely affected. We may not be
able to mitigate these effects because we manufacture satellites to each customer’s specifications and generally
purchase material in response to a particular customer order.
Moreover, most of SS/L’s satellite contracts include orbital receivables, 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’s contracts contain orbital receivables provisions or SS/L provides vendor financing
to its customers, our financial exposure is further increased. In some cases, these arrangements are provided to
(i) customers that are new companies, (ii) companies in the early stages of building new businesses or (iii) highly
leveraged companies, in some cases, with near-term debt maturities. These companies or their businesses may not be
successful and, accordingly, they may not be able to fulfill their payment obligations under their contracts with
SS/L.
There can be no assurance that SS/L will have sufficient funds to meet its cash requirements in the future.
There can be no assurance that SS/L will have sufficient funds to meet its cash requirements in future years
beyond 2011. SS/L has high fixed costs relating primarily to labor and overhead. Based on SS/L’s 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. If SS/L’s
satellite awards fall below 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 the liquidity of SS/L and us. If SS/L
does not have sufficient funds, it will be required to borrow under its credit agreement or will have to obtain new
financing, either in the form of debt or equity, to increase cash availability. In light of current market conditions,
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there can be no assurance that SS/L will be able to obtain such financing on favorable terms, if at all. Failure to
obtain such financing could have a material adverse effect on the ability of SS/L and us to manage unforeseen cash
requirements, to meet contingencies and to fund growth opportunities.
Many of SS/L’s costs are fixed and SS/L may not be able to cut costs sufficiently to maintain profitability in
the event of a downturn in its business.
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 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. This reduces SS/L’s flexibility to reduce
workforce costs in the event of a slowdown or downturn in SS/L’s business. In addition, the manufacturing and test
facilities that SS/L owns or leases under long-term agreements are fixed costs that cannot be adjusted quickly to
account for significant variance in production requirements or economic conditions.
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 contracts 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 to accommodate as many as nine to 13 satellite
construction awards per year, depending on the complexity and timing of the specific satellites, and SS/L can
accommodate the integration and testing of 13 to 14 satellites at any given time in its Palo Alto facility. Due to
scheduling requirements, however, SS/L relies on outside suppliers for certain critical production and testing
activities, such as thermal vacuum testing. It is possible that such outside suppliers will not be able to accommodate
SS/L’s scheduling requirements, which may cause SS/L to incur additional costs or fail to meet contractual delivery
deadlines. Further, SS/L may not 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.
SS/L’s ability to obtain certain satellite construction contracts depends, in part, on its ability to provide the
customer with financing.
In the past, SS/L has provided partial financing to customers to enable it to win certain satellite construction
contracts. The financing has typically been in the form of orbital receivables, vendor financing and/or loans by SS/L
and direct investments by Loral in the customer or the satellite. SS/L’s credit agreement limits its ability to provide
customers with financing. If SS/L is unable to provide financing to a customer, it could lose the satellite construction
contract to a competitor that could provide financing. See above “— The satellite manufacturing market is highly
competitive”.
SS/L’s ability to obtain certain satellite construction contracts depends, in part, on its ability to restrict
certain of its cash or available credit to support “at risk” financial requirements that customers may require
in their contracts.
In the past, SS/L has provided letters of credit, established escrow accounts or provided performance
guarantees or surety bonds that required cash collateral to meet the contractual terms that certain customers have
required in their satellite construction contracts. These requirements have restricted the amount of cash or credit
available for use by SS/L in its operations. At December 31, 2011, SS/L had $24 million in restricted cash in an
escrow account established in connection with a contractual requirement of one of its satellite construction contracts.
Under this contract, the amount to be placed in escrow is scheduled to increase by an additional $12 million before
the escrow is released upon delivery of the satellite in 2013. In addition, in 2012, SS/L entered into a satellite
construction contract that required a financial guarantee in the form of a performance bond in immediately available
funds. To fulfill this financial guarantee, SS/L placed $50 million into a restricted cash account to support the
performance guarantee. Although SS/L will seek to reduce or eliminate the cash collateral supporting this
performance guarantee or find a replacement guarantee that has reduced or no collateral requirements, there is no
assurance that SS/L will be able to achieve this goal. Also, although funds on deposit in these restricted cash
accounts earn interest which accrues to SS/L, SS/L’s liquidity needs to support its operations limit the amount of
cash SS/L can set aside to support these types of contractual requirements. If SS/L does not meet its financial
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projections, it may not have sufficient liquidity to support future surety bonds or similar forms of assurance.
Moreover, if SS/L is unable to provide escrow, performance guarantee or other similar arrangements in the future, it
could lose future satellite construction contracts to a competitor or competitors that are able to meet these types of
financial arrangements or for whom such types of arrangements are not required by the customer. See above “—
The satellite manufacturing market is highly competitive.”
SS/L relies on certain key suppliers whose failure or delayed performance could adversely affect us.
To build satellites, SS/L relies on suppliers, some of which are competitors, to provide SS/L with certain
component parts. The number of suppliers capable of providing these components is limited, and, in some cases, the
supplier is a sole source, based upon the unique nature of the product or the customer requirement to procure
components with proven flight heritage. These suppliers are not all large, well-capitalized companies, and to the
extent they experience financial difficulties, their ability to timely deliver components that satisfy a customer’s
contract requirements 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 give rise to liquidated damage payments by SS/L or could cause a customer
to terminate its construction contract with SS/L for default.
SS/L faces risks in conducting business internationally and is subject to risks that may have a material
adverse effect on our results of operations.
For the year ended December 31, 2011, approximately 64% of SS/L’s revenues were 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. Also, if SS/L
needs to pursue legal remedies against its foreign business partners or customers, SS/L may have to sue them abroad
where it could be difficult for SS/L to enforce its rights.
SS/L sells certain of its communications satellites and other products to non-U.S. customers. SS/L also
procures certain key product components from non-U.S. vendors. International contracts are subject to numerous
risks that may have a material adverse effect on our operating results, including:
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•
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political and economic instability in foreign markets;
restrictive trade policies of the U.S. government and foreign governments;
inconsistent product regulation by foreign agencies or governments;
imposition of product tariffs and burdens;
the cost of complying with a variety of U.S. and international laws and regulations, including
regulations relating to import-export control;
the complexity and necessity of using non-U.S. representatives and consultants;
inability to obtain required U.S. or foreign country export licenses; and
foreign currency exposure. See below “ — SS/L is exposed to foreign currency exchange rate risks that
could have a material adverse effect on our business, results of operations or financial condition. ”
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SS/L relies on patents, and infringement by SS/L of third-party patents would increase its costs, and third
parties may challenge its patents.
SS/L relies, in part, on patents and industry expertise to develop and maintain its competitive position. At
December 31, 2011, SS/L held 164 patents in the United States and had applications for 31 patents pending in the
United States. SS/L’s 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.
SS/L’s patents that are currently in force expire between 2012 and 2029. There is a risk that competitors could
challenge or infringe SS/L’s patents. It is also possible that SS/L will infringe current or future third-party patents or
third-party trade secrets. In the event of infringement, SS/L 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 its products to
avoid infringement, all of which would increase SS/L’s costs. SS/L could also be subject to injunctions prohibiting it
from using components or methods. SS/L may also be required under the terms of its customer contracts to
indemnify its customers for damages relating to infringement.
For example, ViaSat, Inc. and ViaSat Communications, Inc. (formerly known as WildBlue Communications,
Inc.) (collectively, “ViaSat”) have commenced a lawsuit in the United States District Court for the Southern District
of California against SS/L and Loral alleging, among other things, that SS/L and Loral infringed certain ViaSat
patents and that SS/L breached non-disclosure obligations in certain contracts with ViaSat in connection with the
manufacture of satellites by SS/L for customers other than ViaSat. The complaint also seeks to hold Loral liable for
SS/L’s alleged infringement and breach of contract. The complaint seeks, among other things, damages (including
treble damages with respect to the patent infringement claims) in amounts to be determined at trial and to enjoin
SS/L and Loral from further infringement of the ViaSat patents and breach of contract. Although SS/L and Loral
intend to engage in discussions with ViaSat to resolve the matter, there can be no assurance that the parties will
resolve the matter. If the parties are not able to resolve the matter through discussions and the matter proceeds to
trial, SS/L and Loral believe that they each have, and intend to vigorously pursue, meritorious defenses and
counterclaims to ViaSat’s claims. There can be no assurance, however, that SS/L’s and Loral’s defenses and
counterclaims will be successful with respect to all or some of ViaSat’s claims. If SS/L and Loral do not prevail and
ViaSat’s patents are valid, SS/L and Loral could be enjoined from using the technology underlying ViaSat’s patents
and may be required to refrain from using such technology, to take a license from ViaSat under ViaSat’s patents or
to design around ViaSat’s patents for existing or future customers. SS/L and Loral could also be subject to
significant damages and indemnification obligations with respect to customers whose satellites employ such
technology which could have a material adverse effect on our and SS/L’s business, financial position or results of
operations.
SS/L is exposed to foreign currency exchange rate risks that could have a material adverse effect on our
business, results of operations or financial condition.
SS/L is exposed to foreign currency exchange rate risks that are inherent in its satellite sales contracts,
anticipated satellite sales and vendor purchase commitments that are denominated in currencies other than the U.S.
dollar. SS/L’s exposure to foreign currency exchange rates relates primarily to the euro and the Japanese yen. In
addition, we purchase certain supplies and materials from suppliers located outside of the U.S. Failure to sufficiently
hedge or otherwise manage foreign currency risks properly could have a material adverse effect on our business,
results of operations or financial condition.
For the year ended December 31, 2011, approximately 64% of SS/L’s revenues were generated from
customers outside of the United States. Almost all of SS/L’s contracts with foreign customers require payment in
U.S. dollars. 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 our
customers to pay in U.S. dollars. Certain European customers, or potential customers, conduct their business in
euros and may choose to contract with SS/L foreign exchange exposure. Also, devaluation of the euro versus the
U.S. dollar may hurt SS/L’s competitive position with respect to its European-based competitors.
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SS/L is subject to U.S. and foreign laws and regulations, including U.S. export control and economic sanctions
laws, which may result in delays, lost business and additional costs, and any changes in any of these laws and
regulations may have a material and adverse effect on our business and results of operations.
The satellite manufacturing industry is highly regulated due to the sensitive nature of satellite technology. It is
possible that the laws and regulations governing SS/L’s business and operations will change in the future. There
may be a material adverse effect on our business and results of operations if SS/L is required to alter its business
operations to comply with such changes in law or if SS/L’s ability to sell its products and services on a global basis
is reduced or restricted due to increased U.S. or foreign government regulation.
SS/L is required by the International Traffic in Arms Regulations, or ITAR, administered 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, or 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 default, monetary penalties and/or the
loss of incentive payments. SS/L has in the past failed to obtain the export licenses necessary to deliver satellites to
its Chinese customers.
Some of SS/L’s 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 delay or restrict SS/L’s ability to contract with potential foreign
customers or operators. To the extent that SS/L’s 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 it
could become increasingly difficult for the U.S. satellite manufacturing industry, including SS/L, to recapture this
lost market share. Customers concerned over the possibility that the U.S. government may deny the export license
necessary for SS/L to deliver their purchased satellite to them, 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 offered by one of SS/L’s European competitors over SS/L’s satellite. SS/L is further
disadvantaged by the fact that a purportedly “ITAR-free” satellite may be launched less expensively in China on the
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.
SS/L uses estimates in accounting for many contracts. Changes in these estimates could have a material
adverse effect on our future financial results.
Contract accounting requires significant judgments relative to assessing risks, estimating contract revenues
and costs and making assumptions for scheduling and technical issues. Due to the nature of many of SS/L’s
contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables. For
example, significant assumptions have to be made regarding the length of time to complete the contract because
costs also include expected increases in wages and prices for materials. Incentives, penalties and award fees related
to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is
sufficient information for SS/L to assess anticipated performance.
Because of the significance of the judgments and estimation processes described above, it is possible that
materially different amounts could be obtained if different assumptions were used or if the underlying circumstances
or estimates were to change or ultimately be different from SS/L’s expectations. Changes or inaccuracies in
underlying assumptions, circumstances or estimates may have a material adverse effect upon future period financial
results.
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Industry consolidation in the satellite services industry may adversely affect SS/L.
Industry consolidation has resulted in the formation of satellite operators with greater satellite resources and
increased coverage. This consolidation and any additional consolidation in the future 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, risk allocation and other
contractual terms.
We do not control satellite procurement decisions at Telesat.
Although we hold 64% of the economic interests in Telesat, we do not control satellite procurement decisions
at Telesat, and it is possible that Telesat will not 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. 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. In addition, Telesat may, from time to time explore strategic
alternatives, such as an initial public offering or sale. It is possible that, as a result, a transaction may occur such that
SS/L ceases to be an affiliate of Telesat, which could adversely affect SS/L’s ability to obtain future satellite
construction orders from Telesat.
•
Risk Factors Associated With Satellite Services
Telesat derives a substantial amount of its revenues from only a few of its customers. A loss of one or more of
these major customers, or a material adverse change in any such customer’s business or financial condition,
could materially reduce Telesat’s future revenues and contracted backlog.
For the year ended December 31, 2011, Telesat’s top five customers together accounted for approximately
51% of its revenues. At December 31, 2011, Telesat’s top five backlog customers together accounted for
approximately 87% of its backlog. If any of Telesat’s major customers chose to not renew its contract or 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, some of Telesat’s customers’ industries are undergoing significant consolidation, and
Telesat’s customers may be acquired by other companies, including by Telesat’s competitors. Such acquisitions
could adversely affect Telesat’s ability to sell services to such customers and to any end-users whom they serve.
The actual orbital maneuver lives of Telesat’s satellites may be shorter than Telesat anticipates and Telesat
may be required to reduce available capacity on its satellites prior to the end of their orbital maneuver lives.
Telesat anticipates that its satellites will have the end of orbital maneuver life described above in Item1-
Business. For all but one of Telesat’s satellites, the expected end-of orbital maneuver life date goes beyond the
manufacturer’s end-of-service life date. A number of factors will affect the actual commercial service lives of
Telesat’s satellites, including:
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the amount of propellant used in maintaining the satellite’s orbital location or relocating the satellite to a
new orbital location (and, for newly-launched satellites, the amount of propellant used during orbit
raising following launch);
the durability and quality of their construction;
the performance of their components;
conditions in space such as solar flares and space debris;
operational considerations, including operational failures and other anomalies; and
changes in technology which may make all or a portion of Telesat’s satellite fleet obsolete.
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Telesat has been forced to prematurely remove satellites from service in the past due to an unexpected
reduction in their previously anticipated end-of-orbital maneuver life. It is possible that the actual orbital maneuver
lives of one or more of Telesat’s existing satellites may also be shorter than originally anticipated. Further, on some
of Telesat’s satellites it is anticipated that the total payload capacity may need to be reduced prior to the satellite
reaching its end-of-orbital maneuver life. Telesat periodically reviews expected orbital maneuver lives of each of its
satellites using current engineering data. A reduction in the orbital maneuver life of any of Telesat’s satellites could
result in a reduction of the revenues generated by that satellite, the recognition of an impairment loss and an
acceleration of capital expenditures. To the extent Telesat is required to reduce payload capacity prior to the end of a
satellite’s orbital maneuver life, its revenues from the satellite would be reduced.
Telesat’s satellite launches may be delayed, it may suffer launch failures or its satellites may fail to reach their
planned orbital locations. Any such issue could result in the loss of a satellite or cause significant delays in the
deployment of the satellite which could have a material adverse effect on Telesat’s results of operations,
business prospects and financial condition.
Delays in launching satellites are not uncommon and result from construction delays, the unavailability of
reliable launch opportunities with suppliers, delays in obtaining required regulatory approvals and launch failures. If
satellite construction schedules are not met, a launch opportunity may not be available at the time the satellite is
ready to be launched. Satellites are also subject to certain risks related to failed launches. Launch vehicles may fail.
Launch failures result in significant delays in the deployment of satellites because of the need to construct
replacement satellites, which typically takes up to 30 months or longer, and to obtain another launch vehicle. A
delay or perceived delay in launching a satellite, or replacing a satellite, may cause Telesat’s current customers to
move to another satellite provider if they determine that the delay may cause an interruption in continuous service.
In addition, Telesat’s contracts with customers who purchase or reserve satellite capacity may allow the customers
to terminate their contracts in the event of a delay. Any such termination would require Telesat to refund any
prepayment it may have received, and would result in a reduction in Telesat’s contracted backlog and would delay
or prevent Telesat from securing the commercial benefits of the new satellite. The launch vehicle scheduled to be
used by Telesat to launch Nimiq 6 and Anik G1 has experienced launch failures in the past when used to launch
satellites of other operators. Launch vehicles may also underperform, in which case the satellite may be lost or, if it
can be placed into service by using its onboard propulsion systems to reach the desired orbital location, will have a
shorter useful life. Certain of Telesat’s satellites are nearing their expected end-of-orbital maneuver lives. Any
launch failure, underperformance, delay or perceived delay could 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.
Telesat’s in-orbit satellites may fail to operate as expected due to operational anomalies resulting in lost
revenues, increased costs and/or termination of contracts.
Satellites utilize highly complex technology and operate in the harsh environment of space and therefore are
subject to significant operational risks while in orbit. The risks include in-orbit equipment failures, malfunctions and
other kinds of problems commonly referred to as anomalies. Satellite anomalies include, for example, circuit
failures, transponder failures, solar array failures, telemetry transmitter failures, battery cell and other power system
failures, satellite control system failures and propulsion system failures. Some of Telesat’s satellites have had
malfunctions and other anomalies in the past. Acts of war, terrorism, magnetic, electrostatic or solar storms, space
debris, satellite conjunctions or micrometeoroids could also damage Telesat’s satellites.
Despite working closely with satellite manufacturers to determine the causes of anomalies and mitigate them
in new satellites and to provide for intrasatellite redundancies for certain critical components to minimize or
eliminate service disruptions in the event of failure, anomalies are likely to be experienced in the future, whether due
to the types of anomalies described above or arising from the failure of other systems or components, and
intrasatellite redundancy may not be available upon the occurrence of such anomalies. Telesat cannot assure you
that, in these cases, it will be possible to restore normal operations. Where service cannot be restored, the failure
could cause the satellite to have less capacity available for sale, to suffer performance degradation, or to cease
operating prematurely, either in whole or in part. For example, if the damaged solar array on Telstar 14R/Estrela do
Sul 2 were to unexpectedly deploy in the future, this could result in a loss of capability to provide service.
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Any single anomaly or series of anomalies or other failure (whether full or partial) of any of Telesat’s
satellites could cause Telesat’s revenues, cash flows and backlog to decline materially, could require Telesat to
repay prepayments made by customers of the affected satellite and could have a material adverse effect on Telesat’s
relationships with current customers and its ability to attract new customers for satellite services. A failure could
result in a customer terminating its contract for service on the affected satellite. In the event we are unable to provide
alternate capacity to an affected customer, such customer may decide to procure all or a portion of its future satellite
services from an alternate supplier or such customer’s business may be so adversely affected by the satellite failure
that it may not have the financial ability to procure future satellite services. In addition, an anomaly that has a
material adverse effect on a satellite’s overall performance or expected orbital maneuver life could require us to
recognize an impairment loss, which in turn would adversely affect us. It may also require Telesat to expedite its
planned replacement program, adversely affecting its profitability and increasing its financing needs and limiting the
availability of funds for other business purposes. Finally, the occurrence of anomalies may adversely affect Telesat’s
ability to insure satellites at commercially reasonable premiums, if at all, and may cause insurers to demand
additional exclusions in policies they issue.
Telesat’s insurance will not protect it against all satellite-related losses. Further, Telesat may not be able to
renew insurance on its existing satellites or obtain insurance on future satellites on acceptable terms or at all.
Telesat’s current satellite insurance does not protect it against all satellite-related losses that it may experience,
and it does not have in-orbit insurance coverage for all of the satellites in its fleet. As of December 31, 2011, the
total net book value of our four in-orbit satellites for which we do not have insurance is approximately CAD 85
million. Telesat’s insurance does not protect it against business interruption, loss of revenues or delay of revenues.
In addition, Telesat does not insure the net book value of performance incentives that may be payable to a satellite’s
manufacturer as these are payable only to the extent that the satellite operates in accordance with contracted
technical specifications. Telesat’s existing launch and in-orbit insurance policies include, and any future policies
Telesat obtains can be expected to include, specified exclusions, deductibles and material change limitations.
Typically, these insurance policies exclude coverage for damage or losses arising from acts of war, anti-satellite
devices, electromagnetic or radio frequency interference and other similar potential risks for which exclusions are
customary in the industry at the time the policy is written. In addition, they typically exclude coverage for satellite
health-related problems affecting Telesat’s satellites that are known at the time the policy is written or renewed. Any
claims under existing policies are subject to settlement with the insurers and may, in some instances, be payable to
Telesat’s customers.
The price, terms and availability of satellite insurance has fluctuated significantly in recent years. These
fluctuations may be affected by recent satellite launch or in-orbit failures and general conditions in the insurance
industry. Launch and in-orbit policies on satellites may not continue to be available on commercially reasonable
terms or at all. 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. In
addition, higher premiums on insurance policies increase our costs, thereby reducing Telesat’s profitability. In
addition to higher premiums, insurance policies may provide for higher deductibles, shorter coverage periods, higher
loss percentages required for constructive total loss claims and additional satellite health-related policy exclusions.
There can be no assurance that, upon the expiration of an in-orbit insurance policy, which typically has a term of one
year, Telesat will be able to renew the policy on terms acceptable to them.
Subject to the requirements contained in the indentures governing Telesat’s notes and senior secured credit
facilities, Telesat may elect to reduce or eliminate insurance coverage for certain of its existing satellites, or elect not
to obtain insurance policies for its future satellites, especially if exclusions make such policies ineffective, the costs
of coverage make such insurance impractical or if self-insurance is deemed more effective.
Telesat is subject to significant and intensifying competition. Telesat experiences competition both within the
satellite industry and from other providers of communications capacity. Telesat’s failure to compete
effectively would result in a loss of revenues and a decline in profitability, which would adversely affect
Telesat’s business and results of operations.
Telesat provides point-to-point and point-to-multipoint services for voice, data and video communications and
for high-speed Internet access. A trend toward consolidation of major FSS providers has resulted in the creation of
global competitors who are substantially larger than Telesat in terms of both the number of satellites they have in
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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, 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 and may be able to offer expansion capacity for future requirements. Telesat also competes against
regional satellite operators who may enjoy competitive advantages in their local markets. As a condition of Telesat’s
licenses for certain satellites, Telesat is required by Industry Canada to invest in research and development related to
satellite communication activities. Telesat’s global competitors may not face this additional financial burden.
Telesat expects a substantial portion of its ongoing business will continue to be in the Canadian domestic
market. This market is characterized by increasing competition among satellite providers and rapid technological
development. Historically, the Canadian regulatory framework has 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 that have adequate service coverage in Canadian territory to compete for
future business from Telesat’s DTH customers. In 2007 Industry Canada awarded a spectrum which is suitable for
providing services to Canadian customers, including DTH, to Ciel Satellite Group (“Ciel”), which was at the time
Canadian controlled but has since become controlled by a foreign entity, SES S.A. (“SES”), the world’s second
largest FSS satellite operator and a non-Canadian. In addition, in 2009 Industry Canada authorized FreeHD Canada
to use a foreign-based satellite for the provision for DTH services on an interim basis.
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. A number of companies are increasing their ability to transmit signals on
existing terrestrial infrastructures, such as fiber optic cable, DSL (digital subscriber line) and terrestrial wireless
transmitters often with funding and other incentives provided by government. The ability of any of these companies
to significantly increase their capacity and/or the reach of their network likely would result in a decrease in the
demand for Telesat’s services. Increasing availability of capacity from other forms of communications technology
can create an excess supply of telecommunications capacity, decreasing the prices Telesat would be able to charge
for its services under new service contracts and thereby negatively affecting Telesat’s profitability. New technology
could render satellite-based services less competitive by satisfying consumer demand in other ways. Telesat also
competes for local regulatory approval in places where more than one provider may want to operate and with other
satellite operators for scarce frequency assignments and a limited supply of orbital locations. Telesat’s failure to
compete effectively could result in a loss of revenues and a decline in profitability, a decrease in the value of its
business and a downgrade of its credit rating, which would restrict its access to the capital markets.
Changes in technology, video distribution methods and demand could have a material adverse effect on
Telesat’s results of operations and business prospects.
The implementation of new technologies or the improvement of existing technologies may reduce the
transponder capacity needed to transmit a given amount of information thereby reducing the total demand for
capacity. For example, improvements in signal compression could allow Telesat’s customers to transmit the same
amount of data using a reduced amount of capacity. The introduction of Ka-band, high throughput satellites, such as
ViaSat-1, which are able to transmit substantially more content per transponder than pre-existing Ka-band satellites,
may decrease demand and/or prices for pre-existing Ka-band capacity as well as C-band and Ku-band capacity.
While Telesat owns the Canadian Payload on ViaSat-1, if other operators introduce more Ka-band, high throughput
satellites into the markets in which Telesat participates, it could have a material adverse effect on Telesat’s results of
operations, business prospects and financial condition.
Telesat’s business may be negatively impacted by the growth of “over-the-top” (OTT) video distribution (e.g.,
Netflix). This type of distribution involves delivery of broadcasting services through an internet service provider that
is not involved in the control or distribution of the content itself. The growth of OTT distribution may have a
negative impact on the demand for the services of some of Telesat’s large customers in the video distribution
business and could result in lessened demand for Telesat’s satellite capacity.
Developments that Telesat expects to support the growth in demand for satellite services, such as continued
growth in data traffic, the continued proliferation of HDTV, and the adoption of 3D TV may fail to materialize or
may not occur in the manner or to the extent Telesat anticipates.
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Replacing a satellite upon the end of its service life will require Telesat to make significant expenditures and
may require Telesat to obtain approval from its shareholders.
To ensure no disruption in Telesat’s business and to prevent loss of its customers, Telesat will be required to
commence construction of a replacement satellite approximately three to five years prior to the expected end of
service life of the satellite then in orbit. Typically, it costs in the range of $250 million to $300 million to construct,
launch and insure a satellite. There can be no assurance that Telesat will have sufficient cash, cash flow or be able to
obtain third party or shareholder financing to fund such expenditures on favorable terms, if at all, or that Telesat will
obtain shareholder approval, where required, to procure replacement satellites. Certain of Telesat’s satellites are
nearing their expected end-of-orbital maneuver lives. Should Telesat not have sufficient funds available to replace
those satellites or should Telesat not receive approval from its shareholders, where required, to purchase
replacement satellites, it could have a material adverse effect on Telesat’s results of operations, business prospects
and financial condition.
Telesat’s business is capital intensive, and Telesat may not be able to raise adequate capital to finance its
business strategies, or Telesat may be able to do so only on terms that significantly restrict its ability to
operate its business.
Implementation of Telesat’s business strategy requires a substantial outlay of capital. As Telesat pursues its
business strategies and seeks to respond to developments in its business and opportunities and trends in its industry,
its actual capital expenditures may differ from its expected capital expenditures. There can be no assurance that
Telesat will be able to satisfy its capital requirements in the future. In addition, if one of Telesat’s satellites failed
unexpectedly, there can be no assurance of insurance recovery or the timing thereof and Telesat may need to exhaust
or significantly draw upon its revolving credit facility or obtain additional financing to replace the satellite. If
Telesat determines that it needs to obtain additional funds through external financing and is unable to do so, Telesat
may be prevented from fully implementing its business strategy. The availability and cost to Telesat of external
financing depends on a number of factors, including its credit rating and financial performance and general market
conditions. Telesat’s ability to obtain financing generally may be influenced by the supply and demand
characteristics of the telecommunications sector in general and of the FSS sector in particular. Declines in Telesat’s
expected future revenues under contracts with customers and challenging business conditions faced by its customers
are among the other factors that may adversely affect Telesat’s credit. Other factors that could impact Telesat’s
credit rating include the amount of debt in its current or future capital structure, activities associated with strategic
initiatives, the health of its satellites, the success or failure of its planned launches, its expected future cash flows
and the capital expenditures required to execute its business strategy. The overall impact on Telesat’s financial
condition of any transaction that it pursues may be negative or may be negatively perceived by the financial markets
and rating agencies and may result in adverse rating agency actions with respect to its credit rating. Long-term
disruptions in the capital or credit markets as a result of uncertainty or recession, changing or increased regulation or
failures of significant financial institutions could adversely affect Telesat’s access to capital. A credit rating
downgrade or deterioration in Telesat’s financial performance or general market conditions could limit its ability to
obtain financing or could result in any such financing being available only at greater cost or on more restrictive
terms than might otherwise be available and, in either case, could result in Telesat deferring or reducing capital
expenditures including on new or replacement satellites. In certain circumstances, Telesat is required to obtain the
approval of its shareholders to incur additional indebtedness. There can be no assurances that Telesat will receive
such approval, if required.
Telesat operates in a highly regulated industry and government regulations may adversely affect its ability to
sell its services, or increase the expense of such services or otherwise limit Telesat’s ability to operate or grow
its business.
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.
In Canada, Telesat’s operations are subject to regulation and licensing by Industry Canada pursuant to the
Radiocommunication Act (Canada) and by the Canadian Radio-Television and Telecommunications Commission
(“CRTC”), under the Telecommunications Act (Canada). Industry Canada has the authority to issue licenses,
establish standards, assign Canadian orbital locations, and plan the allocation and use of the radio frequency
spectrum, including the radio frequencies upon which Telesat’s satellites and earth stations depend. The Minister
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responsible for Industry Canada has broad discretion in exercising this authority to issue licenses, fix and amend
conditions of licenses, and to suspend or even revoke them. The CRTC has authority over the allocation (and
reallocation) of satellite capacity to particular broadcasting undertakings. Telesat is required to pay different forms
of “universal service” charges in Canada and have certain research and development obligations that do not apply to
other satellite operators it competes with. These rates and obligations could change at any time.
In the United States, the Federal Communications Commission (“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. In addition, to facilitate the provision of FSS satellite services in C- and
Ku-band frequencies in the United States market, foreign licensed operators can apply to have their satellites placed
on the FCC’s Permitted Space Station List. Telesat’s Anik Fl, Anik FlR, Anik F2, Anik F3 and Telstar 14R/Estrela
do Sul 2 satellites are currently on this list. The export from the United States of satellites and technical information
related to satellites, earth station equipment and provision of services to certain countries are subject to State
Department, Commerce Department and Treasury Department regulations, in particular the International Traffic in
Arms Regulations (“ITAR”) which currently include satellites on the list of items requiring export permits. These
ITAR provisions have constrained Telesat’s access to technical information and have had a negative impact on its
international consulting revenues. In addition, Telesat and its satellite manufacturers may not be able to obtain and
maintain necessary export authorizations which could adversely affect its ability to procure new United States-
manufactured satellites; control its existing satellites; acquire launch services; obtain insurance and pursue its rights
under insurance policies; or conduct its satellite-related operations and consulting activities.
Telesat also operates satellites through licenses granted by, and are subject to regulations in, countries other
than Canada and the United States. For example, the Brazilian national telecommunications agency, ANATEL, has
authorized Telesat, through its subsidiary, Telesat Brasil Capacidade de Satélites Ltda. (“TBCS”), to operate Telstar
14R/Estrela do Sul 2, a Ku-band FSS satellite at 63° WL pursuant to a Concession Agreement. Telstar 18 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. Although Telesat’s agreement with APT provides it with renewal rights
with respect to a replacement satellite at this orbital location, Telesat is relying on third parties to secure those
orbital location rights and there can be no assurance that they will be granted at all or on a timely basis. Should
Telesat be unsuccessful in obtaining renewal rights for the orbital location, because of the control over the orbital
location exercised by Tonga or for other reasons, or Telesat otherwise fail to enter into agreements with APT with
respect to such replacement satellite, all revenues obtained from Telstar 18 would cease and could have a material
adverse effect on Telesat’s results of operations, business prospects and financial condition.
In addition to regulatory requirements governing the use of orbital locations, most countries regulate
transmission of signals to and from their territory, and Telesat is required to obtain and maintain authorizations to
carry on business in the countries in which Telesat operates.
If Telesat fails to obtain or maintain particular authorizations on acceptable terms, such failure could delay or
prevent Telesat from offering some or all of its services and adversely affect its results of operations, business
prospects and financial condition. In particular, Telesat may not be able to obtain all of the required regulatory
authorizations for the construction, launch and operation of any of its future satellites, for the orbital locations for
these satellites and for its group infrastructure, on acceptable term or at all. Even if Telesat were able to obtain the
necessary authorizations and orbital locations, the licenses Telesat obtains may impose significant operational
restrictions, or not protect Telesat from interference that could affect the use of its satellites. Countries or their
regulatory authorities may adopt new laws, policies or regulations, or change their interpretation of existing laws,
policies or regulations, that could cause Telesat’s existing authorizations to be changed or cancelled, require Telesat
to incur additional costs, impose or change existing pricing, or otherwise adversely affect its operations or revenues.
As a result, any currently held regulatory authorizations are subject to rescission and renewal and may not remain
sufficient or additional authorizations may be necessary that Telesat may not be able to obtain on a timely basis or
on terms that are not unduly costly or burdensome. Further, because the regulatory schemes vary by country, Telesat
may be subject to regulations in foreign countries of which Telesat is not presently aware that it is not in compliance
with, and as a result could be subject to sanctions by a foreign government.
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Telesat’s operations may be limited or precluded by ITU rules or processes, and Telesat is required to
coordinate its operations with those of other satellite operators.
The International Telecommunication Union (“ITU”), a specialized United Nations agency, regulates the
global allocation of radio frequency spectrum and the registration of radio frequency assignments and any associated
orbital location in the geostationary satellite orbit. Telesat participates in the activities of the ITU. However, only
national administrations have full standing as ITU members. Consequently, Telesat must rely on the relevant
government administrations to represent its interests.
The ITU establishes the Radio Regulations, an international treaty which contains the rules concerning
frequency allocations and the priority to, coordination of, and use of, radio frequency assignments. The ITU Radio
Regulations define the allocation of radio frequencies to specific uses. The ITU Radio Regulations are periodically
reviewed and revised at World Radiocommunication Conferences (“WRC”), which take place typically every three
to four years. As a result, Telesat cannot guarantee that the ITU will not change its allocation decisions and rules in
the future in a way that could limit or preclude Telesat’s use of some or all of its existing or future orbital locations
or spectrum.
The ITU Radio Regulations also establish operating procedures for satellite networks and prescribe detailed
coordination, notification and recording procedures. With respect to the frequencies used by commercial
geostationary satellites, the ITU Radio Regulations set forth a process for protecting earlier-registered satellite
systems from interference from later-registered satellite systems. In order to comply with these rules, Telesat must
coordinate the operation of its satellites, including any replacement satellite that has performance characteristics that
are different from those of the satellite it replaces, with other satellites. This process requires potentially lengthy and
costly negotiations with parties who operate or intend to operate satellites that could affect or be affected by
Telesat’s satellites. For example, as part of Telesat’s coordination effort on Telstar 12, Telesat agreed to provide
four 54 MHz transponders on Telstar 12 to Eutelsat S.A. (“Eutelsat”) for the life of the satellite and have retained
risk of loss with respect to those transponders. Telesat also granted Eutelsat the right to acquire, at cost, four
transponders on the replacement satellite for Telstar 12. Telesat has leased back from Eutelsat three of the four
transponders to provide service to its customers. In addition, the Russian Satellite Communications Company
(“RSCC”) has announced that it has commenced construction of a satellite which it intends to launch and operate at
14° WL, adjacent to the location of Telesat’s Telstar 12 at 15° WL. RSCC’s ITU rights over certain frequencies at
14° WL have priority over Telesat’s use of these same frequencies on Telstar 12. Telesat has had discussions with
RSCC to resolve this issue but, to date, those discussions have not been successful. Failure to reach an appropriate
arrangement with RSCC 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 certain countries, a failure to resolve coordination issues is used by regulators as a justification to limit or
condition market access by foreign satellite operators. In addition, while the ITU Radio Regulations require later-in-
time systems to coordinate their operations with Telesat, Telesat cannot guarantee that other operators will conduct
their operations so as to avoid transmitting any signals that would cause harmful interference to the signals that
Telesat, or its customers, transmit. This interference could require Telesat to take steps, or pay or refund amounts to
its customers, that could have a material adverse effect on Telesat’s results of operations, business prospects and
financial condition. The ITU’s Radio Regulations do not contain mandatory dispute resolution or enforcement
regulations and neither the ITU specifically, nor international law generally, provides clear remedies if the ITU
coordination process fails. Failure to successfully coordinate Telesat’s satellites’ frequencies or to obtain or maintain
other required regulatory approvals could have an adverse effect on Telesat’s financial condition, as well as on the
value of its business.
The content of third-party transmissions over Telesat’s satellites may affect Telesat since Telesat could be
subject to sanctions by various governmental entities for the transmission of certain content.
Telesat provides satellite capacity for transmissions by third parties. Telesat does not decide what content is
transmitted over its satellites, although its contracts generally provide it with rights to prohibit certain types of
content or to cease transmission or permit Telesat to require its customers to cease their transmissions under certain
circumstances. A governmental body or other entity may object to some of the content carried over Telesat’s
satellites, such as “adult services” video channels or content deemed political in nature. Issues arising from the
content of transmissions by these third parties over Telesat’s satellites could affect its future revenues, operations or
relationship with certain governments or customers.
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Telesat may experience a failure of ground operations infrastructure or interference with its satellite signals
that impairs the commercial performance of, or the services delivered over, its satellites or the satellites of
other operators for whom it provides ground services, which could result in a material loss of revenues.
Telesat operates an extensive ground infrastructure including a satellite control center in Ottawa, its main
earth station and back up satellite control facility at Allan Park, six teleports throughout Canada, one teleport located
in the United States and one in Brazil and it telemetry, tracking and control (“TT&C”) facility in Perth, Australia.
These ground facilities are used for controlling Telesat’s satellites and for the provision of end-to-end services to
Telesat’s customers.
Telesat may experience a partial or total loss of one or more of these facilities due to natural disasters
(tornado, flood, hurricane or other such acts of God), fire, acts of war or terrorism or other catastrophic events. A
failure at any of these facilities would cause a significant loss of service for Telesat customers. Additionally, Telesat
may experience a failure in the necessary equipment at the satellite control center, at the back-up facility, or in the
communication links between these facilities and remote teleport facilities. A failure or operator error affecting
TT&C operations might lead to a break-down in the ability to communicate with one or more satellites or cause the
transmission of incorrect instructions to the affected satellite(s), which could lead to a temporary or permanent
degradation in satellite performance or to the loss of one or more satellites. Intentional or non-intentional
electromagnetic or radio frequency interference could result in a failure of Telesat’s ability to deliver satellite
services to its customers. A failure at any of Telesat’s facilities or in the communications links between its facilities
or interference with its satellite signal could cause its revenues and backlog to decline materially and could
adversely affect its ability to market its services and generate future revenues and profit.
Telesat purchases equipment from third party suppliers and depends on those suppliers to deliver, maintain
and support these products to the contracted specifications in order for Telesat to meet its service commitments to its
customers. Telesat may experience difficulty if these suppliers do not meet their obligations to deliver and support
this equipment. Telesat may also experience difficulty or failure when implementing, operating and maintaining this
equipment or when providing services using this equipment. This difficulty or failure may lead to delays in
implementing services, service interruptions or degradations in service, which could cause Telesat’s revenues and
backlog to decline materially and could adversely affect Telesat’s ability to market its services and generate future
revenues and profit.
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 331/3% of the voting power. The rights
of these third parties and fiduciary duties under applicable law could result in others acting or failing to act in ways
that are not in our best interest. While these entities are or have been customers of SS/L, due to these third party
rights and the fiduciary duties of the boards of these entities, there can be no assurance that these entities will
continue to be customers of SS/L, and SS/L does not expect to do business with these entities on other than fair and
competitive terms.
The loss of executive officers and our inability to retain other key personnel could materially adversely affect
our operations.
Loral, SS/L and Telesat rely on a number of key employees, including members of management and certain
other employees possessing unique experience in technical and commercial aspects of the satellite manufacturing
and services businesses, including personnel with security clearances for classified work and highly skilled
engineers and scientists. If Loral, SS/L or Telesat are unable to retain these employees, it could be difficult to
replace them. In addition, the businesses of SS/L and Telesat, with their constant technological developments, must
continue to attract highly qualified and technically skilled employees. In the future, the inability of SS/L or Telesat
to retain or replace these employees, or their inability to attract new highly qualified employees, could have a
material adverse effect on the results of operations, business prospects and financial condition of Loral, SS/L or
Telesat.
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MHR may be viewed as our controlling stockholder and may have conflicts of interest with us in the future.
As of December 31, 2011, various funds affiliated with MHR and Dr. Rachesky held approximately 38.6% 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 57.7% of the outstanding common equity of
Loral as of December 31, 2011. As of February 15, 2012, representatives of MHR occupy two of the seven seats on
our board of directors, with one seat, previously occupied by a former managing principal of MHR, currently being
vacant. 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.
Interruption or failure of, or cyber-attacks on, our information technology and communications systems
could hurt our ability to operate our business effectively, which could harm our business and operating
results.
Our ability to operate our business depends, in part, on the continuing operation of our information technology
and communications systems, which are an integral part of our business. We rely on our information and
communication systems, as well as software applications developed internally to, among other things, effectively
manage our accounting and financial functions, including maintaining our internal controls, manage our
manufacturing processes, perform our research and development and assist with scheduling, sales order entry,
purchasing, materials management and other production functions. Although we take steps to secure our information
and communications systems, including our computer systems, intranet and internet sites, email and other
telecommunications and data networks, the security measures we have implemented may not be effective and our
systems may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events,
including unauthorized access or security breaches, inclement weather, natural or man-made disasters, earthquakes,
explosions, terrorist attacks, floods, fires, cyber-attacks, computer viruses, power loss, telecommunications or
equipment failures, transportation interruptions, accidents or other disruptive events or attempts to harm our
systems. In addition, some of our facilities, particularly those at SS/L, are located in areas with a high risk of major
earthquakes, and our facilities are also subject to break-ins, sabotage and intentional acts of vandalism. Moreover,
some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities.
Our business and operations could be adversely affected if, as a result of a significant cyber event or otherwise, our
operations are disrupted or shut down, our confidential or proprietary information is stolen or disclosed, we incur
costs or are required to pay fines in connection with confidential or export-controlled information that is disclosed,
we must dedicate significant resources to system repairs or to increase cyber security protection or we otherwise
incur significant litigation or other costs as a result of any such event. While our insurance coverage could offset
losses relating to some of these types of events, to the extent any such losses are not covered by insurance, a serious
disruption to our systems could significantly limit our ability to manage and operate our business efficiently, which
in turn could have a material adverse effect on our business, results of operations and financial condition.
Changes in tax rates or policies or changes to our tax liabilities could affect operating results.
We are subject to U.S. federal, state and local income taxation on our worldwide income and foreign taxes on
certain income from sources outside the United States. Significant judgment is required to determine and estimate
our tax liabilities, and our future annual and quarterly tax rates could be affected by numerous factors, including
changes in the applicable tax laws, composition of earnings in countries or states with differing tax rates or our
valuation and utilization of deferred tax assets and liabilities. In addition, we are subject to regular examination of
our income tax returns by the Internal Revenue Service and other taxing authorities. Although we believe our tax
estimates are reasonable, we regularly evaluate the adequacy of our provision for income taxes, and there can be no
assurance that any final determination by a taxing authority will not result in additional tax liability which could
have a material adverse effect on our results of operations.
36
The future use of tax attributes is limited.
As of December 31, 2011, we had federal net operating loss carryforwards, or NOLs, of approximately $380
million and state NOLs, primarily California, of approximately $244 million, that are available to offset future
taxable income (see Notes 2 and 10 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, as determined on any
applicable testing date. We would be adversely affected by an additional “ownership change” if, at the time of such
change, the total market value of our equity multiplied by the federal applicable long-term tax exempt rate, which at
December 31, 2011 was 3.55%, was less than $32.6 million. As of December 31, 2011, since the total market value
of our equity ($2.0 billion) multiplied by the federal applicable long-term tax exempt rate was approximately $70
million an “ownership change” as of that date would not have had an adverse effect.
There is a thin trading market for our voting common stock.
Trading activity in our voting common stock, which is listed on the NASDAQ National Market, has generally
been light, averaging approximately 73,000 shares per day for the year ended December 31, 2011. Moreover, over
50% of our voting 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 voting 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 voting common stock and non-voting common stock that
would also, if exercised, effectively eliminate such restrictions. In addition, our board of directors has authorized a
stock repurchase program pursuant to which the Company is authorized to purchase up to 800,000 shares of our
voting common stock. To the extent the Company does repurchase shares (in 2011, we purchased 136,494 shares of
voting common stock), the number of shares available for trading in the market will be reduced thereby increasing
further the illiquidity of our stock.
The market for our voting common stock could be adversely affected by future issuance of significant
amounts of our voting common stock.
As of December 31, 2011, 21,093,079 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 339,000 shares of
our voting common stock, of which 307,750 were vested and exercisable and of which 31,250 will become vested
and exercisable over the next year. There were also 24,600 non-vested restricted stock units outstanding as of
December 31, 2011. These restricted stock units, which may be settled either in cash or Loral voting common stock
at the Company’s option, vest over the next one and a half years. As of December 31, 2011, 1,158,879 shares of our
voting 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 voting 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 voting 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 voting common stock.
A public offering of stock in Telesat could adversely affect the market for, and price of, our common stock
and the value of our interest in Telesat.
Since the end of October 2011, each of Loral and the other principal shareholder in Telesat has had the right
under the terms of the Telesat Shareholders Agreement to require Telesat to conduct an initial public offering of its
equity securities. To date, neither party has exercised such right. In the event Telesat were to conduct a public
offering of its equity securities, it is uncertain whether the offering would be a primary offering of shares by Telesat,
a secondary offering of shares by either or both of the Telesat shareholders or a combination of both types of
37
offerings. It is also uncertain what effect an offering (and any corporate restructuring required in connection with
such offering under the terms of the Telesat Shareholders Agreement) would have on Loral’s governance rights in
Telesat. Changes in our Telesat governance rights could adversely affect the value of our interest in Telesat and the
price at which our common stock trades. In addition, a public market for Telesat equity would create a situation
where there would be two separate public-market proxies for the value of Telesat – our stock and the Telesat stock –
which could create confusion in the market and could adversely affect the liquidity and/or trading values of either
our or Telesat’s common stock.
We are subject to the Foreign Corrupt Practices Act.
SS/L engages in marketing, procurement of supplies and services, launch activities and satellite sales to
customers located outside of the United States. We are subject to the Foreign Corrupt Practices Act, or the FCPA,
which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign
officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires
companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the
transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents.
Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or
representatives. If we or our intermediaries fail to comply with the requirements of the FCPA, governmental
authorities in the United States could seek to impose civil and/or criminal penalties, which could have a material
adverse effect on our business, results of operations, financial conditions and cash flows.
We may incur costs to comply with or address liabilities under environmental regulations.
We are subject to various federal, state and local environmental health and safety laws and regulations
governing our properties and the operation of our business, including those relating to air emissions, wastewater
discharges, the handling, storage and disposal of hazardous substances and wastes, the management of asbestos-
containing building materials and non-ionizing radiation equipment, releases of hazardous and toxic materials and
the remediation of contamination at real property. In addition, electronic devices or components are subject to
regulation in various jurisdictions requiring end-of-life management, including recycling, and/or restrictions on
certain materials used in manufactured products. Compliance with such laws may result in significant liabilities and
costs, including property damage or personal injury claims, investigation and remediation costs, penalties, capital
expenditures to install or upgrade pollution control equipment, the temporary suspension of production, or a
cessation of operations. Our failure to comply with such laws and regulations could have a material adverse effect
on our business, financial condition or results of operations in the future. In addition, new or stricter requirements
relating to environmental health and safety laws, including restrictions on greenhouse gas emissions, or materials
use could result in us incurring unanticipated capital costs or operating expenses, for example, for fuel or raw
materials. In addition, some environmental laws, such as the U.S. federal Superfund law and similar state statutes,
can impose liability for the entire cost of cleanup of contaminated sites upon any of the current or former site owners
or operators or upon parties who sent, or arranged to send, wastes to these sites, regardless of fault or lawfulness of
the original disposal activity.
Accounting standards periodically change and the application of our accounting policies and methods may
require management to make estimates about matters that are uncertain.
The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting
Standards Board, or the FASB, and the U.S. Securities and Exchange Commission, or the SEC, periodically revise
or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial
statements. Given our reliance on estimates and on the cost-to-cost percentage of completion method of recognizing
revenue, changes in accounting standards, especially revenue recognition, may have a greater effect on us than on
many companies. The effect of such revised or new standards on our consolidated financial statements can be
difficult to predict and can materially affect how we record and report our results of operations and financial
condition. In addition, our management must exercise judgment in appropriately applying many of our accounting
policies and methods so they comply with generally accepted accounting principles. In some cases, the accounting
policy or method chosen might be reasonable under the circumstances and yet might result in our reporting
materially different amounts than would have been reported if we had selected a different policy or method.
Accounting policies are critical to fairly presenting our results of operations and financial condition and may require
management to make difficult, subjective or complex judgments about matters that are uncertain.
38
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 15 to the Loral consolidated
financial statements. Also, see “— SS/L relies on patents, and infringement by SS/L of third-party patents would
increase its costs, and third parties may challenge its patents,” above, for discussion of risks related to a lawsuit filed
by ViaSat. 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 effect on our, business, financial condition and
results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Corporate
We lease approximately 15,000 square feet of space for our corporate offices in New York.
Satellite Manufacturing
Headquartered in Palo Alto, California, with additional facilities located in nearby Menlo Park, Mountain
View, and Sunnyvale, SS/L’s campus as of December 31, 2011 encompasses 1.31 million square feet,
approximately 564,000 square feet of which are owned and 749,000 square feet of which are leased, spanning 35
buildings on 77 acres. The obligations under the SS/L credit agreement are secured by a first mortgage on these
owned properties.
The facilities were expanded in 2007 and 2008 to accommodate as many as nine to 13 satellite construction
awards per year, depending on the complexity and timing of the specific satellites, and SS/L can accommodate the
integration and testing of 13 to 14 satellites at any given time in its Palo Alto facility. At these facilities, SS/L is able
to construct the entire satellite — from design, to manufacturing, assembly, integration, testing, preparation for
shipment to launch sites and orbit raising mission control — at one location located in the heart of the Silicon
Valley.
SS/L’s Palo Alto facilities include four major high bays, dedicated to satellite assembly, system integration
and testing of satellite platforms, communication panel assemblies and full satellite assemblies. Testing facilities
include a 39-foot thermal vacuum chamber, a compact antenna test range, a near-field antenna test range, vibration
test labs and a new multiplexer lab, allowing for timely scheduling of satellite testing and flexibility in
accommodating backlog.
SS/L has upgraded and expanded its factory in support of increased manufacturing and production, including a
new 21,000 square foot repeater products facility and investments in new equipment, tools and proprietary
processes. SS/L employs modern manufacturing technologies, with a composites manufacturing facility to provide
advanced materials development, and state of the art antenna reflectors and lightweight structural components.
Avionics and power control units are manufactured and tested on site in a specialized facility. RF and electronics
subassembly and subsystem manufacturing and integration facilities and a solar array manufacturing facility are also
located at the Palo Alto campus. A nearly three-decades-long history of engineering, manufacturing and testing of
solar arrays, solar array drive assemblies and batteries has also led to the development of specialized facilities on
SS/L’s campus.
SS/L’s technologically advanced mission control center, with three separate control rooms, can support three
launch campaigns simultaneously, from launch and orbit raising, through on-orbit testing. Emergency backup
generators, as well as backup communication equipment, are kept at the ready during all campaigns to ensure the
successful launch and on-orbit delivery of SS/L satellites.
SS/L also maintains secured spaces in our buildings in Palo Alto, meeting all security clearance requirements
for its current classified government projects.
In addition to SS/L’s facilities, SS/L has established good working relationships with corporations that have
suitable additional facilities to meet its overflow requirements. SS/L has a close working relationship with the David
Florida Laboratories in Ottawa, Canada for use of its thermal vacuum chamber and has a relationship with
MacDonald, Dettwiler and Associates Ltd. to allow for use of its near field test facility for antenna subsystems.
39
SS/L expects to spend approximately $200 million over the three-year period ending December 31, 2013,
including $37 million of expenditures in 2011, related to an infrastructure campaign that includes the building of a
second thermal vacuum chamber, completing certain building and systems modifications and purchasing additional
test and satellite handling equipment to meet its contractual obligations more efficiently. Upon completion of this
infrastructure campaign, we anticipate returning to a more customary level of annual capital expenditures of $30
million to $40 million, excluding major system upgrades caused by additional expansion or technology insertion.
SS/L believes that the facilities for satellite manufacturing are sufficient for current operations. Further, a
single campus and small organization enables SS/L’s leadership team to quickly communicate with employees
throughout the organization, enables SS/L to engage in immediate cross-functional team problem solving when
issues do arise, and enables employees to grow their careers in a variety of disciplines and functions.
Satellite Services
Telesat leases an area in its headquarters building of approximately 112,000 rentable square feet pursuant to a
lease which commenced February 1, 2009 and provides for a fifteen year term (terminable by Telesat Canada at any
time after ten years upon two years notice).
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 the single point of contact for Telesat’s international
customers and is also the main earth station complex providing TT&C services for the satellites Telesat operates.
The Allan Park earth station also houses Telesat’s backup satellite control center for the Nimiq and Anik satellites.
In addition to these facilities, Telesat leases facilities for administrative and sales offices in various locations
throughout Canada and the United States as well as in Brazil, England, the Netherlands and Singapore.
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 15 to the Loral consolidated financial statements for
this discussion.
Item 4. Mine Safety Disclosures
Not Applicable
40
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, 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. 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.
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, 2010 through December 31, 2011.
Year ended December 31, 2011
Quarter ended December 31, 2011
Quarter ended September 30, 2011
Quarter ended June 30, 2011
Quarter ended March 31, 2011
Year ended December 31, 2010
Quarter ended December 31, 2010
Quarter ended September 30, 2010
Quarter ended June 30, 2010
Quarter ended March 31, 2010
High
Low
$
$
$
$
64.95
72.11
80.56
82.49
85.16
56.85
45.45
36.55
47.19
45.65
62.41
71.26
51.30
41.53
33.30
26.35
There is no established trading market for the Company’s non-voting common stock. All of the shares of non-
voting common stock were issued pursuant to the exemption from the registration requirements of the Securities Act
of 1933, as amended (the “Securities Act”) provided by Section 4(2) of the Securities Act.
(b) Approximate Number of Holders of Common Stock
At February 17, 2012, there were 283 holders of record of our voting common stock and five holders of record
of our non-voting common stock.
41
(c) Issuer Purchases of Equity Securities
The following table provides information about share repurchases made by Loral of its voting common stock
that are registered pursuant to Section 12 of the Exchange Act during the fourth quarter of 2011. Repurchases are
made from time to time at management’s discretion in accordance with applicable federal securities laws. All share
repurchases of Loral’s voting common stock have been recorded as treasury shares.
Total
number of
shares
purchased
44,346
92,148
136,494
Average
price paid
per share
60.07
62.25
$
Total number
of shares
purchased as
publicly
announced
plans or
programs
44,346
92,148
136,494
Maximum
number of
shares that
may yet be
purchased
under the
plans or
programs(1)
755,654
663,506
November 17-30, 2011
December 1-31, 2011
Total
(1) On November 14, 2011, Loral’s Board of Directors approved a share purchase program that authorizes Loral
to purchase up to 800,000 shares of its outstanding voting common stock.
(d) 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.
(e) Securities Authorized for Issuance under Equity Compensation Plans
See Note 11 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 2012
definitive proxy statement which is incorporated herein by reference.
(f) 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 December 31, 2006 to December 31, 2011.
The graph assumes that $100 was invested on December 31, 2006 in each of our voting 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.
42
Item 6. Selected Financial Data
The following table sets forth our selected historical financial and operating data for each of the five years in
the period ended December 31, 2011.
Until October 31, 2007, the operations of our satellite services segment were conducted through Loral Skynet
Corporation (“Loral Skynet”). On October 31, 2007, Loral and its Canadian partner, Public Sector Pension
Investment Board (“PSP”), through Telesat Holdco, a then 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 Skynet has, therefore, been
excluded from the selected financial data subsequent to October 31, 2007. We refer to this acquisition and transfer
of assets and liabilities as the Telesat transaction.
The information set forth in the following table should be read in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
related notes thereto included elsewhere in this Annual Report on Form 10-K.
LORAL SPACE & COMMUNICATIONS INC.
(In thousands, except per share data)
2011
2010
2009
2008
2007
Year Ended December 31,
$ 1,107,365
—
1,107,365
93,434
$ 1,158,985
—
1,158,985
80,608
$
993,400
—
993,400
20,211
$
$
869,398
—
869,398
(193,977)
761,363
121,091
882,454
45,256
109,990
(89,145 )
93,094
308,622
26,975
(5,571)
(151,523)
(45,744)
157,786
(83,457)
20,845
401,716
21,404
(197,267)
74,329
106,329
127,174
85,625
487,341
210,298
231,702
(495,649)
(692,916)
(21,430)
52,899
(497 )
(495)
—
—
(23,240)
126,677
—
486,846
—
231,702
—
(692,916)
(24,067)
29,659
(19,379)
—
—
—
—
(25,685)
Statement of operations data:
Revenues:
Satellite Manufacturing
Satellite Services
Total Revenues
Operating income (loss)(1)
Income (loss) before income
taxes and equity in net
income (losses) of
affiliates(2)(3)
Income tax (provision) benefit(4)
Income (loss) before equity in net
income (losses) of affiliates
Equity in net income (losses) of
affiliates(5)
Net income (loss)
Net income attributable to
noncontrolling interest
Net income (loss) attributable to
Loral
Preferred dividends
Beneficial conversion feature
related to the issuance of Loral
Series A-1 Preferred Stock(6)
Net income (loss) applicable to
Loral’s common shareholders
$
126,677
$
486,846
$
231,702
$
(716,983)
$
(15,405)
Basic and diluted income (loss)
per share:
Basic income (loss) per share
Diluted income (loss) per
share
$
$
4.13
3.92
$
$
16.18
15.63
$
$
7.79
7.73
$
$
(35.13)
(35.13)
$
$
(0.77)
(0.77)
Cash flow data:
Provided by (used in) operating
activities
(Used in) provided by investing
activities
(Used in) provided by financing
activities
$
57,994
$
41,949
$
154,562
$
(202,210)
$
27,123
(4,037 )
(54,057)
(48,750)
(47,308)
(22,644 )
9,704
(55,155)
52,372
61,519
39,510
43
2011
2010
2009
2008
2007
December 31,
Balance sheet data:
Cash and cash equivalents
Total assets
Debt, including current portion
Non-current liabilities
Equity
Loral shareholders’ equity
Non-controlling interest
Total equity
$ 197,114
1,836,153
—
485,598
$ 165,801
1,754,909
—
414,013
$
168,205
1,253,452
—
380,143
$ 946,459
1,126
$ 900,320
629
$
431,991
—
$ 947,585
$ 900,949
$
431,991
$ 117,548
995,867
55,000
381,836
$ 209,657
—
$ 209,657
$
314,694
1,702,939
—
289,602
$
973,558
—
$
973,558
(1) 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 7 to
the Loral consolidated financial statements.
(2)
In connection with the Telesat transaction during 2007, we recognized a gain on foreign exchange contracts of
$89.4 million.
(3) 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.
(4) During the fourth quarter of 2010, we determined, based on all available evidence, that a full valuation
allowance was no longer required on our deferred tax assets and, therefore, $335.3 million of the valuation
allowance was reversed as an income tax benefit (see Note 10 to the Loral consolidated financial statements).
(5)
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.
(6) 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 and converted to non-voting common stock. 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.
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 communications company engaged in satellite manufacturing with ownership interests in satellite-based
communications services.
On October 31, 2007, Loral and its Canadian Partner, Public Sector Pension Investment Board (“PSP”),
through Telesat Holdings, Inc. (“Telesat Holdco”), a then 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 331/3% 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.
44
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 ownership interest in Telesat.
Satellite Manufacturing
Space Systems/Loral, Inc. (“SS/L”) is a designer, manufacturer and integrator of powerful satellites and
satellite systems for commercial and government customers worldwide. SS/L’s design, engineering and
manufacturing capabilities have allowed it to develop a large portfolio of highly engineered, mission-critical
satellites and secure a strong industry presence. This position provides SS/L with the ability to produce satellites that
meet a broad range of customer requirements for broadband internet service to the home, mobile video and internet
service, broadcast feeds for television and radio distribution, phone service, civil and defense communications,
direct-to-home television broadcast, satellite radio, telecommunications backhaul and trunking, weather and
environment monitoring and air traffic control. In addition, SS/L has applied its design and manufacturing expertise
to produce spacecraft subsystems, such as batteries for the International Space Station, and to integrate government
and other add-on missions on commercial satellites, which are referred to as hosted payloads.
As of December 31, 2011, SS/L had $1.4 billion in backlog for 22 satellites for customers including, among
others, Intelsat Global S.A., SES S.A., Telesat Holdings Inc., Hispasat, S.A., EchoStar Corporation, Sirius-XM
Satellite Radio, TerreStar Networks, Inc., Asia Satellite Telecommunications Co. Ltd., Hughes Network Systems,
LLC, ViaSat, Inc., Eutelsat/ictQatar, DIRECTV, Sing Tel Optus, Satélites Mexicanos, S.A. de C.V., Asia Broadcast
Satellite and Telenor Satellite Broadcasting. From January 1, 2012 to February 15, 2012, SS/L was awarded
contracts for three satellites, including two satellites for NBN Co. Limited.
Satellite demand is driven by fleet replacement cycles, increased video, internet and data bandwidth demand
and new satellite applications. SS/L expects its future success to derive from maintaining and expanding its share of
the satellite construction contracts of its existing customers based on its engineering, technical and manufacturing
leadership; its value proposition and record of reliability; the increased demand for new applications requiring high
power and capacity satellites such as HDTV, 3-D TV and broadband; and SS/L’s expansion of governmental
contracts based on its record of reliability and experience with fixed-price contract manufacturing. We also expect
SS/L to benefit from the increased revenues from larger and more complex satellites.
The costs of satellite manufacturing include costs for material, subcontracts, direct labor and manufacturing
overhead. Due to the long lead times required for certain of our purchased parts, and the desire to obtain volume-
related price concessions, SS/L has entered into various purchase commitments with suppliers in advance of receipt
of a satellite order. SS/L’s costs for material and subcontracts have been relatively stable and are generally provided
by suppliers with which SS/L has a long-established history. The number of available suppliers and the cost of
qualifying the component for use in a space environment to SS/L’s unique requirements limit the flexibility and
advantages inherent in multiple sourcing options.
45
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.
While its requirement for ongoing capital investment to maintain its current capacity is relatively low, SS/L
expects to spend approximately $200 million over the three-year period ending December 31, 2013, including $37
million of expenditures in 2011, related to an infrastructure campaign that includes the building of a second thermal
vacuum chamber, completing certain building and systems modifications and purchasing additional test and satellite
handling equipment to meet its contractual obligations more efficiently. Upon completion of this infrastructure
campaign, we anticipate returning to a more customary level of annual capital expenditures of $30 million to $40
million, excluding major system upgrades caused by additional expansion or technology insertion.
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 2,900 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, and terms and conditions resulting in reduced
margins and increased assumptions of risk by manufacturers such as SS/L.
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 $5.3 billion of backlog as of December 31, 2011.
Telesat is a leading global fixed satellite services operator, with offices and facilities around the world. Telesat
provides its satellite and communication services from a fleet of satellites that occupy Canadian and other orbital
locations.
The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time
and investment. Once the investment in a satellite is made, the incremental costs to maintain and operate the satellite
is relatively low over the life of the satellite with the exception of in-orbit insurance. Telesat has been able to
generate a large contracted revenue backlog by entering into long-term contracts with some of its customers for all
or substantially all of a satellite’s life. Historically, this has resulted in revenue from the satellite services business
being fairly predictable.
At December 31, 2011, Telesat provided satellite services to customers from its fleet of 12 in-orbit satellites.
In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite which was launched in October
2011. Telesat currently has two satellites under construction: Nimiq 6, which Telesat anticipates will be launched in
the first half of 2012, and Anik G1, which Telesat anticipates will be launched in the second half of 2012.
Telesat’s commitment to providing strong customer service and its focus on innovation and technical expertise
has allowed it to successfully build its business to date. Building on its existing contractual revenue backlog,
Telesat’s focus is on taking disciplined steps to grow its core business and sell newly launched and existing in-orbit
satellite services, 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 satellites offer a strong combination of existing revenue backlog, revenue growth and a
strong foundation upon which it will seek to continue to grow its revenue and cash flows. The growth is expected to
come from the Canadian payload on the ViaSat-1 satellite, its Nimiq 6 satellite, its Anik G1 satellite, and the sale of
available capacity on its existing in-orbit satellites.
46
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 long term service agreements prior to 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 until it believes there is a demonstrated need and a sound business plan for such
satellite capacity.
Telesat anticipates that it can increase revenue without a proportional increase in operating expenses, allowing
for operating margin expansion. The satellite services business is capital intensive and the build-out of a satellite
fleet requires substantial time and investment. Once the investment in a satellite is made, the incremental cost to
maintain and operate the satellite is relatively low over the life of the satellite, with the exception of in-orbit
insurance. The relatively fixed cost nature of the business, combined with contracted revenue growth and other
growth opportunities, is expected to produce growth in income and operating cash flow.
In 2012, Telesat will remain focused on: increasing utilization on its existing satellites, continuing
construction of the satellites it is currently procuring, securing additional customer requirements to support the
procurement of additional satellites and maintaining cost and operating discipline.
On April 11, 2011, Telesat acquired from Loral the Canadian payload on the ViaSat-1 satellite and a 15-year
revenue contract with Xplornet Communications Inc. to make use of the payload. The ViaSat-1 satellite was
successfully launched in October 2011 and entered into commercial service in December 2011.
Telesat determined that following the launch in May 2011 of the Telstar 14R/Estrela do Sul 2 satellite, the
satellite’s north solar array failed to fully deploy. The north solar array anomaly has diminished the amount of power
available for the satellite’s transponders and has reduced the life expectancy of the satellite. However, the satellite
will support all of the existing services to customers formerly provided by Telstar 14/Estrela do Sul, the satellite it
replaced at 63° West Longitude, as well as provide some additional capacity for expansion.
Telesat has insurance policies that provide coverage for a total, constructive total or partial loss of Telstar 14R
/Estrela do Sul 2. During the third quarter of 2011, Telesat filed a claim under its policies with its insurers. In
December 2011, Telesat received insurance proceeds in the amount of $132.7 million. The proceeds will be
reinvested in satellite procurements in accordance with the terms and conditions of the Credit Agreement.
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations. Approximately
47% of Telesat’s revenues received in Canada for the year ended December 31, 2011, a large portion 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, 2011 would have increased or
decreased Telesat’s net income for the year ended December 31, 2011 by approximately $155 million. During the
period from October 31, 2007 to December 31, 2011, Telesat’s U.S. term loan facility, senior notes and senior
subordinated notes have increased by approximately $192 million due to the stronger U.S. dollar. During that same
time period, however, 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 $158
million.
Strategic Developments
Telesat’s Board of Directors and
shareholders have authorized management
to explore a
refinancing/recapitalization transaction, which, if consummated, could result in, among other things, the incurrence
by Telesat of up to approximately CAD 530 million of additional debt and payments to Telesat’s option holders and
distributions to Telesat’s shareholders of up to approximately CAD 705 million, of which up to approximately CAD
420 million would be paid to Loral. Among the factors that may affect the determination whether to proceed with
this potential transaction are market conditions for refinancing and incurrence of additional indebtedness. If any
transaction results in receipt of proceeds by Loral, Loral would evaluate all alternatives for the use of such proceeds,
including stock repurchases and/or a dividend to Loral stockholders.
47
With regard to SS/L, Loral has been exploring various strategic initiatives relating to the separation of its
satellite manufacturing subsidiary from Loral, including a potential spin-off as well as other strategic alternatives. In
connection with a potential spin-off, the Loral Board of Directors previously formed a committee of independent
directors to negotiate and approve the terms and conditions of the stock that would be distributed in respect of the
Company’s non-voting common stock pursuant to a spin-off of SS/L and to evaluate alternatives with respect
thereto. The Company is considering alternatives to a spin-off for the separation of SS/L from Loral and, as a result,
the Company has asked the committee to defer further work on its assignment.
There can be no assurance whether or when any transaction involving Loral, Telesat or SS/L will occur.
General
We regularly explore and evaluate possible other strategic transactions and alliances. We also periodically
engage in discussions with satellite service providers, satellite manufacturers and others regarding such matters,
which may include joint ventures and strategic relationships as well as business combinations or the acquisition or
disposition of assets. In order to pursue certain of these opportunities, we will require additional funds. There can be
no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able
to obtain the necessary financing for these transactions on favorable terms, if at all.
In 2008, Loral agreed to purchase the Canadian coverage portion of the ViaSat-1 satellite, which was
successfully launched in October 2011. The ViaSat-1 satellite is a high capacity Ka-band spot beam satellite for
broadband services that was launched into the 115o West longitude orbital location. Loral also entered into an
agreement with Xplornet, Canada’s largest rural broadband provider, to deliver high throughput satellite Ka-band
capacity for broadband services in Canada. Under the agreement, Xplornet agreed to contract with Loral for the
Canadian capacity on the ViaSat-1 satellite and associated gateway services for the expected life of the satellite, now
projected to commence in late 2011 or early 2012, and Loral agreed to construct and operate four gateways in
Canada. Approximately $50 million had been invested by Loral through April 11, 2011. A portion of these costs was
funded by prepayments in 2010 from Xplornet of CAD 2.5 million as required under the agreement. On April 11,
2011, Loral assigned its investment in the Canadian broadband business, including the Canadian coverage portion of
the ViaSat-1 satellite, to Telesat for $13 million plus reimbursement of approximately $48 million, representing
Loral’s net costs incurred through the closing date (see Note 17 to the financial statements). In addition, in
connection with the assignment, Telesat agreed that if it obtains certain supplemental capacity on the payload, Loral
will be entitled to receive, for four years, one-half of any net revenue actually earned by Telesat on such
supplemental capacity.
In connection with the acquisition of our ownership interest in Telesat in 2007, 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 16 to the financial statements) reflects
the results of our business segments for 2011, 2010 and 2009. 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 before depreciation, amortization and
stock-based compensation (excluding stock-based compensation from SS/L phantom stock appreciation rights
expected to be settled in cash), gain on disposition of net assets and directors’ indemnification expense (“Adjusted
EBITDA”) as the measure of a segment’s profit or loss. Adjusted EBITDA is equivalent to the common definition
of EBITDA before: gain on disposition of net assets; directors’ indemnification expense; gains or losses on litigation
not related to our operations; other expense; and equity in net income of affiliates.
48
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, gain on disposition of net assets,
directors’ indemnification expense, gains or losses on litigation not related to our operations, other expense and
equity in net income 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 expense, which are typically for non-recurring
transactions not related to the on-going business, and effects of investments not directly managed. The use of
Adjusted EBITDA allows us and investors to compare operating results exclusive of these items. Competitors in our
industry have significantly different capital structures. The use of Adjusted EBITDA maintains comparability of
performance by excluding interest expense.
We believe the use of Adjusted EBITDA along with U.S. GAAP financial measures enhances the
understanding of our operating results and is useful to us and investors in comparing performance with competitors,
estimating enterprise value and making investment decisions. Adjusted EBITDA as used here may not be
comparable to similarly titled measures reported by competitors. We also use Adjusted EBITDA to evaluate
operating performance of our segments, to allocate resources and capital to such segments, to measure performance
for incentive compensation programs and to evaluate future growth opportunities. Adjusted EBITDA should be used
in conjunction with U.S. GAAP financial measures and is not presented as an alternative to cash flow from
operations as a measure of our liquidity or as an alternative to net income as an indicator of our operating
performance.
Loral 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, 2011, 2010 and 2009. 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)
$
$
Year Ended December 31,
2010
(In millions)
$
$
1,165.1
797.3
1,962.4
(6.1)
(797.3)
1,159.0
$
$
2011
1,108.2
817.3
1,925.5
(0.8)
(817.3)
1,107.4
2009
1,008.7
691.6
1,700.3
(15.3)
(691.6)
993.4
See explanations below for Notes 1, 2 and 3.
Changes in revenues from period to period are influenced by the size, timing and number of satellite contracts
awarded in the current and preceding years and the length of the construction period for satellite contracts awarded.
Revenues are recognized on the cost-to-cost percentage of completion method over the construction period, which
usually ranges between 24 and 36 months. Large satellites with significant new development can require up to 48
months for completion.
Revenues from Satellite Manufacturing before eliminations decreased $57 million for the year ended
December 31, 2011 as compared to 2010, due to an $81 million reduction in revenues generated by the percentage
of completion effect of lower costs incurred in 2011 resulting from the timing of manufacturing activity and the
average size and profitability of satellites under construction during the period and the Telstar 14R anomaly impact
of $13 million, partially offset by improved factory efficiency (which reduces the estimated cost to complete and
increases the percentage of completion and the revenue recognized) of $37 million. Eliminations for the year ended
December 31, 2011 and 2010 consist primarily of revenue applicable to Loral’s interest in a portion of the payload
of the ViaSat-1 satellite which was being constructed by SS/L (see Note 17 to the financial statements). Eliminations
decreased in 2011 due to the sale of Loral’s portion of the ViaSat-1 payload on April 11, 2011.
49
Satellite Services segment revenue increased by $20 million for the year ended December 31, 2011 as
compared to 2010 primarily due to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on
Canadian dollar denominated revenues. In addition, revenue growth in Telesat’s international enterprise activities
and in its Infosat subsidiary was partially offset by a scheduled rate reduction on a long-term contract. Satellite
Services segment revenues excluding foreign exchange impact would have increased by approximately $3 million
for the year ended December 31, 2011 as compared with 2010.
Revenues from Satellite Manufacturing before eliminations increased $156 million for 2010 as compared to
2009, due to $112 million of higher revenues generated by increased satellite contract awards, improved factory
performance (which reduces the estimated cost to complete and increases the percentage of completion and the
revenue recognized) of $59 million and a $5 million increase in performance incentives earned, net of penalties,
partially offset by a revenue decrease of $20 million from prior year contract scope additions, which generated
higher revenues in 2009. Eliminations for 2010 and 2009 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 17 to the financial
statements).
Satellite Services segment revenue increased by $106 million for 2010 as compared to 2009 primarily due to
the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenues,
settlements from two terminated contracts, an increase in equipment sales due to the completion of a significant
project, growth in Telstar 18 service, the full year effect of Nimiq 5 and increased revenue from Telstar 11N,
partially offset by the termination of leasehold interests in Telstar 10, the removal of Nimiq 3 from service and
decreased revenue from services provided to the automotive industry. Satellite Services segment revenues would
have increased by approximately $63 million for 2010 as compared with 2009 if the U.S. dollar/Canadian dollar
exchange rate had been unchanged between the two periods.
Adjusted EBITDA:
Satellite Manufacturing
Satellite Services
Corporate expenses
Segment Adjusted EBITDA before eliminations
Eliminations(1)
Affiliate eliminations(2)
Adjusted EBITDA
See explanations below for Notes 1 and 2.
$
2011
Year Ended December 31,
2010
(In millions)
143.1
$
606.7
(17.9)
731.9
137.7
629.2
(17.2)
749.7
$
(0.3)
(629.2)
$
120.2
$
(1.5)
(606.7)
123.7
2009
90.6
488.1
(21.4)
557.3
(1.7)
(488.1)
$
67.5
Satellite Manufacturing segment Adjusted EBITDA decreased $5 million for the year ended December 31,
2011 compared with the year ended December 31, 2010. The decrease was primarily due to a $14 million increase in
research and development expenses, a $13 million increase in marketing expenses primarily as a result of increased
proposal activity, a $27 million reduction that resulted from the lower profitability on the mix of satellites under
construction in 2011 and the Telstar 14R anomaly impact of $13 million, partially offset by margin increases of $35
million from improved factory efficiency and $27 million as a result of a loss recorded in 2010 on a 2010 contract
award. The Adjusted EBITDA margin remained the same at 12% for the years ended December 31, 2011 and 2010.
Satellite Services segment Adjusted EBITDA increased by $23 million for the year ended December 31, 2011
as compared to the year ended December 31, 2010 primarily due to the revenue increase described above and cost
reductions related to operating discipline, lower revenue related expenses and lower in-orbit insurance premiums,
partially offset by the impact of U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses
and increased cost of equipment sales. Satellite Services segment Adjusted EBITDA excluding foreign exchange
impact would have increased by $10 million for the year ended December 31, 2011 as compared with the year ended
December 31, 2010.
50
Corporate expenses decreased by approximately $1 million for the year ended December 31, 2011 compared
to the year ended December 31, 2010 primarily due to reduced fringe expenses related to stock-based compensation.
Satellite Manufacturing segment Adjusted EBITDA increased $53 million for 2010 compared with 2009. The
increase consists of $55 million from improved factory performance, $35 million from the increased sales volume,
$9 million from performance incentives earned, net of penalties and a $4 million decrease in selling, general and
administrative expenses (other than depreciation and amortization), partially offset by a decrease of $20 million
from prior year contract scope additions, a $27 million loss resulting from a contract award in the third quarter of
2010 and a $3 million increase in stock-based compensation from SS/L phantom stock appreciation rights that are
expected to be paid in cash. As a result, the Adjusted EBITDA margin increased to 12% in 2010 from 9% in 2009.
Satellite Services segment Adjusted EBITDA increased by $119 million for 2010 as compared to 2009
primarily due to the revenue increase described above, expense reductions as a result of efficiencies gained from
restructuring, reductions in third party satellite capacity, elimination of expenses associated with decreased revenue
from services provided to the automotive industry and restructuring charges of $3 million in 2009, partially offset by
the impact of the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses. Satellite
Services segment Adjusted EBITDA would have increased by approximately $87 million for 2010 as compared with
2009 if the U.S. dollar/Canadian dollar exchange rate had been unchanged between the two periods.
Corporate expenses decreased for 2010 compared to 2009 primarily due to a $4 million reduction in deferred
compensation expense because the maximum award under the deferred compensation plan was reached in 2009, and
a $2 million decrease in legal fees, partially offset by a $2 million increase in stock-based compensation from SS/L
phantom stock appreciation rights that are expected to be paid in cash.
Reconciliation of Adjusted EBITDA to Net Income:
$
Adjusted EBITDA
Depreciation, amortization and stock-based compensation(4)
Gain on disposition of net assets
Directors’ indemnification expense (5)
Operating income
Interest and investment income
Interest expense
Gain on litigation(6)
Other expense
Income tax (provision) benefit (7)
Equity in net income of affiliates
120.2
(33.7)
6.9
—
93.4
21.4
(2.7)
4.5
(6.6)
(89.1)
106.3
Net income
$
127.2
$
2011
Year Ended December 31,
2010
(In millions)
$
2009
67.5
(47.3)
—
—
20.2
8.3
(1.4)
—
(0.1)
(5.6)
210.3
231.7
123.7 $
(36.3)
—
(6.8)
80.6
13.5
(3.1)
5.0
(2.9)
308.6
85.6
487.3 $
(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.
Represents the elimination of amounts attributed to Telesat whose results are reported in our consolidated
statements of operations as equity in net income of affiliates.
Includes revenues from affiliates of $140.0 million, $137.2 million and $92.1 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
Includes non-cash stock-based compensation of $1.2 million, $2.5 million and $7.5 million for the years
ended December 31, 2011, 2010 and 2009, respectively (see Note 11 to the financial statements).
(5) Represents the indemnification of legal expenses, net of insurance recovery, incurred by MHR-affiliated
directors in defense of claims asserted against them in their capacity as directors of Loral.
Represents income from directors’ and officers insurance recoveries related to plaintiffs’ fees in shareholder
litigation.
(2)
(3)
(4)
(6)
51
(7) During the fourth quarter of 2010, we determined, based on all available evidence, that a full valuation
allowance was no longer required on our deferred tax assets and, therefore, $335.3 million of the valuation
allowance was reversed as an income tax benefit (see Note 10 to the financial statements).
2011 Compared with 2010 and 2010 Compared with 2009
The following compares our consolidated results for 2011, 2010 and 2009 as presented in our financial
statements:
Revenue from Satellite Manufacturing
Revenue from Satellite Manufacturing
Eliminations
Revenue from Satellite Manufacturing as
reported
Year Ended
December 31,
2010
(In millions)
$
1,165
(6)
2011
$
1,108
(1)
% Increase
(Decrease)
2011
vs.
2010
2010
vs.
2009
2009
$
1,008
(15)
(5%)
(83%)
16%
(60%)
$
1,107
$
1,159
$
993
(4%)
17%
Revenues from Satellite Manufacturing before eliminations decreased $57 million for the year ended
December 31, 2011 as compared to 2010, due to an $81 million reduction in revenues generated by the percentage
of completion effect of lower costs incurred in 2011 resulting from the timing of manufacturing activity and the
average size and profitability of satellites under construction during the period and the Telstar 14R anomaly impact
of $13 million, partially offset by improved factory efficiency (which reduces the estimated cost to complete and
increases the percentage of completion and the revenue recognized) of $37 million. Eliminations for the year ended
December 31, 2011 and 2010 consist primarily of revenue applicable to Loral’s interest in a portion of the payload
of the ViaSat-1 satellite which was being constructed by SS/L (see Note 17 to the financial statements). Eliminations
decreased in 2011 due to the sale of Loral’s portion of the ViaSat-1 payload on April 11, 2011. As a result, revenues
from Satellite Manufacturing as reported decreased $52 million for the year ended December 31, 2011 as compared
to the year ended December 31, 2010.
Revenues from Satellite Manufacturing before eliminations increased for 2010 as compared to 2009 due to
$112 million of higher revenues generated by increased satellite contract awards, improved factory performance
(which reduces the estimated cost to complete and increases the percentage of completion and the revenue
recognized) of $59 million and a $5 million increase in performance incentives earned, net of penalties, partially
offset by a revenue decrease of $20 million from prior year contract scope additions, which generated higher
revenues in 2009. Eliminations for 2010 and 2009 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 17 to the financial
statements). As a result, revenues from Satellite Manufacturing as reported increased $166 million for 2010 as
compared to 2009.
Cost of Satellite Manufacturing
Year Ended
December 31,
2010
(In millions)
987
$
2011
$
909
% Increase
(Decrease)
2011
vs.
2010
2010
vs.
2009
2009
$
880
(8%)
12%
Cost of Satellite Manufacturing
Cost of Satellite Manufacturing as a % of
Satellite Manufacturing revenues as reported
82%
85%
89%
Cost of Satellite Manufacturing decreased by $78 million for the year ended December 31, 2011 as compared
to the year ended December 31, 2010 as a result of a $48 million decrease from the timing of manufacturing activity,
a $24 million decrease from a loss recorded in 2010 on a 2010 contract award and a $5 million reduction in
depreciation and amortization.
52
Cost of Satellite Manufacturing increased by $107 million for 2010 as compared to 2009 as a result of a $92
million increase from the higher sales volume and the $27 million loss from a contract award in the third quarter of
2010, partially offset by a $7 million decrease in amortization and a $2 million decrease in stock-based
compensation.
Selling, General and Administrative Expenses
Year Ended
December 31,
2010
2009
2011
% Increase
(Decrease)
2011
vs.
2010
2010
vs.
2009
Selling, general and administrative expenses
% of revenues as reported
(In millions)
85
112
93
32%
(4%)
10%
7%
9%
Selling, general and administrative expenses increased by $27 million for the year ended December 31, 2011
as compared to the year ended December 31, 2010, primarily due to a $13 million increase in marketing expenses
primarily as a result of increased proposal activity and a $14 million increase in research and development expenses.
Selling, general and administrative expenses decreased by $8 million for 2010 as compared to 2009, primarily
due to a $5 million reduction in deferred compensation expense because the maximum award under the deferred
compensation plan was reached in 2009, a $3 million decrease in research and development expenses, a $3 million
increase in the allowance for billed receivables in the third quarter of 2009 and a $2 million decrease in legal fees,
partially offset by a $4 million increase in new business acquisition expenses and a $3 million increase in stock-
based compensation.
Gain on Disposition of Net Assets
Gain on disposition of net assets for the year ended December 31, 2011 represents the gain associated with the
sale of Loral’s portion of the ViaSat-1 payload and related net assets to Telesat, net of the elimination of Loral’s
64% ownership interest in Telesat.
Directors’ Indemnification Expense
Directors’ indemnification expense for the year ended December 31, 2010 represents our indemnification of
legal expenses incurred by MHR-affiliated directors in defense of claims asserted against them in their capacity as
directors of Loral, net of directors and officers insurance recoveries (see Note 15 to the financial statements).
Interest and Investment Income
Interest and investment income
2011
Year Ended
December 31,
2010
(In millions)
2009
$
21 $
14 $
8
Interest and investment income increased by $7 million for 2011 as compared to 2010, primarily due to $5
million of increased interest income on long-term orbital receivables as a result of satellite launches and interest
income on directors and officers liability insurance claims.
Interest and investment income increased by $6 million for 2010 as compared to 2009, primarily due to
increased interest income on long-term orbital receivables as a result of satellite launches.
Interest Expense
Interest expense
2011
Year Ended
December 31,
2010
(In millions)
2009
$
3 $
3 $
1
53
Interest expense for 2011, 2010 and 2009 consists primarily of fees and amortization of issuance costs related
to the SS/L credit agreement and the interest related to the ChinaSat transponders. Interest expense for 2009 includes
a $1 million reversal of interest expense previously recorded due to the favorable resolution of a contingent liability.
Gain on Litigation
For each of the years ended December 31, 2011 and 2010, we recorded income of $5.0 million from directors
and officers insurance recoveries related to plaintiffs fees for shareholders litigation arising from the issuance of our
Series-1 Preferred Stock which was concluded during 2008 (see Note 15 to the financial statements).
Other Expense
Other expense for the year ended December 31, 2011, includes expenses related to the evaluation of strategic
alternatives for SS/L and preparation for a potential spin-off of SS/L.
Other expense for the year ended December 31, 2010, includes expenses related to the evaluation of strategic
alternatives for SS/L and preparation and filing of registration statements and amendments related to a potential
initial public offering of SS/L, partially offset by the reversal of a liability related to the sale of certain assets in a
prior year.
Income Tax Provision
Until the fourth quarter of 2010, we maintained a 100% valuation allowance against our net deferred tax assets
except with regard to the deferred tax assets related to AMT credit carryforwards. During the fourth quarter of 2010,
we determined, based on all available evidence, that it was more likely than not that we would realize the benefit
from a significant portion of our deferred tax assets in the future, and therefore, a full valuation allowance was no
longer required. Accordingly, during the fourth quarter of 2010, we reversed $335.3 million of our valuation
allowance as a deferred income tax benefit. As of December 31, 2011, we maintained a valuation allowance of
$10.9 million against our deferred tax assets for certain tax credit and loss carryovers due to the limited carryforward
periods and character of such attributes and will continue to maintain such valuation allowance until sufficient
positive evidence exists to support its full or partial reversal.
For 2011, we recorded a current tax provision of $19.9 million (which included a provision of $17.1 million to
increase our liability for uncertain tax positions (“UTPs”) ) and a deferred tax provision of $69.2 million (which
included a benefit of $17.9 million for UTPs), resulting in a total provision of $89.1 million on pre-tax income of
$110.0 million. For 2010, we recorded a current tax provision of $16.6 million (which included a provision of $11.5
million to increase our liability for UTPs) and a deferred tax benefit of $325.2 million (which included a benefit of
$14.1 million for UTPs), resulting in a total tax benefit of $308.6 million on pre-tax income of $93.1 million. 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.
For 2011, the additional provision is primarily attributable to the impact of our equity in net income of Telesat
on the deferred income tax provision after having reversed our valuation allowance in the fourth quarter of 2010.
See Critical Accounting Matters — Taxation below for discussion of our accounting method for income taxes.
Equity in Net Income of Affiliates
Telesat
XTAR
Other
2011
$
$
114.5
(6.7)
(1.5)
106.3
54
Year Ended
December 31,
2010
(In millions)
$
92.8 $
(7.0)
(0.2)
85.6 $
$
2009
213.2
(2.7)
(0.2)
210.3
Equity in net income of affiliates for the year ended December 31, 2011, includes a charge of $1.5 million to
reduce the carrying value of our investment in an affiliate to zero based on our determination that the investment has
been impaired and the impairment is other than temporary.
Loral’s equity in net income of Telesat is based on our proportionate share of Telesat’s results in accordance
with U.S. GAAP and in U.S. dollars. The amortization of Telesat fair value adjustments applicable to the Loral
Skynet assets and liabilities acquired by Telesat in 2007 is proportionately eliminated in determining our share of the
net income of Telesat. Our equity in net income of Telesat also reflects the elimination of our profit, to the extent of
our beneficial interest, on satellites we are constructing for Telesat.
Summary financial information for Telesat in accordance with U.S. GAAP and in Canadian dollars (“CAD”)
and U.S. dollars (“$”) for the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and
2010 follows (in millions):
Year Ended December 31
2011
2010
2009
2011
(In Canadian dollars)
Year Ended December 31
2010
(In U.S. dollars)
2009
808.4
(186.0)
(245.3)
135.0
(1.1)
(1.5)
509.5
(218.2)
(80.1)
50.1
2.0
(64.6)
198.7
821.4
(196.5)
(256.8)
—
—
3.9
371.9
(241.6)
164.0
(79.2)
0.6
(42.4)
173.3
788.7
(232.0)
(262.5)
—
—
33.4
327.6
(260.0)
500.9
(169.9)
(0.9)
(2.5)
395.2
817.3
(188.1)
(248.0)
136.5
(1.1)
(1.5)
515.1
(220.6)
(81.0)
50.7
2.0
(65.3)
200.9
797.3
(190.7)
(249.3)
—
—
3.7
361.0
(234.5)
159.2
(76.9)
0.6
(41.2)
168.2
691.6
(203.4)
(230.2)
—
—
29.3
287.3
(228.0)
439.2
(149.0)
(0.7)
(2.2)
346.6
Statement of Operations Data:
Revenues
Operating expenses
Depreciation, amortization and
stock-based compensation
Gain on insurance proceeds
Impairment of intangible assets
(Loss) gain on disposition of
long-lived assets
Operating income
Interest expense
Foreign exchange (losses) gains
Gains (losses) on financial
instruments
Other income (expense)
Income tax provision
Net income loss
Average exchange rate for
translating Canadian dollars
to U.S. dollars
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 translating Canadian
dollars to U.S. dollars
.9891
1.0302
1.1405
As of December 31,
As of December 31,
2011
2010
(In Canadian dollars)
2011
2010
(In U.S. dollars)
359.3
5,461.1
295.6
2,877.9
4,131.8
141.4
1,187.9
290.8
5,298.8
293.9
2,923.0
4,137.1
141.4
1,020.4
351.8
5,347.2
289.4
2,817.9
4,045.6
138.5
1,163.1
291.4
5,309.4
294.5
2,928.9
4,145.3
141.7
1,022.4
1.0213
0.9980
Following the May 2011 launch of Telstar 14R/Estrela do Sul 2, an SS/L-built satellite, the satellite’s north
solar array failed to fully deploy. The north solar array anomaly has diminished the amount of power available for
the satellite’s transponders and has reduced the life expectancy of the satellite. As a result, during the third quarter of
2011, Telesat carried out an impairment test for the satellite. Based on Telesat management’s best estimates and
55
assumptions, there was no impairment in Telstar 14R/Estrela do Sul 2 and as a result no adjustment to the carrying
value of the asset was required. In December 2011, Telesat received insurance proceeds of $132.7 million from its
insurers with respect to the claim Telesat filed for the failed solar array deployment.
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.
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, 2011, 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, 2011 would have increased or decreased
Telesat’s net income for the year 2011 by approximately $155 million. During the period from October 31, 2007 to
December 31, 2011, the carrying value of Telesat’s U.S. Term Loan Facility, Senior Notes and Senior Subordinated
Notes has increased by approximately $192 million due to the stronger U.S. dollar. During that same time period,
however, 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 $158
million.
The equity losses in XTAR, LLC (“XTAR”), our 56% owned joint venture, represent our share of XTAR
losses incurred in connection with its operations.
We regularly evaluate our investment in XTAR to determine whether there has been a decline in fair value
that is other than temporary. During November 2011 and January 2012, XTAR reduced its revenue forecast for 2012
and subsequent years. We have performed an impairment test for our investment in XTAR as of December 31, 2011,
using the January 2012 forecast, and concluded that our investment in XTAR was not impaired. Any further declines
in XTAR’s projected revenues may result in a future impairment charge.
Backlog
Backlog as of December 31, 2011 and 2010 was as follows (in millions):
Satellite Manufacturing
Satellite Services
Total backlog before eliminations
Satellite Manufacturing eliminations
Satellite Services eliminations
Total backlog
2011
2010
$
$
1,426
5,333
6,759
—
(5,333)
1,426
$
$
1,625
5,477
7,102
(4)
(5,477)
1,621
It is expected that approximately 62% of satellite manufacturing backlog as of December 31, 2011 will be
recognized as revenue during 2012.
It is expected that approximately 11% of satellite services backlog will be recognized as revenue during 2012.
As of December 31, 2011, Telesat had received approximately $399 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
56
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 and performance incentives that
will be received as the satellite performs on orbit) and the potential for component obsolescence in connection with
long-term procurements. Estimated amounts for performance incentives and penalties are included in contract value
when and to the extent that it is probable such amounts will be paid or received. Performance incentives and
penalties relate primarily to on-orbit performance of the satellite and early or late delivery of the satellite, although a
limited number of contracts include performance incentives and penalties related to mass, payload performance and
other items.
Satellite construction contracts often include provisions for performance incentives pursuant to which a
portion of the contract value (typically about 10%) is at risk, over the life of the satellite (typically 15 years),
contingent upon the in-orbit performance of the satellite in accordance with contractual specifications. These
performance incentives are structured in two forms: (i) under warranty payback, the customer pays the entire amount
of the performance incentives during the period of satellite construction and such performance incentive amounts are
subject to warranty claims, or (ii) under orbital receivables, the customer makes payments of performance incentives
at regular intervals (often monthly) over the in-orbit life of the satellite.
Performance incentives, whether warranty payback or orbital receivables, are included in revenues during the
construction period of the satellite. The amount of performance incentives recorded as revenues is net of (i) a factor
based on past experience to reflect the risk that a portion of the performance incentives will be lost due to non-
performance and (ii) in the case of orbital receivables, a discount for the time value of money because the amounts
will be collected over the operating life of the satellite.
Estimates for performance incentives and penalties are assessed continually during the term of the contract
and revisions are reflected when the conditions become known. Changes in estimates are typically the result of
schedule changes that affect performance incentives and penalties, changes in contract scope, changes in new
business forecasts that can affect the level of overhead allocated to a given contract and changes in estimates on
contracts as a result of the complex nature of the satellites we manufacture. Changes in estimates are included in
sales and cost of sales using the cumulative catch-up method, which recognizes the cumulative effect of changes in
estimates on current and prior periods in the current period based on a contract’s completion percentage. 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. For the years ended
December 31, 2011, 2010 and 2009, cumulative catch up adjustments related to prior year activity as a result of
changes in contract estimates increased operating income by $48 million, $59 million and $41 million, respectively,
and diluted earnings per share by $0.90, $1.15 and $0.62, respectively.
Billed Receivables and Long-Term Receivables
We are required to estimate the collectability of our long-term receivables and billed receivables which are
included in contracts in process on our consolidated balance sheet. A considerable amount of judgment is required in
assessing the collectability of these receivables, including the current creditworthiness of each customer and related
aging of the past due balances. Charges for bad debts recorded to the statements of operations on billed receivables
for the years ended December 31, 2011, 2010 and 2009, were nil, nil and $2.8 million, respectively. At
December 31, 2011, 2010 and 2009, billed receivables were net of allowances for doubtful accounts of $0.2 million,
$0.2 million and $3.7 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. Performance incentives, whether warranty payback or orbital receivables, are recorded as
receivables on our balance sheet as we record the revenues on the satellite during the construction period, which is
typically two to three years. Performance incentives structured as warranty payback are included in contracts in
process, and orbital receivables, which are collected over the in-orbit life of the satellite, are included in long-term
receivables.
57
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 nil, $4.3 million and $1.0 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
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 our 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, 2011:
Assets
Cash equivalents: Money market funds
Available-for-sale securities: Communications industry
Derivatives: Foreign exchange contracts
Non-qualified pension plan assets
Liabilities
Derivatives: Foreign exchange contracts
Level 1
Level 2
(In thousands)
Level 3
191,482 $
—
$ —
531 $
—
$ —
— $
844 $
1
—
$ —
$ —
— $
4,622
$ —
$
$
$
$
$
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, 2011.
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.
58
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 and deferred tax required on distributions received or deemed to be received 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.
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 potential accrued interest and penalties related to UTPs in income tax expense on
a quarterly basis.
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.
Pension and Other Employee Benefits
We maintain qualified pension and supplemental retirement plans. These plans are defined benefit pension
plans. In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired
employees and dependents. These pension and other employee benefit costs are developed from actuarial valuations.
Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return
on plan assets. Material changes in these pension and other employee postretirement benefit costs may occur in the
future due to changes in these assumptions, as well as our actual experience.
The discount rate is subject to change each year, based on a hypothetical yield curve developed from a
portfolio of high quality, corporate, non-callable bonds with maturities that match our projected benefit payment
stream. The resulting discount rate reflects the matching of the plan liability cash flows to the yield curve. Changes
in applicable high-quality long-term corporate bond indices are also considered. The discount rate determined on
this basis was 4.75% as of December 31, 2011, a decrease of 75 basis points from December 31, 2010.
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. Both
investment types may include alternative investments which are permitted to be up to 40% of total plan assets.
Pension plan assets are primarily 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 managers 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. The expected long-term rate of return on plan assets determined
on this basis was 8.0% for 2011, 2010 and 2009. For 2012, we are continuing to use an expected long-term rate of
return of 8.0%.
These pension and other employee postretirement benefit costs are expected to increase to approximately
$26.8 million in 2012 from $18.8 million in 2011, primarily due to the lower discount rate. 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 $2.9 million and $1.5 million, respectively, in 2011.
59
The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by
$315.7 million at December 31, 2011. 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. 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.
The SS/L phantom stock appreciation rights program has been designed to incentivize and reward our
employees based on the increase in a synthetically determined value of SS/L’s equity. As SS/L’s common stock has
not historically been publicly traded and thus does not have a readily ascertainable market value, its equity value
under the program is derived from a formula that calculates equity value based on a multiple of Adjusted EBITDA
plus cash on hand less debt at the end of the relevant year. Each phantom stock appreciation right provides the
recipient with the right to receive an amount equal to the increase in our notional stock price over the base price at
the date of grant multiplied by the number of phantom stock appreciation rights vested on the applicable vesting
date. The baseline price at each grant date is updated accordingly.
The phantom stock appreciation rights have fixed exercise dates. As such, the phantom stock appreciation
rights are automatically exercised and the value (if any) is paid out on each vesting date. The phantom stock
appreciation rights may be settled in Loral stock or cash at our option. The number of shares of Loral stock to be
issued on the vesting date is determined by dividing the value of the phantom stock appreciation rights by the price
per share of Loral stock on the vesting date. Accordingly, the phantom stock appreciation rights are accounted for as
liability awards and the value of the awards is adjusted quarterly for changes in the value of the award resulting from
increases or decreases in actual or forecasted Adjusted EBITDA for the relevant year. Compensation expense is
recognized ratably over the requisite vesting period.
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.
60
Accounting Standards Issued and Not Yet Implemented
For discussion of accounting standards issued and not yet implemented that could have an impact on us, see
Note 2 to the financial statements.
Liquidity and Capital Resources
Loral
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. SS/L’s operations are
consolidated in the Company’s financial statements, while the operations of Telesat and XTAR are not consolidated
but are presented using the equity method of accounting.
The Parent Company has no debt. SS/L amended and restated its revolving credit facility on December 20,
2010, increasing the facility amount to $150 million, extending the maturity to January 24, 2014 and removing the
Parent Company guarantee. At December 31, 2011, there were no outstanding borrowings under the SS/L Credit
Agreement and $5 million of letters of credit outstanding. Telesat has third party debt with financial institutions. The
Parent Company has not provided a guarantee for the debt of Telesat. XTAR has no external debt other than to its
LLC member, Hisdesat, for restructured lease payments on the Spainsat satellite. XTAR makes payments of $5
million per year to pay down the outstanding restructured lease balance. A convertible note to Hisdesat was paid off
on November 30, 2011 through capital contributions from the partners. Loral’s capital contribution to XTAR was
$10 million.
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.
The Parent Company’s cash flow is fairly predictable. SS/L’s cash flow, however, is subject to substantial
timing fluctuation of receipts and expenditures and is difficult to forecast on a quarter to quarter basis. A typical
satellite production contract takes two to three years to complete. SS/L’s cash receipts are tied to the achievement of
contract milestones which are negotiated for each contract, and the timing of milestone receipts does not necessarily
match the timing of cash expenditures. Revenues and profits under these long-term contracts are recognized using
the cost-to-cost percentage of completion method, so the timing of revenue recognition and cash receipts do not
match, creating fluctuations in certain balance sheet accounts including contracts-in-process, long-term receivables
and customer advances. In addition, the timing of satellite awards is difficult to predict, contributing to the
unevenness of revenues and cash flow.
Cash and Available Credit
At December 31, 2011, the Company had $197 million of cash and cash equivalents, $24 million of restricted
cash and no debt. The Company’s cash and cash equivalents increased by $31 million from December 31, 2010,
while restricted cash increased by $18 million. SS/L entered into a satellite manufacturing contract during the first
quarter of 2011 that requires certain customer payments to be placed into escrow until the satellite is delivered. The
escrow amount of $24 million at December 31, 2011 for this contract will grow by an additional $12 million in
2012. The escrow funds with interest earned will be released to SS/L upon delivery of the satellite in 2013. During
2011, SS/L did not borrow any funds under its revolving credit agreement. The cash increase during 2011 consisted
of $58 million provided by operating activities, partially offset by $23 million used in financing activities and $4
million used in investing activities. A more detailed discussion of these cash changes by activity is set forth in the
sections, “Net Cash Provided by Operating Activities”, “Net Cash Used in Investing Activities”, and “Net Cash
(Used In) Provided by Financing Activities.” Changes in cash at the Parent Company and SS/L during 2011 are
discussed below.
As discussed above, the SS/L Credit Agreement was amended and restated on December 20, 2010 to increase
the facility from $100 million to $150 million, extend the maturity to January 24, 2014 and eliminate the Parent
Company guarantee. On December 8, 2011, the SS/L Credit Agreement was amended, increasing the $50 million
letter of credit sub-limit to $100 million. As of December 31, 2011, SS/L had borrowing availability of
approximately $145 million under the facility after giving effect to approximately $5 million of outstanding letters
61
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. The amended and restated SS/L Credit Agreement allows
for a spin-off of SS/L from Loral or an initial public offering of SS/L.
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 for similar risk categories of investment. 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.
Orbital Receivables
As of December 31, 2011, SS/L had orbital receivables of approximately $355 million, net of fresh-start fair
value adjustments of $16 million. Of the gross orbital receivables as of December 31, 2011, approximately $230
million are related to satellites launched and $141 million are related to satellites that are under construction. This
represents an increase in gross orbital receivables of approximately $41 million from December 31, 2010. During
2011, our orbital receivables decreased by approximately $7 million related to the Telstar 14R/Estrela do Sul 2
anomaly and increased by approximately $4 million related to the sale of our Canadian broadband business to
Telesat. The growth in the orbital receivable balance as a percentage of sales in 2011 was less than in 2010 because
more contracts-in-process during 2011 included performance incentives structured as warranty payback rather than
orbital receivables.
We anticipate that this orbital receivable asset will continue to grow, deferring the receipt of cash. We will
generate positive cash flow from orbital receivables once principal and interest payments received for the in-orbit
satellites become greater than the amount being deferred for satellites under construction. During 2011, SS/L
received $25 million of orbital receivable payments, representing principal and interest. The timing of when we will
have positive cash flow from orbital receivables is dependent on a number of factors including the number of new
satellite awards with the requirement for orbital incentive payments, the timing of the completion of contracts under
construction, interest rates associated with orbital incentive payments, the performance of on-orbit satellites and the
number of satellites in operation as compared to the number of satellites under construction.
Liquidity
The $31 million increase in cash and cash equivalents for the Company from December 31, 2010 to
December 31, 2011 consisted of a $74 million increase for the Parent Company and a $43 million decrease for SS/L.
The $18 million increase in restricted cash was the result of a $24 million increase at SS/L for two contract receipts
required to go into escrow as discussed above, partially offset by a $1 million reduction in restricted cash for the
Parent Company and a $5 million reduction in other restricted cash for SS/L.
During 2011, the Parent Company’s unrestricted cash position increased approximately $74 million to $101
million. In January 2011, as permitted by the SS/L revolving credit facility, the Parent Company received a $50
million dividend from SS/L and paid SS/L $1 million in settlement of net intercompany account balances. On
March 1, 2011, Loral entered into agreements to sell its investment in the Canadian broadband business, including
the Canadian coverage portion of the ViaSat-1 satellite, to Telesat for $13 million plus reimbursement of
approximately $48 million, representing Loral’s net costs incurred through the closing date. This transaction closed
on April 11, 2011 with the Parent Company receiving the cash proceeds. In addition, in connection with this
transaction, Telesat agreed that, if it obtains certain supplemental capacity on the payload, Loral will be entitled to
receive, for four years, one-half of any net revenue actually earned by Telesat on such supplemental capacity. The
62
Parent Company also received approximately $16 million in cash from the 2010 settlement of directors’ and
officers’ liability insurance claims and received two quarterly management fee payments from Telesat totaling $3
million. Partially offsetting these cash receipts, the Parent Company used $11 million to fund operating expenses
and changes in working capital, paid $17 million to fund withholding taxes on employee cashless stock option
exercises, made a $10 million capital contribution to XTAR and made approximately $6 million in tax payments. In
addition, on November 14, 2011, we announced a stock repurchase program under which the Company may
repurchase up to 800,000 shares. As of December 31, 2011, the Company repurchased 136,494 shares for cash of $8
million. At December 31, 2011, SS/L owed the Parent Company approximately $3 million that was reimbursed by
SS/L in January 2012.
At the Parent Company, we expect that our cash and cash equivalents will be sufficient to fund projected
expenditures for the next 12 months, including the stock repurchase program. In addition to our cash on hand, we
believe that, given the substantial value of our assets, which include our 64% economic interest in Telesat and our
56% equity interest in XTAR, we have the ability, if appropriate, to access the financial markets for debt or equity at
the Parent Company. Given the continuously changing financial environment, however, there can be no assurance
that the Parent Company would be able to obtain such financing on acceptable terms.
During 2011, SS/L generated cash of $26 million before payment of a $50 million dividend to the Parent
Company and a $19 million increase in restricted cash, resulting in an unrestricted cash position of $96 million as of
December 31, 2011. The primary source for this increase in cash was Adjusted EBITDA of $137 million which was
partially offset by an increase in net program assets (contracts-in-process, long-term receivables and customer
advances) of $46 million, $37 million of capital expenditures, a $17 million decrease in pension and postretirement
liabilities and a $6 million increase in inventories. In addition, other changes in balance sheet accounts used cash of
approximately $5 million. SS/L’s restricted cash balance at December 31, 2011 was $24 million.
SS/L’s projected use of cash for the next 12 months includes capital expenditures and continued growth in its
orbital receivables balance. With regard to capital expenditures, SS/L expects to spend approximately $200 million
over the three-year period ending December 31, 2013, including $37 million of expenditures in 2011, related to an
infrastructure campaign that includes the building of a second thermal vacuum chamber, completing certain building
and systems modifications and purchasing additional test and satellite handling equipment to meet its contractual
obligations more efficiently. Upon completion of this infrastructure campaign, SS/L anticipates returning to a more
customary level of annual capital expenditures of $30 million to $40 million, excluding major system upgrades
caused by additional expansion or technology insertion. The orbital receivable asset will continue to grow in 2012.
We anticipate that an additional $12 million of cash received in 2012 will be added to the restricted escrow account
as required by the contract that was signed in the first quarter of 2011. In addition, in relation to a new contract
award entered into in 2012 that required a $60 million performance bond representing approximately 10% of the
contract value, SS/L has deposited $50 million in an escrow account with the surety supplying the bond. The
uncertainty as to the timing and nature of new construction contract awards, milestone receipts and cash flow related
to contract assets can change our cash requirements. 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 also enhances SS/L’s liquidity position.
Risks to Cash Flow
Economic and credit market conditions could adversely affect the ability of customers to make payments to
us, including orbital receivable payments under satellite construction contracts with SS/L. Though most of our
customers are substantial corporations for which creditworthiness is generally high, there are certain customers
which are either highly leveraged or are in the developmental stage and are not fully funded. There can be no
assurance that these customers will not delay contract payments to, or seek financial relief from, us if such
customers have financial difficulties. If customers fall behind or default on their payment obligations, our 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 their 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
63
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.
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 the
date of termination, 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 our liquidity.
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, liquidated damages, and interest which through
December 31, 2011 totaled approximately $204 million, plus re-procurement costs. In the event of termination for
default, SS/L would own the satellite and would attempt to recoup any losses through resale to another customer.
Many of SS/L’s customer contracts include performance incentives, structured as warranty payback or orbital
receivables. If a satellite sold under a contract with performance incentives experiences an anomaly that leads to a
degradation in performance as defined in each particular contract, then in the case of warranty payback, SS/L would
be obligated to return to the customer a portion of the performance incentive payments received and, in the case of
orbital receivables, SS/L would no longer be entitled to a portion of the future orbital receivable payments owed.
The amount SS/L would either need to return to the customer in case of warranty payback, or would no longer be
entitled to receive from the customer in the case of orbital receivables, would depend on various factors including,
among others, the specific contractual specifications, the satellite performance and life remaining. Our liquidity
could be adversely affected by failure to achieve contractual performance incentives. For example, in May 2011,
following the launch of Telstar 14R/Estrela do Sul 2, the satellite’s north solar array failed to fully deploy resulting
in a loss of power and reduced mission life. As a result of the failure, SS/L recorded a charge of approximately $8.5
million for lost orbital incentives that would otherwise have been payable with respect to Telstar 14R/Estrela do
Sul 2.
64
On October 19, 2010, TerreStar Networks Inc. (“TerreStar”), an SS/L customer, filed for bankruptcy under
chapter 11 of the Bankruptcy Code. As of December 31, 2011, SS/L had $19 million of past due receivables from
TerreStar related to an in-orbit SS/L built satellite and other related ground system deliverables and $16 million of
past due receivables from TerreStar related to a second satellite under construction. SS/L had previously exercised
its contractual right to stop work on the satellite under construction as a result of TerreStar’s payment default. The
in-orbit satellite long-term orbital receivable balance, net of fair value adjustment, reflected on the balance sheet at
December 31, 2011 is $16 million. The long-term orbital receivable balance reflected on the balance sheet for the
satellite under construction is $13 million.
In July 2011, the TerreStar Bankruptcy Court approved an agreement between TerreStar and a subsidiary of
DISH Network Corporation (“DISH Subsidiary”) pursuant to which DISH Subsidiary agreed to purchase
substantially all of TerreStar’s assets. In connection with the sale, pursuant to a Stipulation and Order entered into
between TerreStar and SS/L and approved by the TerreStar Bankruptcy Court in July 2011, the parties agreed to
amend the satellite construction contract for the in-orbit satellite, the contract for related ground system deliverables
and the contract for the satellite under construction, and TerreStar agreed to assume and assign to DISH Subsidiary,
and DISH Subsidiary will take assignment of, such contracts as amended. The contract amendments provide for
restructuring of certain past due payments and payments to become due as a result of which SS/L will maintain the
collective profit position of the contracts and will not realize any impairment to its receivables. In addition, SS/L
will be entitled to an allowed unsecured claim against TerreStar in the amount of approximately $5 million. The
assumption will be effective as of the earlier of the closing of the asset sale to DISH Subsidiary or the effective date
of confirmation of a plan of reorganization for TerreStar. The assignment will be effective as of the closing of the
asset sale to DISH Subsidiary. On February 15, 2012, the TerreStar Bankruptcy Court entered an order confirming
TerreStar’s plan of reorganization. The effective date of the plan of reorganization and the closing of the asset sale
are each subject to a number of conditions, including, among others, FCC and other regulatory approvals. Pending
assumption and assignment of the contracts, TerreStar is required to make payments that fall due in the ordinary
course of business under the contracts as amended. Assuming closing of the asset sale to DISH Subsidiary and
assumption and assignment of the contracts as amended, SS/L believes that it will not incur a loss with respect to the
receivables due from TerreStar.
As of December 31, 2011, 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 $1 million. In addition, under its
contract, ICO has future payment obligations to SS/L that total approximately $23 million, of which approximately
$11 million (including $9 million of orbital incentives) is included in long-term receivables. After receiving
Bankruptcy Court approval, ICO, which sought to reorganize under chapter 11 of the Bankruptcy Code in May
2009, assumed 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 certain payments to be received from ICO has changed (for
example, certain significant payments become due only on or after the effective date of a chapter 11 plan of
reorganization for ICO), SS/L will receive substantially the same net present value from ICO as SS/L was entitled to
receive under the original contract. In March 2011, the ICO Bankruptcy Court approved an investment agreement
pursuant to which DISH Network Corporation (“DISH”) agreed to acquire ICO. In connection with this investment
agreement, in April 2011, DISH purchased certain claims against ICO for cash, including SS/L claims aggregating
approximately $7.0 million plus approximately $1.4 million of accrued interest. SS/L believes that, based upon
completion of the tender offer and other payments by ICO to SS/L under the modified contract, it is not probable
that SS/L will incur a material loss with respect to the receivables from ICO. Although, in July 2011, the ICO
Bankruptcy Court confirmed a plan of reorganization for ICO, closing of DISH’s acquisition of ICO and ICO’s
emergence from chapter 11 is still subject to certain other conditions, including, FCC regulatory approval.
SS/L was awarded seven satellite contracts in each of 2008 and 2009 and was awarded six satellite contracts
in each of 2010 and 2011. SS/L had backlog of $1.4 billion at December 31, 2011. From January 1, 2012 to
February 15, 2012, SS/L was awarded three satellite contracts. SS/L has high fixed costs relating primarily to labor
and overhead. Based on SS/L’s current cost structure which has been sized to accommodate six to eight satellite
contract awards per year, SS/L estimates that it 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. If SS/L’s satellite awards fall below 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
65
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 SS/L’s revolving credit facility are sufficient to
finance SS/L, even if SS/L receives fewer than four awards over the next 12 months. If SS/L were to experience a
shortage of orders below four 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 SS/L could obtain such financing on favorable terms, if at all.
Telesat
Cash and Available Credit
As of December 31, 2011, Telesat had CAD 278 million of cash and short-term investments as well as
approximately CAD 153 million of borrowing availability under its Revolving Facility (as defined below). Included
in cash and cash equivalents is CAD 125 million of restricted cash received from insurance proceeds in connection
with the solar array failure on Telstar 14R/Estrela do Sul 2. The restricted cash can be used for capital expenditures
of satellite projects in accordance with the Credit Agreement. Telesat believes the unrestricted cash and short-term
investments as of December 31, 2011, cash flow from operating activities, including amounts 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 requirements for the next 12 months for activities in the normal course of
business, including interest and required principal payments on debt.
For fiscal 2012, Telesat expects its major cash requirements to include capital expenditures of approximately
CAD 240 million, payment of CAD 315 million in principal and interest on long-term debt (including the swaps)
and payment of CAD 7 million on operating leases. Telesat expects to meet its cash needs for fiscal 2012 through a
combination of operating cash and short-term investments, restricted cash received from insurance proceeds, cash
flow from operations, cash flow from customer prepayments or through borrowings on available lines of credit
under the Credit Facility. To the extent market conditions are receptive, Telesat may refinance its existing credit
facilities and use a portion of the proceeds to pay a dividend to its shareholders. See “Business — Strategic
Developments.”
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, in addition to cash on hand and available credit facilities will be sufficient to provide for its
capital requirements and to fund its interest and debt payment obligations for the next 12 months.
The construction of Nimiq 6 and Anik G1, as well as any other satellite replacement or expansion program
will require significant capital expenditures. Telesat may choose to invest in new satellites to further grow its
business. Cash required for current and future satellite construction programs will be funded from some or all of the
following: cash and short-term investments, restricted cash received from insurance proceeds, cash flow from
operating activities, cash flow from customer prepayments or through borrowings on available lines of credit under
the Credit Facility. In addition, Telesat may sell certain satellite assets, and in accordance with the terms and
conditions of the Credit Facility, reinvest the proceeds in replacement satellites or pay down indebtedness under the
Credit Facility. Subject to market conditions and subject to compliance with the terms and conditions of its Credit
Facility and the financial leverage covenant tests therein, Telesat may also obtain additional secured or unsecured
financing to fund current or future satellite construction or to distribute to its equity holders. However, Telesat’s
ability to access these sources of funding is not guaranteed and, therefore, Telesat may not be able to fully fund
additional replacement and new satellite construction programs.
66
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.
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
Less: deferred financing costs and
repayment options
Current portion
Long term portion
Maturity
Currency
December 31,
2011
December 31,
2010
(In CAD millions)
October 31, 2012
October 31, 2012
CAD or USD equivalent
CAD
October 31, 2014 USD
October 31, 2014 USD
November 1, 2015 USD
November 1, 2017 USD
CAD
CAD
CAD
—
80
1,721
148
707
222
2,878
(43)
2,835
(87)
2,748
—
170
1,699
146
691
217
2,923
(54)
2,869
(97)
2,772
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 80 million for the year ended December 31,
2012. For the U.S. term loan facilities, required repayments in 2012 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.
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 2012 is approximately CAD 212 million, assuming Telesat does not refinance its facilities. Depending
on market conditions, Telesat may refinance a portion of its facilities and incur additional secured debt.
67
Derivatives
Telesat has used interest rate and currency derivatives to hedge its exposure to changes in interest rates and
changes in foreign exchange rates.
As required, 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, 2011, Telesat did not have any
outstanding foreign exchange contracts. At December 31, 2010, the fair value of the outstanding foreign exchange
contracts was a liability of CAD 2.6 million.
Telesat has 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, 2011, the Company had a cross currency basis swap of CAD 1,175.3 million which requires
the Company to pay Canadian dollars to receive $1,011.8 million. At December 31, 2011, the fair value of this
derivative contract was a liability of CAD 160.4 million. Most of this non-cash loss will remain unrealized until the
contract is settled. This contract is due on October 31, 2014. At December 31, 2010, there was a liability of CAD
192.5 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, 2011, the fair value of these derivative contract liabilities was CAD 53.1 million, and at
December 31, 2010, there was a liability of CAD 49.4 million. These contracts mature on October 31, 2014.
Capital Expenditures
Telesat has entered into contracts with SS/L for the construction of Nimiq 6, a direct broadcast satellite to be
used by Telesat’s customer, Bell TV, and Anik G1. These expenditures will be funded from some or all of the
following: cash and short-term investments, restricted cash from insurance proceeds, 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.
In November 2011, Loral and Hisdesat made capital contributions to XTAR in proportion to their respective
equity interests in XTAR, which used the proceeds to repay the convertible loan to Hisdesat of $18.5 million which
included the principal amount and accrued interest. Loral’s capital contribution was $10.4 million.
Contractual Obligations and Other Commercial Commitments
The following tables aggregate our contractual obligations and other commercial commitments as of
December 31, 2011 (in thousands).
Contractual Obligations:
Lease payments(1)
Unconditional purchase
Payments Due by Period
Total
Less than
1 Year
1-3 Years
4-5 Years
More than
5 Years
$
41,527
$
11,356
$
15,860
$
9,417
$
4,894
obligations(2)
Revolving credit agreement(3)
Total contractual cash obligations(4) $
441,841
—
483,368
$
265,957
—
277,313
$
175,884
—
191,744
$
—
—
9,417
$
—
—
4,894
68
Other Commercial Commitments:
Total
Amounts
Committed
Amount of Commitment Expiration Per Period
Less than
1 Year
1-3 Years
4-5 Years
More than
5 Years
Standby letters of credit
$
4,785
$
4,785
$
—
$
—
$
—
(1) Represents future minimum payments under operating and capital leases with initial or remaining terms of one
year or more.
(2)
SS/L has entered into various purchase commitments with suppliers due to the long lead times required to
produce purchased parts.
(3) On December 20, 2010, SS/L amended and restated its revolving credit agreement with several banks and
other financial institutions. The credit agreement provides for a $150 million senior secured revolving credit
facility. The credit agreement matures on January 24, 2014 (see Note 9 to the financial statements). No
amounts were outstanding under the credit agreement at December 31, 2011.
(4) Does not include our liabilities for uncertain tax positions of $139.9 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
10 to the financial statements). Does not include obligations for pensions and other postretirement benefits, for
which we expect to make employer contributions of $45.7 million in 2012. We also expect to make significant
employer contributions to our plans in future years.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $58 million for the year ended December 31, 2011.
The major driver of cash provided by operating activities was net income adjusted for non-cash items of $125
million which was partially offset by cash used in net program related assets (contracts-in-process and customer
advances) of $44 million. Cash flow from operating activities was reduced by $25 million in 2011 due to an increase
in contracts-in-process caused by advance spending on programs that customers are obligated to pay us for in the
future. Customer advances reduced cash flow from operating activities by $19 million due to the timing of awards
and progress on new satellite programs.
Significant cash uses in 2011 also included a decrease in pension and other postretirement liabilities of $19
million and an increase in inventories of $6 million.
Net cash provided by operating activities was $42 million for the year ended December 31, 2010.
The major driver of cash provided by operating activities was net income adjusted for non-cash items of $108
million which was partially offset by cash used in program related assets (contracts-in-process and customer
advances) of $87 million. Cash flow from operating activities was reduced by $44 million in 2010 due to an increase
in contracts-in-process caused by advance spending on programs that customers are obligated to pay us for in the
future. Customer advances reduced cash flow from operating activities by $43 million due to the timing of awards
and progress on new satellite programs.
Other factors affecting cash from operating activities in 2010 were: increases in accounts payable, accrued
expenses and other current liabilities increased cash by $20 million; a decrease in inventories increased cash by $14
million; increases in other current assets and other assets decreased cash by $9 million; and decreases in pension and
other post retirement liabilities reduced cash by $9 million.
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 and customer advances) of $72 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. In addition, a decrease in inventories increased cash by $17 million.
69
Net Cash Used in Investing Activities
Net cash used in investing activities for 2011 was $4 million, which included capital expenditures of $37
million for satellite manufacturing, an $18 million increase in restricted cash and an additional investment of $10
million in XTAR, representing our 56% share of an $18 million capital call, partially offset by proceeds of $61
million from the sale of our interest in the ViaSat-1 satellite and related net assets.
Net cash used in investing activities for 2010 was $54 million, which included capital expenditures of $35
million for satellite manufacturing and $19 million for the Canadian broadband business.
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) Provided by Financing Activities
Net cash used in financing activities for 2011 was $23 million, which included $8 million for the repurchase
of the Company’s voting common stock and $15 million for withholding taxes on cashless exercise of employee
stock options, net of proceeds from and excess tax benefit associated with exercise of employee stock options.
Net cash provided by financing activities for 2010 was $10 million, which included $12 million from the
exercise of stock options, net of withholding taxes, partially offset by $2 million of issuance costs related to the
amendment and extension of SS/L’s revolving credit facility.
Net cash used in financing activities for 2009 was $55 million, primarily resulting from the repayment of
borrowings under the SS/L Credit Agreement.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that
have or are reasonably likely to have a material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are
not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these
arrangements.
Other
Operating cash flows for 2011 included contributions of approximately $34 million to the qualified pension
plan and approximately $2 million for other employee post-retirement benefit plans. Operating cash flows for 2010
included contributions of approximately $25 million to the qualified pension plan and approximately $3 million for
other employee post-retirement benefit plans. During 2009, we contributed approximately $23 million to the
qualified pension plan and funded approximately $3 million for other employee post-retirement benefit plans.
During 2012, based on current estimates, we expect to contribute approximately $41 million to the qualified pension
plan and expect to fund approximately $3 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 7 to the financial statements for further information on affiliate
matters).
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 relating to affiliate
$
transactions
Profits relating to affiliate transactions not eliminated
70
2011
Year Ended December 31,
2010
(In millions)
$
137.2 $
140.0
(18.5)
10.4
(14.7)
8.3
2009
92.1
(10.1)
5.7
Commitments and Contingencies
Our business and operations are subject to a number of significant risks, the most significant of which are
summarized in Item 1A — Risk Factors and also in Note 15 to the financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency
Loral
In the normal course of business, we 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, 2011, 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, 2011 exchange rates) that were unhedged:
Future revenues — Japanese yen
Future expenditures — Japanese yen
Future revenues — euros
Future expenditures — euros
Derivatives
Foreign Currency
U.S.$
¥
¥
€
€
(In millions)
$
50.1
$
2,275.3
$
17.6
$
5.3
0.7
29.6
22.9
6.9
In June 2010 and July 2008, SS/L was awarded satellite contracts denominated in euros and entered into a
series of foreign exchange forward contracts with maturities through 2013 and 2011, respectively, 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.
The maturity of foreign currency exchange contracts held as of December 31, 2011 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
2012
2013
€
€
To Sell
At
Contract
Rate
(In millions)
32.9
$
33.0
Euro
Amount
27.2
27.0
54.2
$
65.9
$
At
Market
Rate
$
35.3
35.2
70.5
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.
There were no derivative instruments in an asset position as of December 31, 2011. Therefore, there was no
exposure to loss at such date as a result of the potential failure of the counterparties to perform as contracted.
71
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 47% of Telesat’s revenues for the
year ended December 31, 2011, a large portion 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, 2011 would have increased or decreased Telesat’s net income for the year
ended December 31, 2011 by approximately $155 million. During the period from October 31, 2007 to
December 31, 2011, Telesat’s U.S. Term Loan Facility, Senior Notes and Senior Subordinated Notes have increased
by approximately $192 million due to the stronger U.S. dollar. During that same time period, however, 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 $158 million.
Interest
The Company had no borrowings outstanding under the SS/L Credit Agreement at December 31, 2011.
Borrowings under this facility are limited to Eurodollar Loans for periods ending in one, two, three or six months or
daily loans for which the interest rate is adjusted daily based upon changes in the Prime Rate, Federal Funds Rate or
one month Eurodollar 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 $150 million credit facility, if it were fully borrowed, a one
percent change in interest rates would effect the Company’s interest expense by $1.5 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, 2011, the Company held 984,173 shares of Globalstar Inc. common stock and $0.8
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,
2011, 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.
72
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, 2011.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2011 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,
2011 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.
73
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, 2011, 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 the
assessed 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, 2011, 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, 2011, of the Company and our report dated February 28, 2012 expressed an unqualified opinion on
those consolidated financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 28, 2012
74
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 February 15, 2012.
Name
Michael B. Targoff
Avi Katz
Richard P. Mastoloni
Harvey B. Rein
John Capogrossi
Age
Position
53
67 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.
Senior Vice President, General Counsel and Secretary since January 2008. Vice
President, General Counsel and Secretary from November 2005 to January 2008.
Senior Vice President of Finance and Treasurer since January 2008. Vice President
and Treasurer from November 2005 to January 2008.
Senior Vice President and Chief Financial Officer since January 2008. Vice
President and Controller from November 2005 to January 2008.
47
58
58 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.
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.
The remaining information required under Item 10 will be presented in the Company’s 2012 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 2012 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 2012 definitive proxy statement which
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required under Item 13 will be presented in the Company’s 2012 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 2012 definitive proxy statement which
is incorporated herein by reference.
75
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, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
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 Income for the years ended December 31, 2011 and 2010
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011 and 2010
Consolidated Statements of Changes in Shareholders’ Equity for the year ended December 31, 2011 with
comparative figures for the period ended December 31, 2010
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Cash Flow for the years ended December 31, 2011 and 2010
Notes to the 2011 Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-54
F-55
F-56
F-57
F-58
F-59
F-60
F-61
76
Exhibit
Number
Description
INDEX TO EXHIBITS
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
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)
Share Purchase Agreement among 4363213 Canada Inc., BCE Inc. and Telesat dated December 16,
2006(5)
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)
Restated Certificate of Incorporation of Loral Space & Communications Inc. dated May 19, 2009(17)
Amended and Restated Bylaws of Loral Space & Communications Inc. dated December 23, 2008(13)
Amendment No. 1 to Bylaws of Loral Space & Communications dated January 12, 2010(21)
Amended and Restated Credit Agreement, dated as of December 20, 2010, by and among Space
Systems/Loral, Inc., as borrower, the several banks and other financial institutions or entities from time to
time party thereto, Credit Suisse Securities (USA) LLC, as documentation agent, ING Bank N.V., as
syndication agent, J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC, as joint lead
arrangers and joint bookrunners, and JPMorgan Chase Bank, N.A., as administrative agent(25)
First Amendment dated as of December 8, 2011 to the Amended and Restated Credit Agreement, dated
as of December 20, 2010, by and among Space Systems/Loral, Inc., the several banks and other financial
institutions or entities from time to time party thereto, Credit Suisse Securities (USA) LLC, as
documentation agent, ING Bank N.V., as syndication agent, and JPMorgan Chase Bank, N.A., as
administrative agent †
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)
77
Exhibit
Number
Description
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Consulting Services Agreement, dated as of October 31, 2007, by and between Loral Space &
Communications Inc. and Telesat(9)
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)
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)
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(13)
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.(18)
Letter Agreement dated April 30, 2010 relating to indemnification among the Special Committee of the
Board of Directors of Loral Space & Communications Inc. and Mark Rachesky, Hal Goldstein, Sai
Devahaktuni, MHR Fund Management LLC and certain entities affiliated with MHR Fund Management
LLC (23)
Settlement Agreement dated December 15, 2010 between XL Specialty Insurance Company, Arch
Insurance Company, U.S. Specialty Insurance Company, Loral Space & Communications Inc., Mark H.
Rachesky, Hal Goldstein and Sai S. Devabhaktuni, and (for purposes of paragraphs 6 and 7 and 9 through
20 only) MHR Fund Management LLC and certain of its affiliated entities(24)
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.(20)
Gateway Facilities Assignment and Assumption Agreement dated as of March 1, 2011 by and between
Telesat Canada, Loral Space & Communications Inc. and Loral Canadian Gateway Corporation(26)
Space Segment Assignment and Assumption Agreement dated as of March 1, 2011 by and between
Telesat IOM Limited and Loral Space & Communications Inc.(26)
Barrett Assignment Agreement dated as of March 1, 2011 by and between Telesat IOM Limited and
Loral Space & Communications Inc.(26)
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(15) ‡
First Amendment of Employment Agreement dated as of July 19, 2011 between Loral Space &
Communication Inc. and Michael B. Targoff(29) ‡
Second Amendment of Employment Agreement dated as of January 17, 2012 between Loral Space &
Communications Inc. and Michael B. Targoff(31) ‡
Form of Officers’ and Directors’ Indemnification Agreement between Loral Space & Communications
Inc. and Loral Executives(3) ‡
78
Exhibit
Number
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
Description
Loral Space Management Incentive Bonus Program (Adopted as of December 17, 2008)(13) ‡
Loral Space & Communications Inc. 2005 Stock Incentive Plan (Amended and Restated as of April 3,
2009)(16) ‡
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(15) ‡
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(14) ‡
Restricted Stock Unit Agreement dated March 5, 2010 between Loral Space & Communications Inc. and
Michael B. Targoff(22) ‡
Restricted Stock Unit Agreement dated March 5, 2011 between Loral Space & Communications Inc. and
Michael B. Targoff(27) ‡
Option Agreement dated October 27, 2009, between Loral Space & Communications Inc. and Michael B.
Targoff(19) ‡
Form of Restricted Stock Unit Agreement dated October 27, 2009 between Loral Space &
Communications Inc. and Loral executives(19) ‡
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(19) ‡
Form of Director 2006 Restricted Stock Agreement(6) ‡
Form of Director 2007 Restricted Stock Agreement(6) ‡
Form of Director 2008 Restricted Stock Agreement(15) ‡
Form of Director 2009 Restricted Stock Unit Agreement(22) ‡
Form of Director 2010 Restricted Stock Unit Agreement(27) ‡
Form of Director 2011 Restricted Stock Unit Agreement† ‡
Form of Employee Restricted Stock Agreement(6) ‡
Amended and Restated Space Systems/Loral, Inc. Supplemental Executive Retirement Plan (Amended
and Restated as of December 17, 2008)(13) ‡
Loral Savings Supplemental Executive Retirement Plan (Amended and Restated as of December 17,
2008)(13) ‡
Loral Space & Communications Inc. Severance Policy for Corporate Officers (Amended and restated as
of August 4, 2011)(30) ‡
Grant Agreement, dated as of May 20, 2011, by and among Telesat Holdings Inc., Telesat Canada, Loral
Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and
Daniel Goldberg(28) ‡
Grant Agreement, dated as of May 31, 2011, by and among Telesat Holdings Inc., Telesat Canada, Loral
Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and
Michael C. Schwartz(28) ‡
79
Exhibit
Number
10.46
Description
Grant Agreement, dated as of May 31, 2011, by and among Telesat Holdings Inc., Telesat Canada, Loral
Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and
Michel G. Cayouette(28) ‡
14.1
21.1
23.1
23.2
31.1
31.2
32.1
32.2
99.1
99.2
99.3
99.4
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Code of Conduct, Revised as of November 1, 2010(27)
List of Subsidiaries of the Registrant†
Consent of Deloitte & Touche LLP†
Consent of Deloitte & Touche LLP†
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)
Articles of Incorporation of Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(9)
By-Law No. 1 of Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(9)
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)
Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 8, 2005.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 5, 2005.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 23, 2005.
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.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 21, 2006.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 29, 2007.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 9, 2007.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on September 27, 2007.
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.
80
(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 Report on Form 8-K filed on December 23, 2008.
(14) Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 10, 2009.
(15) 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.
(16) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009 filed on May 11, 2009.
(17) Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 20, 2009.
(18) Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 30, 2009.
(19) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 filed on November 9, 2009.
(20) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 7, 2010.
(21) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 15, 2010.
(22) Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 filed on March 15, 2010.
(23) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010 filed on May 10, 2010.
(24) Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 17, 2010.
(25) Incorporated by reference from the Company’s Current Report on Form 8-K filed on December 22, 2010.
(26) Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 3, 2011.
(27) Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2010 filed on March 15, 2011.
(28) Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 13, 2011.
(29) Incorporated by reference from the Company’s Current Report on Form 8-K filed on July 20, 2011.
(30) Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011 filed on August 9, 2011.
(31) Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 17, 2012.
†
Filed herewith.
‡ Management compensation plan.
81
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: February 28, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
/s/ MARK H. RACHESKY, M.D.
Mark H. Rachesky, M.D.
/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
Vice Chairman of the Board,
Chief Executive Officer and President
February 28, 2012
Director, Non-Executive
Chairman of the Board
February 28, 2012
Director
February 28, 2012
Director
February 28, 2012
Director
February 28, 2012
Director
February 28, 2012
Senior Vice President and CFO
(Principal Financial Officer)
February 28, 2012
Vice President and Controller
(Principal Accounting Officer)
February 28, 2012
82
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, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
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 Income for the years ended December 31, 2011 and 2010
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011 and 2010
Consolidated Statements of Changes in Shareholders’ Equity for the year ended December 31, 2011 with
comparative figures for the period ended December 31, 2010
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Cash Flow for the years ended December 31, 2011 and 2010
Notes to the 2011 Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-53
F-54
F-55
F-56
F-57
F-58
F-59
F-60
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Loral Space & Communications Inc. and
subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of
operations, equity, and cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2011, 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, 2011, 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 February 28, 2012 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 28, 2012
F-2
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Contracts-in-process
Inventories
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Long-term receivables
Investments in affiliates
Intangible assets, net
Long-term deferred tax assets
Other assets
Total assets
Current liabilities:
LIABILITIES AND EQUITY
Accounts payable
Accrued employment costs
Customer advances and billings in excess of costs and profits
Other current liabilities
Total current liabilities
Pension and other postretirement liabilities
Long-term liabilities
Total liabilities
Commitments and contingencies
Equity:
Loral shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares
issued and outstanding
Common Stock:
Voting common stock, $0.01 par value; 50,000,000 shares
authorized, 21,229,573 and 20,924,874 shares issued
Non-voting common stock, $0.01 par value; 20,000,000 shares
authorized, 9,505,673 issued and outstanding
Paid-in capital
Treasury stock (at cost), 136,494 shares of voting common stock at
December 31, 2011
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss
Total shareholders’ equity attributable to Loral
Noncontrolling interest
Total equity
Total liabilities and equity
See notes to consolidated financial statements.
F-3
December 31,
2011
2010
$
197,114
159,261
77,301
67,070
15,038
515,784
203,722
362,688
446,235
8,179
263,363
36,182
$ 1,836,153
$
165,801
186,896
71,233
66,220
28,927
519,077
235,905
319,426
362,556
11,110
294,019
12,816
$ 1,754,909
$
90,323
59,897
227,485
25,265
402,970
311,273
174,325
888,568
$
95,952
52,017
261,603
30,375
439,947
244,817
169,196
853,960
—
212
—
209
95
1,014,724
95
1,028,263
(8,400)
94,303
(154,475)
946,459
1,126
947,585
$ 1,836,153
—
(32,374)
(95,873)
900,320
629
900,949
$ 1,754,909
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Revenues
Cost of revenues
Selling, general and administrative expenses
Gain on disposition of net assets
Directors’ indemnification expense
Operating income
Interest and investment income
Interest expense
Gain on litigation
Other expense
Income before income taxes and equity in net income of affiliates
Income tax (provision) benefit
Income before equity in net income of affiliates
Equity in net income of affiliates
Net income
Net income attributable to noncontrolling interest
Net income attributable to Loral
Net income per share attributable to Loral common shareholders:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
2011
$ 1,107,365
(908,715)
(112,129)
6,913
—
$
Year Ended December 31,
2010
$ 1,158,985
(986,697)
(84,823)
—
(6,857)
80,608
13,550
(3,143)
5,000
(2,921)
93,094
308,622
401,716
85,625
487,341
(495)
486,846
$
$
93,434
21,350
(2,688)
4,535
(6,641)
109,990
(89,145)
20,845
106,329
127,174
(497)
126,677
2009
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
4.13
3.92
$
$
16.18
15.63
$
$
7.79
7.73
30,680
31,166
30,085
30,887
29,761
29,981
See notes to consolidated financial statements.
F-4
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Common Stock
Voting
Non-Voting
Shares
Issued
Amount
Shares
Issued
Amount
Paid-In
Capital
20,287 $
203
9,506 $
95
$ 1,007,011
Treasury Stock
Voting
Shares Amount
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
Equity
$
(750,922 ) $
231,702
(46,730 )
— $ 209,657
74
(43)
73
1
0
1,403
(1,559)
6,935
20,391
204
9,506
95
1,013,790
547
5
(13)
—
13,990
(2,477)
412
2,548
(16,148 )
(519,220 )
486,846
(62,878 )
$
(32,995 )
20,925 $
209
9,506 $
95
$ 1,028,263
$
(32,374 ) $
126,677
(95,873 ) $
$
(58,602 )
305
3
1,055
(16,972)
1,198
1,180
136 (8,400 )
215,554
1,404
(1,559)
6,935
431,991
—
495
454,346
13,995
(2,477)
412
2,548
134
134
629 $ 900,949
497
68,572
1,058
(16,972)
1,198
1,180
(8,400)
Balance, January 1, 2009
Net income
Other comprehensive loss
Comprehensive income
Exercise of stock options
Shares surrendered to fund
withholding taxes
Stock based compensation
Balance, December 31,
2009
Net income
Other comprehensive loss
Comprehensive income
Exercise of stock options
Shares surrendered to fund
withholding taxes
Tax benefit associated
with exercise of stock
options
Stock based compensation
Contribution by
noncontrolling
interest
Balance, December 31,
2010
Net income
Other comprehensive loss
Comprehensive income
Exercise of stock options
Shares surrendered to fund
withholding taxes
Tax benefit associated
with exercise of stock
options
Stock based compensation
Voting common stock
repurchased
Balance, December 31, 2011
21,230 $
212
9,506 $
95
$ 1,014,724
136 $ (8,400 ) $
94,303 $
(154,475 ) $
1,126 $ 947,585
See notes to consolidated financial statements.
F-5
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-cash items
Changes in operating assets and liabilities:
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 operating activities
Investing activities:
Capital expenditures
Proceeds from sale of net assets
(Increase) decrease in restricted cash
Investments in and advances to affiliates
Other
Net cash used in investing activities
Financing activities:
(Repayments) borrowings under SS/L revolving credit
facility
Debt issuance costs
Voting common stock repurchased
Proceeds from the exercise of stock options
Funding of withholding taxes on employees cashless stock
option exercise
Excess tax benefit associated with exercise of stock
options
Net cash (used in) provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of year
Year Ended December 31,
2010
2009
2011
$ 127,174
$
487,341
$
231,702
(2,226)
(379,507)
(164,785)
(24,814)
(6,068)
(3,145)
1,457
(10,613)
7,682
(19,399)
(4,273)
(19,318)
11,537
57,994
(36,965)
61,482
(18,175)
(10,379)
—
(4,037)
—
—
(7,928)
1,058
(16,972)
1,198
(22,644)
31,313
165,801
(43,845)
14,409
(5,964)
(8,527)
9,453
10,976
(43,229)
4,076
(9,069)
5,835
41,949
(54,057)
—
—
—
—
(54,057)
—
(2,226)
—
13,995
(2,477)
412
9,704
(2,404)
168,205
165,801
(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
(5,480)
277
(48,750)
(55,000)
—
—
1,404
(1,559)
—
(55,155)
50,657
117,548
$
168,205
Cash and cash equivalents — end of year
$ 197,114
$
See notes to consolidated financial statements.
F-6
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 leading satellite communications company engaged in satellite manufacturing with ownership interests in
satellite-based communications services.
Loral has two segments (see Note 16):
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 ownership interest 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.
Loral holds a 64% economic interest and a 331/3% voting interest in Telesat Holdco (see Note 7). We use
the equity method of accounting for our ownership interest in Telesat Holdco.
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”).
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.
Ownership interests in Telesat and XTAR, LLC (“XTAR”) are accounted for using the equity method of
accounting. Income and losses of affiliates are recorded based on our beneficial interest. 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.
F-7
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the 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 performance incentives) and the potential for component obsolescence in connection with
long-term procurements. Changes in estimates are typically the result of schedule changes that affect performance
incentives and penalties, changes in contract scope, changes in new business forecasts that can affect the level of
overhead allocated to a given contract and changes in estimates on contracts as a result of the complex nature of the
satellites we manufacture. Changes in estimates are included in sales and cost of sales using the cumulative catch-up
method, which recognizes the cumulative effect of changes in estimates on current and prior periods in the current
period based on a contract’s completion percentage. 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. For the years ended December 31, 2011, 2010 and 2009, cumulative catch up adjustments
related to prior year activity as a result of changes in contract estimates increased operating income by $48 million,
$59 million and $41 million, respectively, and diluted earnings per share by $0.90, $1.15 and $0.62, respectively.
Significant estimates also include the allowances for doubtful accounts and long-term receivables, estimated
useful lives of our plant and equipment and finite lived intangible assets, the fair value of stock based compensation,
the realization of deferred tax assets, uncertain tax positions, the fair value of and 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, 2011, the Company had $197.1 million of cash and cash equivalents and $23.8 million of
restricted cash (included in other assets on our consolidated balance sheet). Cash and cash equivalents include liquid
investments, primarily money market funds, with maturities of less than 90 days at the time of purchase and no
redemption limitations. 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 loss.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash
and cash equivalents, contracts-in-process and long-term receivables. 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 and our title interest in satellites under construction provide for
management of potential credit risks with regard to our current customer base. However, swings in the global
financial markets that include illiquidity, market volatility, changes in interest rates and currency exchange
fluctuations can be difficult to predict and negatively affect certain customers’ ability to make payments when due.
Billed Receivables and Long-Term Receivables
Financing receivables consist of billed and unbilled receivables which are included in contracts-in-process and
unbilled orbital receivables and notes receivable from Telesat for consulting services which are included in long-
term receivables.
F-8
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We estimate the collectibility of our billed, unbilled and long-term receivables by assessing the current credit
worthiness of each customer and related aging of past due balances. A billed receivable is considered past due when
it remains unpaid beyond its stated billing terms which can range from 30-60 days. 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. An allowance for doubtful accounts is
established on a case-by-case basis based on the information available to us and is re-evaluated periodically.
Inventories
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.
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:
Assets
Cash equivalents
Money market funds
Available-for-sale
securities
Communications
industry
Derivatives
Foreign exchange
contracts
Non-qualified pension plan
assets
Liabilities
Derivatives
Foreign exchange
contracts
December 31, 2011
Level 1
Level 2
Level 3
Level 1
(In thousands)
December 31, 2010
Level 2
(In thousands)
Level 3
$ 191,482
$ —
$ —
$ 162,487
$
—
$ —
$
$
$
$
531
$ —
$ —
$
1,427
$
—
$ —
—
$
1
$ —
844
$ —
$ —
$
$
—
2,039
$
$
4,548
$ —
—
$
13
—
$ 4,622
$ —
$
—
$ 15,007
$ —
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, 2011.
F-9
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We review the carrying values of our equity method investments when events and circumstances warrant and
consider all available evidence in evaluating when declines in fair value are other than temporary. The fair values of
our investments are determined based on valuation techniques using the best information available and may include
quoted market prices, market comparables and discounted cash flow projections. An impairment charge is recorded
when the carrying amount of the investment exceeds its current fair value and is determined to be other than
temporary.
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, 2011:
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 were capitalized until these assets were sold in April 2011 (see Note 7). Such costs included
direct contract costs, allocated indirect costs, launch costs, launch and in-orbit insurance costs and costs for gateway
services equipment.
Intangible Assets
Intangible assets consist primarily of 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, including intangible assets, 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
exceeds 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.
F-10
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Treasury Stock
In November 2011, our Board of Directors authorized the purchase of up to 800,000 shares of our voting
common stock. These purchases may be made from time to time in the open market or private transactions, as
conditions may warrant. Under the repurchase program we purchased 136,494 shares of our voting common stock at
a total cost of $8.4 million (an average price of $61.54 per share) during the year ended December 31, 2011.
We intend to hold repurchased shares of our voting common stock in treasury. We account for the treasury
shares using the cost method.
Revenue Recognition
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 performance incentives, including 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.
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.
Research and Development
Research and development costs, which are expensed as incurred, were $34.2 million, $19.9 million, and
$23.0 million for 2011, 2010 and 2009, 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 loss in the accompanying consolidated statements of equity to the extent of the
effectiveness of such hedging instruments and reclassified to income in the same period or periods in which the
hedge transaction impacts income. 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 Note 14).
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.
F-11
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 11). We accreted 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. No deferred compensation was charged or credited
to expense in 2011 and 2010 because the maximum award under the deferred compensation plan was reached in
2009 and maintained throughout 2010 and 2011. Deferred compensation charged to expense, net of estimated
forfeitures, was $6.6 million for the year ended December 31, 2009. As of December 31, 2011, other current
liabilities in our consolidated balance sheet included deferred compensation liabilities of $6.4 million.
Income Taxes
Loral Space & Communications Inc. and its subsidiaries are subject to U.S. federal, state and local income
taxation on their worldwide income and foreign taxation on certain income from sources outside the United States.
Telesat is subject to tax in Canada and other jurisdictions, and Loral will provide in operating earnings any
additional U.S. current and deferred tax required on distributions received or deemed to be received 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.
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 potential accrued interest and penalties related to UTPs in income tax
expense on a quarterly basis.
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-12
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings per Share
Basic earnings per share are computed based upon the weighted average number of shares of voting and non-
voting common stock outstanding during each period. Shares of non-voting common stock are in all respects
identical to and treated equally with shares of voting common stock except for the absence of voting rights (other
than as provided in Loral’s Amended and Restated Certificate of Incorporation which was ratified by Loral’s
stockholders on May 19, 2009). Diluted earnings per share are based on the weighted average number of shares of
voting and non-voting common stock outstanding during each period, adjusted for the effect of outstanding stock
options and unvested restricted stock units, restricted stock and SS/L phantom stock appreciation rights.
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:
Equity in net income of affiliates
Deferred taxes
Depreciation and amortization
Amortization of fair value adjustments related to orbital
incentives
Stock based compensation
Provisions for inventory obsolescence
Warranty expense accruals (reversals)
Provisions for bad debts on billed receivables
(Gain) loss on disposition of net assets
Amortization of prior service credit and actuarial loss
Unrealized gain on nonqualified pension plan assets
Non-cash net interest expense (income)
Loss (gain) on foreign currency transactions and
contracts
Net non-cash operating items
Non-cash investing activities:
Capital expenditures incurred not yet paid
Non-cash financing activities:
Issuance of restricted stock
Contributions by noncontrolling interest
Repurchase of voting common stock not yet paid
Capitalized lease obligation
Supplemental information:
Interest paid
Tax payments (refunds), net
Year Ended December 31,
2010
2009
2011
$
(106,329)
69,223
32,509
$
(85,625)
(325,223)
33,732
$
(210,298)
(192)
39,796
(1,024)
1,180
—
1,383
—
(6,453)
876
(157)
354
6,212
(2,226)
$
7,766
—
—
472
2,243
1,649
5,937
$
$
$
$
$
$
$
(1,639)
2,548
4,297
(1,437)
—
84
(1,029)
(295)
(1,230)
(3,690)
(379,507)
2,782
—
134
—
—
1,991
573
(664)
7,514
1,042
(65)
2,759
—
412
(831)
(1,582)
(2,676)
$
(164,785)
$
$
$
$
$
$
$
3,091
1,591
—
—
—
2,164
(17,972)
$
$
$
$
$
$
$
$
F-13
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220)—Presentation of
Comprehensive Income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive
income as part of the statement of equity and requires an entity to present the total of comprehensive income, the
components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. The amendments are effective
retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The
guidance, effective for the Company on January 1, 2012, requires changes in presentation only and will not have a
significant impact on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (ASC Topic 820)—Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU
No. 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency
around valuation inputs and investment categorization. The changes to the ASC as a result of this update are
effective prospectively for interim and annual periods beginning after December 15, 2011. We do not expect that the
adoption of this guidance, effective for the Company on January 1, 2012, will have a significant impact on our
consolidated financial statements.
3. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
Balance at January 01, 2009
Period Change
Balance at December 31, 2009
Period Change
Balance at December 31, 2010
Period Change
Balance at December 31, 2011
Proportionate
Share of Telesat
Other
Comprehensive
Loss
Postretirement
Benefits
Accumulated
Other
Comprehensive
Loss
(46,730)
(16,148)
(62,878)
(32,995)
(95,873)
(58,602)
(154,475)
— $
(5,139)
(5,139) $
(3,049)
(8,188) $
(12,866)
(21,054) $
Derivatives
$
18,182 $
(11,900)
Unrealized Gains
(Losses) on
Investments
117
658
$
$
6,282 $
(13,035)
(6,753) $
5,447
775
340
1,115
(535)
$
$
$
(65,029) $
233
(64,796) $
(17,251)
(82,047) $
(50,648)
$
(1,306) $
580
$
(132,695) $
F-14
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity in other comprehensive income (loss) and related income tax effects were as follows (in
thousands):
Derivatives:
Unrealized loss on foreign currency hedges, net of tax benefit
of $3,549 and $6,368 in 2011 and 2010, respectively
Less: reclassification adjustment for loss (gain) included in
net income, net of tax provision of $7,216 in 2011 and tax
benefit of $2,441 in 2010
Unrealized gain (loss) on derivatives, net
Unrealized gain (loss) on investments:
Unrealized gain (loss) on available-for-sale securities, net of
tax benefit of $360 in 2011 and tax provision of $230 in
2010
Postretirement benefits:
Net actuarial losses and prior service credits, net of tax
benefit of $34,424 and $11,254 in 2011 and 2010,
respectively
Amortization of actuarial gains and prior service credits, net
of tax provision of $352 in 2011 and tax benefit of $415 in
2010
Postretirement benefits
Proportionate share of Telesat other comprehensive loss:
Proportionate share of Telesat other comprehensive loss, net
of tax benefit of $8,651 and $2,052 in 2011 and 2010,
respectively
Other comprehensive loss
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
Year Ended December 31,
2010
2009
2011
$
(5,272)
$
(9,422)
$
(94)
10,719
5,447
(3,613)
(13,035)
(11,806)
(11,900)
(535)
340
658
(51,172)
(16,637)
(179)
524
(614)
(50,648)
(17,251)
412
233
(12,866)
(3,049)
(5,139)
$
(58,602)
$
(32,995)
$
(16,148)
December 31,
2011
2010
$
$
34
1,311
1,345
265
1,634
1,899
107,886
50,030
157,916
$ 159,261
125,328
59,669
184,997
$ 186,896
As of December 31, 2011 and 2010, billed receivables were reduced by an allowance for doubtful accounts of
$0.2 million.
F-15
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 receivable 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 using 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 17) as of December 31, 2011 are scheduled to be received as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
Less, current portion included in contracts-in-process
Long-term receivables
$
Long-Term
Receivables
14,837
16,145
17,487
19,046
20,600
289,410
377,525
(14,837)
$
362,688
F-16
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financing Receivables
The following summarizes the age of financing receivables that have a contractual maturity of over one year
as of December 31, 2011 (in thousands):
Total
Unlaunched
Launched
Financing
Receivables
Subject To
Aging
Current
90 Days or
Less
More Than 90 Days
Satellite Manufacturing:
Orbital Receivables
Long term orbitals
Short term unbilled
Short term billed
$
Deferred Receivables
Consulting Services:
Telesat receivables
Contracts-in-Process:
340,015
11,370
3,467
354,852
1,973
20,700
377,525
$
$
$
141,518
—
—
141,518
198,497
11,370
3,467
213,334
$
$
198,497
11,370
3,467
213,334
198,497
11,370
1,084
210,951
—
—
—
—
1,973
1,973
20,700
20,700
141,518
213,334
236,007
233,624
— $
—
—
—
—
—
—
Unbilled receivables
39,971
39,971
—
—
—
—
Total
$
417,496
$
181,489
$
213,334
$
236,007
$
233,624
$
— $
—
—
2,383
2,383
—
—
2,383
—
2,383
The following summarizes the age of financing receivables that have a contractual maturity of over one year
as of December 31, 2010 (in thousands):
Total
Unlaunched
Launched
Financing
Receivables
Subject To
Aging
Current
90 Days or
Less
More Than 90 Days
Satellite Manufacturing:
Orbital Receivables
Long term orbitals
Short term unbilled
Short term billed
Deferred Receivables
$
298,977 $
11,009
2,426
312,412
2,893
Consulting Services:
Telesat receivables
17,556
133,688
—
—
133,688
$
165,289
11,009
2,426
178,724
$
$
$
165,289
11,009
2,426
178,724
165,289
11,009
659
176,957
—
—
—
—
2,893
2,893
17,556
199,173
17,556
197,406
332,861
133,688
178,724
— $
—
—
—
—
—
—
Contracts-in-Process:
Unbilled receivables
50,294
50,294
—
—
—
—
Total
$
383,155 $
183,982
$
178,724
$
199,173
$
197,406
$
— $
—
—
1,767
1,767
—
—
1,767
—
1,767
Billed receivables of $104.5 million and $123.2 million as of December 31, 2011 and 2010, respectively (not
including billed orbital receivables of $3.5 million and $2.4 million as of December 31, 2011 and 2010,
respectively), have been excluded from the table above as they have contractual maturities of less than one year.
Long term unbilled receivables include satellite orbital incentives related to satellites under construction of
$141.5 million and $133.7 million as of December 31, 2011 and 2010, respectively. These receivables are not
included in financing receivables subject to aging in the table above since the timing of their collection is not
determinable until the applicable satellite is launched. Contracts-in-process include $40.0 million and $50.3 million
as of December 31, 2011 and 2010, respectively, of unbilled receivables that represent accumulated incurred costs
and earned profits net of losses on contracts in process that have been recorded as sales but have not yet been billed
to customers. These receivables are not included in financing receivables subject to aging in the table above since
the timing of their collection is not determinable until the contractual obligation to bill the customer is fulfilled.
F-17
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We assign internal credit ratings for all our customers with financing receivables. The credit worthiness of
each customer is based upon public information and/or information obtained directly from our customers. We utilize
credit ratings where available from the major credit rating agencies in our analysis. We have therefore assigned our
rating categories to be comparable to those used by the major credit rating agencies. Credit risk profile by internally
assigned ratings, consisted of the following:
Rating Categories
A/BBB
BB/B
B/CCC
Customers in bankruptcy
Other
Total financing receivables
5. Inventories
Inventories are comprised of the following (in thousands):
Inventories-gross
Impaired inventory
Inventories included in other assets
December 31,
2011
December 31,
2010
$
$
41,607
246,373
94,156
39,307
(3,947)
417,496
$
37,303
225,533
80,222
39,376
721
$
383,155
December 31,
2011
110,087
(31,360)
78,727
(1,426)
77,301
$
$
December 31,
2010
104,029
(31,370)
$
72,659
(1,426)
71,233
$
The Company recorded inventory impairment charges of nil, $4.3 million and $1.0 million for the years ended
December 31, 2011, 2010 and 2009, respectively. The charge recorded in 2010 related primarily to long-term
inventories.
6. 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 17)
Other construction in progress
Accumulated depreciation and amortization
December 31,
$
2011
27,036
69,182
16,696
182,987
31,412
—
25,828
353,141
(149,419)
$ 203,722
$
2010
27,036
68,899
14,007
159,432
26,368
40,495
20,187
356,425
(120,520)
$ 235,905
Depreciation and amortization expense for property, plant and equipment was $29.5 million, $25.8 million
and $25.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.
F-18
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Investments in Affiliates
Investments in affiliates consist of (in thousands):
Telesat Holdings Inc.
XTAR, LLC
Other
Equity in net income of affiliates consists of (in thousands):
2011
Telesat Holdings Inc.
XTAR, LLC
Other
December 31,
2011
$ 377,244
68,991
—
$ 446,235
2010
$ 295,797
65,293
1,466
$ 362,556
Year Ended December 31,
2010
$ 92,798
(6,991)
(182)
$ 85,625
2009
$ 213,241
(2,743)
(200)
$ 210,298
$ 114,476
(6,681)
(1,466)
$ 106,329
Equity in net income of affiliates for the year ended December 31, 2011 includes a charge of $1.5 million to
reduce the carrying value of our investment in an affiliate to zero based on our determination that the investment has
been impaired and the impairment is other than temporary.
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 relating to
affiliate transactions
Profits relating to affiliate transactions not eliminated
Year Ended December 31,
2010
$ 137,244
2009
$ 92,144
2011
$ 139,960
(18,498)
10,411
(14,734)
8,294
(10,071)
5,671
The above amounts related to transactions with affiliates exclude the effect of Loral’s sale to Telesat in April
2011 of its portion of the payload on the ViaSat-1 satellite and related net assets. As a result of this sale to Telesat,
Loral received a $13 million sale premium and reversed $5 million of cumulative intercompany profit eliminations
that were recorded when the satellite was being built for Loral. This combined benefit was reduced by the $11
million elimination of the portion of the benefit applicable to Loral’s 64% interest in Telesat, which has been
reflected as a reduction of our investment in Telesat, and the remaining $7 million has been reflected as a gain on
our consolidated statement of operations for the year ended December 31, 2011.
We use the equity method of accounting for our majority economic interest in Telesat because we own 33 1/3%
of the voting stock and do not exercise control by other means to satisfy the U.S. GAAP requirement for treatment
as a consolidated subsidiary. Loral’s equity in net income or loss of Telesat is based on our proportionate share of
Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. Our proportionate share of Telesat’s net income
or loss is based on our 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 ability of Telesat to pay dividends and consulting fees in cash to Loral
is governed by applicable covenants relating to Telesat’s debt and shareholder agreements. Telesat is permitted to
pay cash dividends of $75 million plus 50% of cumulative consolidated net income to its shareholders and
consulting fees to Loral only when Telesat’s ratio of consolidated total debt to consolidated EBITDA is less than 5.0
to 1.0. For the year ended December 31, 2011, Loral has received cash payments from Telesat for consulting fees
and interest thereon of $3.2 million. Loral did not receive any cash payments from Telesat for consulting fees and
interest for the years ended December 31, 2010 and 2009. Through December 31, 2011, Loral has received no
dividend payments from Telesat.
F-19
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The contribution of Loral Skynet, a wholly owned subsidiary of Loral prior to its contribution, to Telesat in
2007 was recorded by Loral at the historical book value of our retained interest combined with the gain recognized
on the contribution. However, the contribution was recorded by Telesat at fair value. Accordingly, the amortization
of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities is proportionately eliminated in
determining our share of the income or losses of Telesat. Our equity in the net income of Telesat also reflects the
elimination of our profit, to the extent of our economic interest, on satellites we are constructing for Telesat.
Telesat
We hold equity interests in Telesat Holdco representing 64% of the economic interests and 331 /3 % of the
voting interests. Our Canadian partner, Public Sector Pension Investment Board (“PSP”), holds 36% of the
economic interests and 662/3% of the voting interests in Telesat Holdco (except with respect to the election of
directors as to which it holds a 30% voting interest).
The following table presents summary financial data for Telesat in accordance with U.S. GAAP, as of
December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 (in thousands):
Year Ended December 31,
2010
2009
2011
Statement of Operations Data:
Revenues
Operating expenses
Depreciation, amortization and stock-based compensation
Gain on insurance proceeds
Impairment of intangible assets
(Loss) gain on disposition of long-lived assets
Operating income
Interest expense
Foreign exchange (losses) gains
Gains (losses) on financial instruments
Other income (expense)
Income tax expense
Net income
$
817,269
(188,119)
(248,012)
136,507
(1,112)
(1,499)
515,034
(220,598)
(80,991)
50,731
1,964
(65,271)
200,869
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Long-term debt, including current portion
Total liabilities
Redeemable preferred stock
Shareholders’ equity
$
797,283
(190,632)
(249,318)
—
—
3,714
361,047
(234,556)
159,191
(76,937)
619
(41,177)
168,187
$
691,566
(203,417)
(230,176)
—
—
29,311
287,284
(227,986)
439,160
(148,954)
(764)
(2,185)
346,555
Year Ended December 31,
2011
2010
$
351,802
5,347,174
289,351
2,817,857
4,045,619
138,485
1,163,070
$
291,367
5,309,441
294,485
2,928,916
4,145,336
141,718
1,022,387
Following the launch in May 2011 of Telstar 14R/Estrela do Sul 2, an SS/L-built satellite, the satellite’s north
solar array failed to fully deploy. The north solar array anomaly has diminished the amount of power available for
the satellite’s transponders and has reduced the life expectancy of the satellite. As a result, during the third quarter of
2011, Telesat carried out an impairment test for the satellite. Based on Telesat management’s best estimates and
assumptions, there was no impairment in Telstar 14R/Estrela do Sul 2 and as a result no adjustment to the carrying
value of the asset was required. In December 2011, Telesat received insurance proceeds of $132.7 million from its
insurers with respect to the claim Telesat filed for the failed solar array deployment.
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.
F-20
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
XTAR
We own 56% of XTAR, a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of
Spain. We account for our ownership interest in XTAR under the equity method of accounting because we do not
control certain of its significant operating decisions.
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.
We regularly evaluate our investment in XTAR to determine whether there has been a decline in fair value
that is other than temporary. During November 2011 and January 2012, XTAR reduced its revenue forecast for 2012
and subsequent years. We have performed an impairment test for our investment in XTAR as of December 31, 2011,
using the January 2012 forecast, and concluded that our investment in XTAR was not impaired. Any further declines
in XTAR’s projected revenues may result in a future impairment charge.
In January 2005, Hisdesat provided XTAR with a convertible loan in the principal amount of $10.8 million
due February 2011, for which Hisdesat received enhanced governance rights in XTAR. The loan was subsequently
extended to December 31, 2011. In November 2011, Loral and Hisdesat made capital contributions to XTAR in
proportion to their respective ownership interests, and the proceeds were used to repay the loan balance of $18.5
million, which included the principal amount and accrued interest. Loral’s capital contribution was $10.4 million.
XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders was $24 million in 2011, 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 2022. 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%. Cumulative amounts paid to Hisdesat for Catch-Up Payments through December 31, 2011 were
$14.2 million. 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 17). The ability of XTAR to pay dividends and
management fees in cash to Loral is governed by XTAR’s shareholder agreements.
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-21
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents summary financial data for XTAR as of December 31, 2011 and 2010 and for
each of the three years in the period ended December 31, 2011 (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,
2010
$ 37,907
(35,724)
(9,618)
(7,435)
—
(12,435)
2011
$ 37,055
(34,734)
(9,617)
(7,296)
—
(11,882)
2009
$ 32,038
(34,594)
(9,618)
(12,174)
11,668
(4,849)
December 31,
2011
2010
$ 10,558
88,033
45,704
54,614
33,419
$
9,290
96,383
61,839
69,616
26,767
As of December 31, 2011 and 2010, 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.
8. Intangible Assets
Intangible Assets were established in connection with our adoption of fresh-start accounting and consist of (in
thousands):
Weighted Average
Remaining
Amortization
Period
(Years)
December 31, 2011
Gross
Amount
Accumulated
Amortization
December 31, 2010
Gross
Amount
Accumulated
Amortization
Internally developed
software and technology
Trade names
Total
1
14
$ 59,027
9,200
$ 68,227
$
$
(57,173)
(2,875)
$ 59,027
9,200
(60,048)
$ 68,227
$
$
(54,702)
(2,415)
(57,117)
Total amortization expense for intangible assets was $2.9 million, $9.2 million and $11.3 million for the years
ended December 31, 2011, 2010 and 2009, respectively. Annual amortization expense for intangible assets for the
five years ended December 31, 2016 is estimated to be as follows (in thousands):
2012
2013
2014
2015
2016
$ 2,314
460
460
460
460
F-22
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes fair value adjustments made 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,
2011
$ (36,896)
20,255
$ (16,641)
2010
$ (36,896)
19,299
$ (17,597)
Net amortization of these fair value adjustments was a credit to expense of $1.0 million in 2011, a credit to
expense of $2.9 million in 2010 and a charge to expense of $2.6 million in 2009.
9. Debt Obligations
SS/L Credit Agreement
On December 20, 2010, SS/L entered into an amended and restated credit agreement (the “Credit Agreement”)
with several banks and other financial institutions. The Credit Agreement provides for a $150 million senior secured
revolving credit facility (the “Revolving Facility”). On December 8, 2011, the Credit Agreement was amended to
increase the letter of credit sublimit from $50 million to $100 million. The Revolving Facility includes a $10 million
swingline commitment. The Credit Agreement matures on January 24, 2014 (the “Maturity Date”). The prior $100
million credit agreement was entered into on October 16, 2008 and had a maturity date of October 16, 2011.
The following summarizes information related to the Credit Agreement and prior credit agreement (in
thousands):
Letters of credit outstanding
Borrowings
December 31,
2011
$ 4,785
—
2010
$ 4,911
—
Year Ended December 31,
2010
2009
2011
Interest expense (including commitment and letter of credit fees)
Amortization of issuance costs
$
$
1,302
725
$
818
1,570
1,168
878
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 substantially all real
property owned by SS/L and (ii) a first priority security interest in substantially all tangible and intangible assets of
SS/L and certain of its subsidiaries. There is no Loral guarantee of the facility.
SS/L may elect to borrow under the Revolving Facility on either a daily basis or for periods ending in one,
two, three or six months. Daily borrowings bear interest at an annual rate equal to 2.75% plus the greater of (1) the
Prime Rate then in effect, (2) the Federal Funds Rate then in effect plus 0.5% and (3) the one month Eurodollar Rate
then in effect plus 1.0%. Borrowings for periods ending in one, two, three or six months will bear interest at an
annual rate equal to 3.75% plus the appropriate Eurodollar Rate. Interest on a daily 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.
F-23
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 including dividends, 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 Agreement 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 3.00 to 1.00.
SS/L must maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 (or 3.00 to
1.00 if SS/L elects to provide a dividend to its shareholders of preferred stock which entitles holders
thereof to receive cash distributions based on orbital incentives received by SS/L) as of the last day of
any fiscal quarter for the period of four consecutive fiscal quarters ending on such day.
The Credit Agreement restricts the payments SS/L may make to Loral. SS/L is permitted to make payments to
Loral to fund tax liabilities and to make annual payments to Loral of up to $1.5 million as a management fee and up
to $15 million for corporate overhead, subject to restrictions. Additionally, SS/L is permitted to make dividend
payments related to its cumulative consolidated net income beginning October 1, 2010, subject to restrictions.
Notwithstanding the dividend related to the cumulative consolidated net income amount, though offsetting the
amount available for such dividends, SS/L is permitted to pay dividends of up to $20 million in the aggregate in any
fiscal year and $60 million during the term of the Credit Agreement. The Credit Agreement also provides that SS/L
may make a one-time payment to Loral on or before January 14, 2011 of up to $66 million. In January 2011, SS/L
made a one-time dividend payment of $50 million to Loral.
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 for the Credit Agreement of approximately $2.2 million are being amortized on a straight
line basis over the life of the Revolving Facility.
10. Income Taxes
The (provision) benefit for income taxes on the income before income taxes and equity in net income of
affiliates consists of the following (in thousands):
Current:
U.S. Federal
State and local
Total current
Deferred:
U.S. Federal
State and local
Total deferred
Total income tax (provision) benefit
Year Ended December 31,
2010
2009
2011
$
(12,243)
(7,679)
(19,922)
$
(4,575)
(12,026)
(16,601)
$
(2,597)
(3,166)
(5,763)
(61,248)
(7,975)
(69,223)
$
(89,145)
277,916
47,307
325,223
$ 308,622
669
(477)
192
$
(5,571)
F-24
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our current tax (provision) benefit includes an increase to our liability for UTPs for (in thousands):
Year Ended December 31,
2010
2011
(Increase) decrease to unrecognized tax benefits
Interest expense
Penalties
Total
$
$
(10,593)
(4,809)
(1,659)
$
(17,061)
$
(5,517)
(5,391)
(633)
(11,541)
$
2009
2,817
(4,426)
(701)
$
(2,310)
For 2011, the deferred income tax provision of $69.2 million related primarily to our equity in net income of
Telesat for the current year after having reversed our valuation allowance in the fourth quarter of 2010.
For 2010, the deferred income tax benefit of $325.2 million related primarily to (i) a benefit of $335.3 million
from the reversal of a significant portion of our valuation allowance during the fourth quarter after having
determined that based on all available evidence, it was more likely than not that we would realize the benefit from a
significant portion of our deferred tax assets in the future offset by (ii) a provision of $10.1 million for the decrease
to our deferred tax asset for federal AMT credits.
For 2009, the deferred income benefit of $0.2 million is detailed above.
In addition to the (provision) benefit for income taxes presented above, we recorded: (i) a deferred tax benefit
of $39.4 million and $22.3 million for 2011 and 2010, respectively, related to tax adjustments in other
comprehensive loss (see Note 3) and (ii) a current state tax benefit of $1.2 million and $0.4 million for 2011 and
2010, respectively, related to the excess tax benefits from stock option exercises recorded to paid-in-capital. The
Company uses the with-and-without approach of determining when excess tax benefits from equity compensation
have been realized. There were no additional items for 2009.
The (provision) benefit for income taxes differs from the amount computed by applying the statutory U.S.
Federal income tax rate on income before income taxes and equity in net income of affiliates because of the effect of
the following items (in thousands):
Tax provision 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 of affiliates
Losses in litigation
Provision for unrecognized tax benefits
Nondeductible expenses
Change in valuation allowance
Other, net
Total income tax (provision) benefit
$
$
Year Ended December 31,
2010
(32,583)
$
$
2011
(38,497)
(9,703)
(37,216)
1,542
1,457
(2,500)
375
(4,603)
(89,145)
(31,898)
(29,969)
(583)
2,542
(987)
402,809
(709)
$ 308,622
$
2009
(9,441)
(16,703)
(73,604)
(526)
(1,356)
(2,076)
96,617
1,518
(5,571)
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
Balance at December 31
F-25
2011
$ 132,211
1,220
(24,745)
(1,629)
(7,606)
15,842
$ 115,293
Year Ended December 31,
2010
$ 120,124
339
(1,933)
(1,886)
(5,207)
20,774
$ 132,211
2009
$ 108,592
8,855
(1,969)
(3,178)
(4,887)
12,711
$ 120,124
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2007. Earlier years related to certain foreign jurisdictions remain subject to
examination. Various state and foreign income tax returns are currently under examination. However, to the extent
allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were
generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward. While
we intend to contest any future tax assessments for uncertain tax positions, no assurance can be provided that we
would ultimately prevail. During the next twelve months, the statute of limitations for assessment of additional tax
will expire with regard to UTPs related to Old Loral, as well as several of our federal and state income tax returns
filed for 2007 and 2008, potentially resulting in a $61.0 million reduction to our unrecognized tax benefits.
Our liability for UTPs increased from $122.8 million at December 31, 2010 to $139.9 million at December 31,
2011 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2011, we have
accrued $29.0 million and $24.5 million for the potential payment of tax-related interest and penalties, respectively.
If our positions are sustained by the taxing authorities, approximately $108.1 million of the tax benefits will reduce
the Company’s income tax provision. Other than as described above, there were no significant changes to our
unrecognized tax benefits during the twelve months ended December 31, 2011, 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 retained the benefit of tax recoveries related to the transferred
assets and indemnified Telesat for Loral Skynet tax liabilities 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 receivable at December 31, 2011 for the probable outcome of these
matters is not material. (see Note 17)
At December 31, 2011, we had federal NOL carryforwards of $380.4 million, state NOL carryforwards,
primarily California, of $244.0 million, and federal research credits of $5.8 million which expire from 2012 to 2031,
as well as federal and state AMT credit carryforwards of approximately $14.4 million that may be carried forward
indefinitely.
The reorganization of the Company on the Effective Date constituted an ownership change under section 382
of the Internal Revenue Code. Accordingly, use of our tax attributes, such as NOLs and tax credits generated prior to
the ownership change, are subject to an annual limitation of approximately $32.6 million, subject to increase or
decrease based on certain factors. Our annual limitation was increased significantly each year through 2010, the last
year allowed for the recognition of additional benefits from 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. We
continue to maintain our valuation allowance until sufficient positive evidence exists to support full or partial
reversal. As of December 31, 2011, we had a valuation allowance totaling $10.9 million against our deferred tax
assets for certain tax credit and loss carryovers due to the limited carryforward periods and character of such
attributes. During 2011, the valuation allowance decreased by $0.3 million, primarily recorded as a benefit in our
statement of operations.
During the fourth quarter of 2010, we determined, based on all available evidence, that it was more likely than
not that we would realize the benefit from a significant portion of the deferred tax assets in the future and no longer
required a full valuation allowance. We based this conclusion on cumulative profits generated in recent periods, as
well as our current expectation that future operations would generate sufficient taxable income to realize the tax
benefit from certain deferred tax assets. Accordingly, during 2010, our valuation allowance decreased from $414.0
million to $11.2 million. Of the $402.8 million change, which was recorded as a benefit in our statement of
operations, $335.5 million was reversed as a deferred income tax benefit during the fourth quarter of 2010.
During 2009, our valuation allowance decreased by $73.7 million. The net change consisted primarily of (i) a
decrease of $96.6 million recorded as a benefit in our statement of operations, (ii) an increase of $7.0 million
charged to accumulated other comprehensive loss and (iii) an increase of $15.9 million offset by a corresponding
increase to the deferred tax asset.
F-26
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 assets
Deferred tax liabilities:
Property, plant and equipment
Intangible assets
Total deferred tax liabilities
Net deferred tax assets
Classification on consolidated balance sheets:
Current deferred tax assets
Long-term deferred tax assets
Total deferred tax assets
11. Stock-Based Compensation
Stock Plans
December 31,
2011
2010
$
26,685
20,165
139,070
24,984
3,269
22,402
6,175
5,850
29,576
93,948
372,124
(10,887)
361,237
(27,515)
(3,289)
(30,804)
$ 330,433
$
25,504
24,666
151,497
26,996
6,575
24,686
34,227
5,468
29,249
70,268
399,136
(11,228)
387,908
(23,189)
(4,480)
(27,669)
$ 360,239
$
67,070
263,363
$ 330,433
$
66,220
294,019
$ 360,239
The Loral amended and restated 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 voting common stock reserved and available for issuance under the Stock Incentive Plan is
1,742,879 shares of which 1,158,879 were available for future grant at December 31, 2011. This number of shares of
voting common stock available for issuance would be reduced if restricted stock units or SS/L phantom stock
appreciation rights are settled in voting common stock. 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 under the Stock Incentive
Plan generally have an exercise price equal to the fair market value of our stock, as defined, vest over a four year
period and have a five to seven year life. The Awards provide for accelerated vesting if there is a change in control,
as defined in the Stock Incentive Plan.
In June 2009, Michael B. Targoff, Chief Executive Officer of Loral, was awarded an option to purchase
125,000 shares of voting common stock with an exercise price of $35 per share (the “June 2009 CEO Grant”). The
option was 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-27
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of the June 2009 CEO Grant was estimated using the Hull-White I barrier lattice model based
on the assumptions below. There were no stock options granted in 2011 or 2010.
Risk — free interest rate
Expected life (years)
Estimated volatility
Expected dividends
Weighted average grant date fair value
Year Ended
December 31,
2009
2.72%
4.67
64.77%
None
11.39
$
A summary of the Company’s stock option activity for the year ended December 31, 2011 is presented below:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Outstanding at December 31, 2011
Vested and expected to vest at December 31,
2011
Exercisable at December 31, 2011
Weighted
Average
Remaining
Contractual
Term
1.3 years
Aggregate
Intrinsic
Value
(In thousands)
54,524
$
Shares
1,134,915
—
(795,915)
—
Weighted
Average
Exercise
Price
$
28.46
$ —
$
27.43
$ —
339,000
$
30.86
1.5 years
339,000
307,750
$
$
30.86
30.44
1.5 years
1.4 years
$
$
$
11,533
11,533
10,599
A summary of the Company’s non-vested restricted stock activity for the year ended December 31, 2011 is
presented below:
Non-vested restricted stock at January 1, 2011
Granted
Vested
Forfeited
Non-vested restricted stock at December 31, 2011
Shares
Weighted Average
Grant- Date
Fair Value
6,000
$
—
$
(2,000) $
—
$
4,000
$
33.58
—
33.58
—
33.58
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.
Mr. Targoff 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-28
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.
A summary of the Company’s non-vested RSU activity for the year ended December 31, 2011 is presented
below:
Non-vested RSUs at January 1, 2011
Granted
Vested
Forfeited
Non-vested RSUs at December 31, 2011
Weighted
Average
Grant- Date
Fair Value
18.25
64.11
15.88
—
52.11
$
$
$
$
$
Shares
70,811
15,000
(61,211)
—
24,600
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 voting common stock (based on the fair value of Loral voting common stock on the date of
settlement) or cash at the option of the Company. SS/L Phantom SARs expire on June 30, 2016.
A summary of SS/L Phantom SARs granted along with their vesting schedule is presented below. The fair
value of the SS/L Phantom SARs in included as a liability in our consolidated balance sheet.
SARs granted
2010
2011
Vesting Date – March 18,
2012
2013
225,000
217,500
65,000
32,500
175,000
50%
50%
25%
50%
—
25%
25%
25%
25%
25%
F-29
25% —
25% —
25%
25% —
25%
2014
—
—
25% —
—
25%
25%
Grant Date
June-2009
Oct-2009
Oct-2009
Dec-2009
May-2010
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, 2011
is presented below:
Non-vested SS/L Phantom SARs at January 1, 2011
Granted
Vested
Forfeited
Non-vested SS/L Phantom SARs at December 31, 2011
Shares
461,250
—
(178,750)
(7,500)
275,000
Weighted
Average
Grant- Date
Fair Value
5.17
—
5.60
9.08
4.78
$
$
During fiscal years 2011, 2010 and 2009, the following activity occurred under the Stock Incentive Plan (in
thousands):
Total intrinsic value of options exercised
Total fair value of restricted stock vested
Total fair value of stock awards vested
Total fair value of restricted stock units vested
2011
$ 39,018
155
$
$
—
3,969
$
Year Ended December 31,
2010
$ 16,889
1,493
$
$
—
$ 12,687
2009
$ 1,578
$ 1,395
$ 1,591
$ —
We recorded total stock compensation expense of $4.0 million (of which $2.8 million was or is expected to be
paid in cash), $10.0 million (of which $7.5 million was paid in cash) and $9.6 million (of which $2.1 million was
paid in cash) for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, total
unrecognized compensation costs related to non-vested awards were $2.2 million and are expected to be recognized
over a weighted average remaining period of 1.2 years.
12. Earnings Per Share
Telesat has awarded employee stock options, which, if exercised, would result in dilution of Loral’s
ownership interest in Telesat. The following table presents the dilutive impact of Telesat stock options on Loral’s
reported net income for the purpose of computing diluted earnings per share (in thousands):
Net income attributable to Loral common shareholders — basic
Less: Adjustment for dilutive effect of Telesat stock options
Net income attributable to Loral common shareholders — diluted
Year Ended
December 31,
2011
126,677
(4,352)
122,325
$
$
Year Ended
December 31,
2010
486,846
(4,177)
482,669
$
$
Telesat stock options were excluded from the calculations of 2009 diluted earnings per share because they did
not have a significant dilutive effect in 2009.
Basic earnings 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 common shares outstanding for diluted
earnings per share:
Common shares outstanding for diluted earnings per share:
Weighted average common shares outstanding
Stock options
Unvested restricted stock units
Unvested restricted stock
Unvested SS/L Phantom SARS
Common shares outstanding for diluted earnings per share
F-30
2011
Year Ended December 31,
2010
(In thousands)
2009
30,680
257
226
3
—
31,166
30,085
495
206
8
93
30,887
29,761
48
115
4
53
29,981
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. The
following summarizes stock options outstanding, non-vested restricted stock and non-vested restricted stock units
excluded from the calculation of diluted earnings per share:
Stock options outstanding
Unvested restricted stock units
Unvested restricted stock
13. Pensions and Other Employee Benefits
Pensions
Year Ended
December 31,
2009
(In thousands)
125
8
30
We maintain qualified pension and supplemental retirement plans. 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 plans, 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 plans on a discretionary basis. Plan assets are
generally invested in equity investments and fixed income investments. Pension plan assets are managed primarily
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 plans. These benefits are funded primarily on a pay-as-you-go
basis, with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance
provisions.
F-31
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Funded Status
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of
assets for 2011 and 2010, and a statement of the funded status as of December 31, 2011 and 2010, 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
Plan amendment
Actuarial loss (gain)
Benefit payments
Obligation at December 31,
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of period
Actual return on plan assets
Employer contributions
Participant contributions
Benefit payments
Fair value of plan assets at December 31,
Funded status at end of period
Pension Benefits
Year Ended
December 31,
2011
2010
(In thousands)
$
$
476,031
12,265
25,504
1,469
—
57,824
(24,080)
549,013
289,036
(2,453)
34,110
1,469
(22,870)
299,292
(249,721)
$
$
420,076
10,677
24,673
1,507
—
41,826
(22,728)
476,031
256,166
28,133
24,932
1,507
(21,702)
289,036
(186,995)
Other Benefits
Year Ended
December 31,
2011
(In thousands)
$
$
62,840
522
3,198
2,014
—
1,755
(4,280)
66,049
269
(2)
2,026
2,014
(4,280)
27
(66,022)
$
$
2010
67,392
672
3,411
1,968
(1,386)
(5,085)
(4,132)
62,840
507
2
1,924
1,968
(4,132)
269
(62,571)
The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by
$315.7 million at December 31, 2011 (the “unfunded benefit obligations”). The unfunded benefit obligations were
measured using a discount rate of 4.75% and 5.5% at December 31, 2011 and 2010, respectively. Lowering the
discount rate by 0.5% would have increased the unfunded benefit obligations by approximately $36.5 million and
$31.6 million as of December 31, 2011 and 2010, 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 loss as of December 31, 2011 and 2010
consist of (in thousands):
Actuarial (loss) gain
Amendments-prior service credit
Pension Benefits
December 31,
2011
$ (187,275)
19,954
$ (167,321)
2010
$ (108,826)
22,673
(86,153)
$
Other Benefits
December 31,
2011
$
9,578
2,416
$ 11,994
2010
$ 12,402
3,144
$ 15,546
The amounts recognized in other comprehensive loss during the year ended December 31, 2011 consist of (in
thousands):
Actuarial loss during the period
Amortization of actuarial loss (gain)
Amortization of prior service credit
Total recognized in other comprehensive loss
Pension
Benefits
$
$
(83,828)
5,379
(2,719)
(81,168)
Other
Benefits
$
$
(1,768)
(1,056)
(728)
(3,552)
F-32
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,
2011
2010
Other Benefits
December 31,
2011
2010
$
971
248,750
$
1,223
185,772
$
3,499
62,523
$
3,526
59,045
$ 249,721
$ 186,995
$ 66,022
$ 62,571
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 $11.9 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 $0.4 million and
$0.7 million, respectively.
The accumulated pension benefit obligation was $530.0 million and $464.2 million at December 31, 2011 and
2010, respectively.
During 2011, we contributed $34.1 million to the qualified pension plan and $2.0 million for other employee
post-retirement benefit plans. In addition, we made benefit payments relating to the supplemental retirement plan of
$1.2 million. During 2012, based on current estimates, we expect to contribute approximately $41 million to the
qualified pension plan and expect to fund approximately $3 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, 2011, 2010 and 2009 (in thousands):
Pension Benefits
For the Year Ended December 31,
2011
$ 12,265 $
25,504
2010
10,677 $
24,673
2009
Other Benefits
For the Year Ended December 31,
2010
2011
2009
9,436
24,447
$
522
3,198
$
672
3,411
$
863
3,965
(23,552)
(20,641)
(17,176)
(2,719)
(2,719)
(2,719)
(12)
(728)
(31)
(728)
(50)
(481)
5,379
$ 16,877 $
3,536
15,526 $
4,083
18,071
(1,056)
1,924
$
(1,118)
2,206
$
(471)
$ 3,826
Service cost
Interest cost
Expected return on plan
assets
Amortization of prior service
credit
Amortization of net actuarial
loss (gain)
Net periodic cost
Assumptions
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:
Discount rate
Rate of compensation increase
F-33
For the Year Ended December 31,
2010
2009
2011
5.50%
8.00%
4.25%
6.00%
8.00%
4.25%
6.50%
8.00%
4.25%
December 31,
2010
2009
2011
4.75%
4.25%
5.50%
4.25%
6.00%
4.25%
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. The expected long-term rate of return on plan assets determined on this basis
was 8.0% for the years ended December 31, 2011, 2010 and 2009. Our expected long-term rate of return on plan
assets for 2012 is 8.0%.
Actuarial assumptions to determine the benefit obligation for other benefits as of December 31, 2011 used a
health care cost trend rate of 9.0% decreasing gradually to 5% by 2019. Actuarial assumptions to determine the
benefit obligation for other benefits as of December 31, 2010, used a health care cost trend rate of 9.0% 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 2011 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
Plan Assets
1% Increase
1% Decrease
$
$
276
5,310
$
$
(224)
(4,490)
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 plans, 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 plans’ investment objectives stated
above. Asset allocation policy is reviewed regularly by the investment committee. The pension plans’ actual and
targeted asset allocations are as follows:
Equities
Fixed Income
December 31,
Actual Allocation
2011
2010
Target Allocation
Target
Target Range
58%
42%
61%
39%
60%
40%
100%
100%
100%
50-65%
35-50%
100%
F-34
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
Global Equities
Non-U.S. Equities
Alternative Equity Investments
Total Equities
Fixed Income
Alternative Fixed Income Investments
Total Fixed Income
Target Allocation
Target
Target Range
25%
5%
10%
10%
10%
60%
30%
10%
40%
15-40%
0-10%
5-20%
5-20%
0-20%
50-70%
20-40%
0-20%
30-50%
Total Target Allocation
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.
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.
F-35
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tables below provides the fair values of the Company’s pension plan assets at December 31, 2011 and
2010, 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.
Asset Category
Total
Percentage
Fair Value Measurements
Quoted Prices
In Active Markets
For Identical
Assets
Level 1
(In thousands)
Significant
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
At December 31, 2011:
Equity securities:
U.S. large-cap(1)
U.S. small-cap(2)
Global (3)
Non-U.S.(4)
Alternative investments:
Equity long/short fund(5)
Real Estate Securities fund(6)
Private equity fund(7)
Fixed income securities:
Commingled funds(8)
Alternative investments:
Distressed opportunity limited
partnership(9)
Multi-strategy limited partnerships(10)
Diversified alternatives fund(11)
Other limited partnerships(12)
At December 31, 2010:
Equity securities:
U.S. large-cap(1)
U.S. small-cap(2)
Non-U.S.(4)
Alternative investments:
Equity long/short fund(5)
Private equity fund(7)
Fixed income securities:
Commingled funds(8)
Alternative investments:
Distressed opportunity limited
partnership(9)
Diversified alternatives fund(11)
Other limited partnerships(12)
$
60,813
18,010
20,273
33,781
16,509
17,689
6,870
173,945
20%
6% $
7%
11%
6%
6%
2%
58%
$
60,813
14,109
20,273
32,744
3,901
1,037
5,952 $
5,854
—
139,745
10,557
11,835
6,870
29,262
4,938
100,178
33%
100,178
5,217
19,916
—
36
125,347
2%
7%
—
—
42%
—
—
—
—
—
100,178
5,217
19,916
—
36
25,169
$ 299,292
100% $
4,938 $ 239,923 $
54,431
$
86,866
16,002
53,101
11,993
6,934
174,896
30%
6% $
18%
4%
2%
61%
$
86,866
12,219
51,852
3,783
1,249
6,111 $
5,032
157,048
110,152
38%
110,152
3,598
353
37
114,140
1%
0%
0%
39%
110,152
5,882
6,934
12,816
3,598
353
37
3,988
$ 289,036
100% $
5,032 $ 267,200 $
16,804
F-36
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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.
Investments in common stocks across the world without being limited by national borders or to specific
regions.
Investments in common stocks of companies from developed and emerging countries outside the United
States.
Investments primarily in long and short positions in equity securities of U.S. and non-U.S. companies. We are
invested in two funds; one fund has semi-annual tender offer redemption periods on June 30 and December 31
and is reported on a one month lag. The other fund has no limitations on redemptions and is reported on a
current basis.
Investments in real estate through both the private and public sector. The pension plan is invested in two funds
of funds. One fund invests in global public real estate securities (REITs) while the second fund invests in
private real estate investments. The private real estate fund is valued on a quarterly lag.
Fund invests in portfolios of secondary interest in established venture capital, buyout, mezzanine and special
situation funds on a global basis. The pension plan committed to invest up to $10 million in this fund. The
remaining outstanding commitment at December 31, 2011 is $1.55 million. The amount invested in the fund,
net of distributions, is $6.45 million and $7.30 million at December 31, 2011 and 2010, respectively. 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. As of December 31, 2011, $2 million was subject to
the lock-up period which will expire in June 2012. This fund is reported on a one month lag.
(10)
Investments mainly in partnerships that have multi-strategy investment programs and do not rely on a single
investment model. In 2011, the pension plan invested in two limited partnerships that have multi-strategy
investment programs. One partnership has quarterly liquidation rights with notice of 65 days while the second
partnership has monthly liquidation rights with notice of 33 days. Both funds are reported on a one month lag.
(11)
Fund is a fund of hedge funds. Fund was closed and unwound its holdings. At December 31, 2010, the
remaining assets were sold with the cash proceeds received in 2011.
(12) The pension plan 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 results 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 as well as
public real estate investment trusts 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.
F-37
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional information pertaining to the changes in the fair value of the pension plan assets classified as Level
3 for the years ended December 31, 2011 and 2010 is presented below:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Private
Equity
Fund
Equity
Long/Short
Fund
Distressed
Opportunity
Ltd. Partnership
Diversified
Alternatives
Fund
Other
Limited
Partnership
Multi
Strategy
Funds
Real
Estate
Fund
Total
$ 6,245 $
339
—
1,300
(950 )
5,468 $
414
—
—
—
3,204 $
394
—
—
—
(In thousands)
3,135 $
(884)
(697)
—
(1,201)
218
(66)
233
35
(383)
$ — $ — $ 18,270
197
—
—
(464 )
—
—
1,335
—
—
(2,534 )
—
—
$ 6,934 $
786
—
200
(1,050 )
5,882 $
(325)
—
5,000
—
3,598 $
(381)
—
2,000
—
353 $
2,521
(2,527)
—
(347)
37
(1)
—
—
—
$ — $ — $ 16,804
335 2,851
—
(2,527 )
11,500 38,700
(1,397 )
—
(84 )
—
20,000
—
Balance at January 1, 2010
Unrealized gain/(loss)
Realized gain/(loss)
Purchases
Sales
Balance at December 31,
2010
Unrealized gain/(loss)
Realized gain/(loss)
Purchases
Sales
Balance at December 31, 2011 $ 6,870 $ 10,557 $
5,217 $
— $
36
$ 19,916 $11,835 $ 54,431
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 Multi-Strategy Funds invest in various underlying securities. Each fund’s net asset value is calculated by
the fund manager and is not publicly available. The fund managers accumulate all the underlying security values and
use them in determining the funds’ net asset values.
During 2011, the pension plan received the cash proceeds from its the investment balance in the Diversified
Alternatives Fund that was closed and liquidating its remaining assets at December 31, 2010.
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 real estate fund is a fund of funds. The fund records its investments at acquisition cost and the value is
adjusted quarterly to reflect the fund’s share of income, appreciation or depreciation and additional contributions to
or withdrawals from the underlying funds. The underlying funds’ real estate investments are independently
appraised at least once per year and debt is marked to market on a quarterly basis.
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 $0.8 million and $2.1 million as of December 31, 2011 and 2010, 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 of these assets as of December 31, 2011 and 2010, respectively, and other assets included nil
and $1.3 million of these assets as of December 31, 2011 and 2010, respectively.
F-38
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Benefit Payments
The following benefit payments, which reflect future services, as appropriate, are expected to be paid (in
thousands):
2012
2013
2014
2015
2016
2017 to 2021
Employee Savings (401k) Plan
Pension
Benefits
27,281
27,952
28,959
29,671
30,426
170,801
Other Benefits
Gross
Benefit
Payments
3,873
4,131
4,383
4,551
4,682
24,487
Medicare
Subsidy
Receipts
265
278
293
310
321
1,773
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 662 /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 2011, 2010 and 2009,
Company contributions were $11.5 million, $10.0 million and $8.7 million, respectively. Participants of the savings
(401k) plan are able to redirect Company contributions to any available fund within the plan. Participants are also
able to direct their contributions to any available fund.
14. Financial Instruments, Derivative Instruments and Hedging
Financial Instruments
The carrying amount of cash equivalents and restricted cash approximates fair value because of the short
maturity of those instruments. The fair value of short-term investments, investments in available-for-sale securities
and supplemental retirement plan assets is based on market quotations. The fair value of derivatives is based on the
income approach, using observable Level II market expectations at the measurement date and standard valuation
techniques to discount future amounts to a single present value.
Foreign Currency
In the normal course of business, we are subject to the risks associated with fluctuations in foreign currency
exchange rates. To limit this foreign exchange rate exposure, the Company seeks to denominate its contracts in U.S.
dollars. If we are unable to enter into a contract in U.S. dollars, we review our foreign exchange exposure and,
where appropriate, derivatives are used to minimize the risk of foreign exchange rate fluctuations to operating
results and cash flows. We do not use derivative instruments for trading or speculative purposes.
As of December 31, 2011, SS/L had the following amounts denominated in Japanese yen and euros (which
have been translated into U.S. dollars based on the December 31, 2011 exchange rates) that were unhedged:
Future revenues — Japanese yen
Future expenditures — Japanese yen
Future revenues — euros
Future expenditures — euros
Foreign Currency
U.S.$
(In thousands)
50,062
2,275,318
17,635
5,317
$
650
$ 29,567
$ 22,867
$ 6,894
¥
¥
€
€
F-39
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives and Hedging Transactions
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 entering into
contracts only with carefully selected major financial institutions based upon their credit ratings and other factors.
There were no derivative instruments in an asset position as of December 31, 2011. Therefore, there was no
exposure to loss at such 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.
In June 2010 and July 2008, SS/L was awarded satellite contracts denominated in euros and entered into a
series of foreign exchange forward contracts with maturities through 2013 and 2011, respectively, 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.
The maturity of foreign currency exchange contracts held as of December 31, 2011 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
2012
2013
To Sell
At
Contract
Rate
(In thousands)
$ 32,894
32,967
At
Market
Rate
$ 35,275
35,208
Euro
Amount
€ 27,244
27,000
€ 54,244
$ 65,861
$ 70,483
F-40
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Balance Sheet Classification
The following summarizes the fair values and location in our consolidated balance sheet of all derivatives held
by the Company as of December 31, 2011 (in thousands):
Asset Derivatives
Balance Sheet
Location
Fair Value
Liability Derivatives
Balance Sheet
Location
Fair Value
Derivatives designated as hedging
instruments
Foreign exchange contracts
Other current liabilities
Other liabilities
$
2,381
2,185
4,566
Derivatives not designated as
hedging instruments
Foreign exchange contracts
Total derivatives
Other current assets
$
$
1
1
Other liabilities
56
4,622
$
The following summarizes the fair values and location in our consolidated balance sheet of all derivatives held
by the Company as of December 31, 2010 (in thousands):
Asset Derivatives
Liability Derivatives
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging
instruments
Foreign exchange contracts
Derivatives not designated as
hedging instruments
Foreign exchange contracts
Total derivatives
Other current assets
Other current assets
$
$
$
$
4,152 Other current liabilities
Other liabilities
$
4,152
9,451
5,360
14,811
396 Other current liabilities
Other liabilities
4,548
133
63
15,007
$
Cash Flow Hedge Gains (Losses) Recognition
The following summarizes the gains (losses) recognized in the consolidated statements of operations and in
accumulated other comprehensive loss for all derivatives for the years ended December 31, 2011 and 2010 (in
thousands):
Derivatives in Cash Flow
Hedging Relationships
Loss Recognized
in OCI on Derivatives
(Effective Portion)
Gain (Loss) Reclassified from
Accumulated
OCI into Income
(Effective Portion)
Amount
Location
Gain (Loss) on Derivative
Ineffectiveness and
Amounts Excluded from
Effectiveness Testing
Location
Year ended December 31, 2011
Foreign exchange contracts
Year ended December 31, 2010
Foreign exchange contracts
$
$
(8,821) Revenue
$
(17,935) Revenue
Interest income
(15,790) Revenue
$
6,054 Revenue
Interest income
F-41
Amount
$
$
$
$
(411)
(1)
636
(13)
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Flow Derivatives Not Designated as Hedging Instruments
Year ended December 31, 2011
Foreign exchange contracts
Year ended December 31, 2010
Foreign exchange contracts
Gain (Loss) Recognized in
Income
on Derivatives
Location
Amount
Revenue
$
(254)
Revenue
$
33
We estimate that $6.5 million of net losses from derivative instruments included in accumulated other
comprehensive loss will be reclassified into earnings within the next 12 months.
15. 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 $442 million as of December 31, 2011
and primarily relate to Satellite Manufacturing backlog.
SS/L has deferred revenue and accrued liabilities for warranty payback obligations relating to performance
incentives for 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 year ended December 31, 2011 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
2011
35,730
(2,131)
3,514
37,113
$
$
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 (“orbital incentives”), 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 incentive 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, 2011 were $355 million, net of fair value adjustments of $16 million. Approximately $230 million of
the gross orbital receivables are related to satellites launched as of December 31, 2011, and $141 million are related
to satellites under construction as of December 31, 2011.
On October 19, 2010, TerreStar Networks Inc. (“TerreStar”), an SS/L customer, filed for bankruptcy under
chapter 11 of the Bankruptcy Code. As of December 31, 2011, SS/L had $19 million of past due receivables from
TerreStar related to an in-orbit SS/L built satellite and other related ground system deliverables and $16 million of
past due receivables from TerreStar related to a second satellite under construction. SS/L had previously exercised
its contractual right to stop work on the satellite under construction as a result of TerreStar’s payment default. The
in-orbit satellite long-term orbital receivable balance, net of fair value adjustment, reflected on the balance sheet at
December 31, 2011 is $16 million. The long-term orbital receivable balance reflected on the balance sheet for the
satellite under construction is $13 million.
F-42
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In July 2011, the TerreStar Bankruptcy Court approved an agreement between TerreStar and a subsidiary of DISH
Network Corporation (“DISH Subsidiary”) pursuant to which DISH Subsidiary agreed to purchase substantially all of
TerreStar’s assets. In connection with the sale, pursuant to a Stipulation and Order entered into between TerreStar and
SS/L and approved by the TerreStar Bankruptcy Court in July 2011, the parties agreed to amend the satellite construction
contract for the in-orbit satellite, the contract for related ground system deliverables and the contract for the satellite under
construction, and TerreStar agreed to assume and assign to DISH Subsidiary, and DISH Subsidiary will take assignment
of, such contracts as amended. The contract amendments provide for restructuring of certain past due payments and
payments to become due as a result of which SS/L will maintain the collective profit position of the contracts and will not
realize any impairment to its receivables. In addition, SS/L will be entitled to an allowed unsecured claim against
TerreStar in the amount of approximately $5 million. The assumption will be effective as of the earlier of the closing of
the asset sale to DISH Subsidiary or the effective date of confirmation of a plan of reorganization for TerreStar. The
assignment will be effective as of the closing of the asset sale to DISH Subsidiary. On February 15, 2012, the TerreStar
Bankruptcy Court entered an order confirming TerreStar’s plan of reorganization. The effective date of the plan of
reorganization and the closing of the asset sale are each subject to a number of conditions, including, among others, FCC
and other regulatory approvals. Pending assumption and assignment of the contracts, TerreStar is required to make
payments that fall due in the ordinary course of business under the contracts as amended. Assuming closing of the asset
sale to DISH Subsidiary and assumption and assignment of the contracts as amended, SS/L believes that it will not incur a
loss with respect to the receivables due from TerreStar.
As of December 31, 2011, 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 $1 million. In addition, under its contract, ICO has future payment
obligations to SS/L that total approximately $23 million, of which approximately $11 million (including $9 million of
orbital incentives) is included in long-term receivables. ICO, which sought to reorganize 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 will receive substantially the same
net present value from ICO as SS/L was entitled to receive under the original contract. In March 2011, the ICO
Bankruptcy Court approved an investment agreement pursuant to which DISH Network Corporation (“DISH”) agreed to
acquire ICO. In connection with this investment agreement, in April 2011, DISH purchased certain claims against ICO for
cash, including SS/L claims aggregating approximately $7.0 million plus approximately $1.4 million of accrued interest.
SS/L believes that, based upon completion of the tender offer and other payments by ICO to SS/L under the modified
contract, it is not probable that SS/L will incur a material loss with respect to the receivables from ICO. Although, in July
2011, the ICO Bankruptcy Court confirmed a plan of reorganization for ICO, closing of DISH’s acquisition of ICO and
ICO’s emergence from chapter 11 is still subject to certain other conditions, including, FCC regulatory approval.
See Note 17 — 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-
seven of the satellites built by SS/L, launched since 1997 and still on-orbit 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 performance incentives by 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-43
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, liquidated damages and interest, which through
December 31, 2011 totaled approximately $204 million, plus re-procurement costs. In the event of 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. In May 2010, SS/L provided
EchoStar, at its request, with a proposal to complete construction and prepare the satellite for launch under the
current specifications. In August 2010, SS/L provided EchoStar, at its request, additional proposal information.
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 if a loss is incurred with
respect to this program, such loss would not be material.
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 could also be subject to injunctions prohibiting us from using components or methods. We
may also be required under the terms of our customer contracts to indemnify our customers for damages relating to
infringement. For example, ViaSat, Inc. and ViaSat Communications, Inc. (formerly known as WildBlue
Communications, Inc.) have commenced a lawsuit in the United States District Court for the Southern District of
California against SS/L and Loral alleging, among other things, that SS/L and Loral infringed certain ViaSat patents
and that SS/L breached non-disclosure obligations in certain contracts with ViaSat in connection with the
manufacture of satellites by SS/L for customers other than ViaSat. The lawsuit also seeks to hold Loral liable for
SS/L’s alleged infringement and breach of contract. See “Legal Proceedings” below for details of this lawsuit.
See Note 17 — 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 18.
F-44
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Regulatory Matters
SS/L is required to obtain licenses and enter into technical assistance agreements, presently under the
jurisdiction of the State Department, in connection with the export of satellites and related equipment, and with the
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. We have no sublease income in
any of the periods presented. Rent expense, is as follows (in thousands):
Year ended December 31, 2011
Year ended December 31, 2010
Year ended December 31, 2009
Rent
Expense
$ 16,234
$ 18,911
$ 16,337
Property, plant and equipment relating to capital leases was $3.4 million at December 31, 2011 and nil at
December 31, 2010 with accumulated amortization of $0.7 million and nil, respectively. Depreciation and
amortization of assets recorded under capital leases was $0.7 million in 2011 and nil in 2010 and 2009.
The following is a schedule of future minimum payments, by year and in the aggregate, under leases with
initial or remaining terms of one year or more as of December 31, 2011 (in thousands):
2012
2013
2014
2015
2016
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of future minimum lease payments
Legal Proceedings
Capital
Leases
Operating
Leases
$
10,155
7,783
6,876
5,747
3,670
4,894
$
39,125
$
$
1,201
1,201
—
—
—
—
2,402
(159)
2,243
In February 2012, ViaSat, Inc. and ViaSat Communications, Inc. (formerly known as WildBlue
Communications, Inc.) (collectively, “ViaSat”) commenced a lawsuit in the United States District Court for the
Southern District of California against SS/L and Loral, Case No. 3:12-cv-00260-H-WVG. The complaint alleges,
among other things, that SS/L and Loral infringed certain ViaSat patents and that SS/L breached non-disclosure
obligations in certain contracts with ViaSat in connection with the manufacture of satellites by SS/L for customers
other than ViaSat. The complaint also seeks to hold Loral liable for SS/L’s alleged infringement and breach of
contract. The complaint seeks, among other things, damages (including treble damages with respect to the patent
infringement claims) in amounts to be determined at trial and to enjoin SS/L and Loral from further infringement of
the ViaSat patents and breach of contract. Although SS/L and Loral intend to engage in discussions with ViaSat to
resolve the matter, there can be no assurance that the parties will resolve the matter. If the parties are not able to
resolve the matter through discussions and the matter proceeds to trial, SS/L and Loral believe that they each have,
and intend vigorously to pursue, meritorious defenses and counterclaims to ViaSat’s claims. There can be no
assurance, however, that SS/L’s and Loral’s defenses and counterclaims will be successful with respect to all or
F-45
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
some of ViaSat’s claims. We believe that SS/L’s and Loral’s conduct was consistent with, and in due regard for, any
applicable and valid intellectual property rights of ViaSat. Although no assurance can be provided, we do not
believe that this matter will have a material adverse effect on SS/L’s or Loral’s financial position or results of
operations.
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.
16. Segments
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, 2011, 2010 and 2009. 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 of affiliates. Our
investment in XTAR, for which we use the equity method of accounting, is included in Corporate.
The common definition of EBITDA is “Earnings Before Interest, Taxes, Depreciation and Amortization”. In
evaluating financial performance, we use revenues and operating income before depreciation, amortization and
stock-based compensation (excluding stock-based compensation from SS/L Phantom SARs expected to be settled in
cash), gain on disposition of net assets and directors’ indemnification expense (“Adjusted EBITDA”) as the measure
of a segment’s profit or loss. Adjusted EBITDA is equivalent to the common definition of EBITDA before: gains on
disposition of net assets, directors’ indemnification expense, gains or losses on litigation not related to our
operations; other expense; and equity in net income 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, gains on disposition of net assets,
directors’ indemnification expense, gains or losses on litigation not related to our operations, other expense and
equity in net income 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 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-46
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)
2011
Year Ended December 31,
2010
(In thousands)
2009
Revenues
Satellite manufacturing:
External revenues
Intersegment revenues(1)
Satellite manufacturing revenues
Satellite services revenues(2)
Operating segment revenues before eliminations
Intercompany eliminations(3)
Affiliate eliminations(2)
Total revenues as reported
Segment Adjusted EBITDA(4)
Satellite manufacturing
Satellite services(2)
Corporate(5)
Adjusted EBITDA before eliminations
Intercompany eliminations(3)
Affiliate eliminations(2)
Adjusted EBITDA
Reconciliation to Operating Income
Depreciation, Amortization and Stock-Based Compensation(4)
Satellite manufacturing
Satellite services(2)
Corporate
Segment depreciation before affiliate eliminations
Affiliate eliminations(2)
Depreciation, amortization and stock-based compensation
as reported
Gain on disposition of net assets(6)
Directors’ indemnification expense (7)
Operating income as reported
Capital Expenditures
Satellite manufacturing
Satellite services(2)
Corporate
Segment capital expenditures before affiliate eliminations(8)
Affiliate eliminations(2)
$ 967,432
140,763
1,108,195
817,269
1,925,464
(830)
(817,269)
$ 1,107,365
$ 137,659
629,150
(17,170)
749,639
(279)
(629,150)
120,210
(32,514)
(248,010)
(1,175)
(281,699)
248,010
(33,689)
6,913
—
$
93,434
$
36,615
390,641
350
427,606
(390,641)
Capital expenditures as reported
$
36,965
$
F-47
$ 1,021,768
143,318
1,165,086
797,283
1,962,369
(6,101)
(797,283)
$ 1,158,985
$ 143,076
606,651
(17,866)
731,861
(1,465)
(606,651)
123,745
$ 901,283
107,401
1,008,684
691,566
1,700,250
(15,284)
(691,566)
$ 993,400
$ 90,565
488,149
(21,371)
557,343
(1,673)
(488,149)
67,521
(34,675)
(249,318)
(1,605)
(285,598)
249,318
(44,203)
(230,176)
(3,107)
(277,486)
230,176
(36,280)
—
(6,857)
80,608
(47,310)
—
—
$ 20,211
35,378
254,020
18,679
308,077
(254,020)
54,057
$ 26,426
231,654
17,131
275,211
(231,654)
$ 43,557
$
$
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total Assets(8)
Satellite manufacturing
Satellite services(9)
Corporate
Total assets before affiliate eliminations
Affiliate eliminations(2)
Total assets as reported
As of December 31,
2011
2010
(In thousands)
$ 929,408
5,724,418
529,501
7,183,327
(5,347,174)
$ 1,836,153
$ 920,647
5,605,239
538,464
7,064,350
(5,309,441)
$ 1,754,909
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Intersegment revenues include $140 million, $137 million and $92 million for the years ended December 31,
2011, 2010 and 2009, respectively, of revenue from affiliates.
Satellite services represents Telesat. 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 7).
Represents the elimination of intercompany sales and intercompany Adjusted EBITDA for a satellite under
construction by SS/L for Loral.
Compensation expense related to SS/L Phantom SARs and restricted stock units paid in cash or expected to be
paid in cash is included in Adjusted EBITDA. Compensation expense related to SS/L Phantom SARs and
restricted stock units paid in Loral common stock or expected to be paid in Loral common stock is included in
depreciation, amortization and stock-based compensation.
Includes corporate expenses incurred in support of our operations and includes our equity investments in
XTAR and Globalstar service providers.
Represents the gain on the sale of Loral’s portion of the payload on the ViaSat-1 satellite and related net assets
to Telesat adjusted for elimination of Loral’s 64% ownership interest in Telesat (see Note 17).
Represents indemnification expense, net of insurance recovery, in connection with defense costs incurred by
MHR affiliated directors in the Delaware shareholder derivative case (see Note 15).
(8) Amounts are presented after the elimination of intercompany profit.
(9)
Includes $2.4 billion of satellite services goodwill related to Telesat as of December 31, 2011 and 2010,
respectively.
Revenue by Customer Location
The following table presents our revenues by country based on customer location for the years ended
December 31, 2011, 2010 and 2009 (in thousands):
United States
Canada
Spain
Bermuda
Mexico
France
People’s Republic of China (including Hong Kong)
United Kingdom
Australia
Luxembourg
Norway
The Netherlands
Other
F-48
$
$
2011
397,389
137,610
113,546
83,600
82,657
80,923
47,967
40,741
40,067
31,107
29,809
18,501
3,448
$ 1,107,365
For the Year Ended December 31,
2010
645,769
137,195
85,161
—
49,157
24,657
44,135
57,976
—
70,678
—
26,721
17,536
$ 1,158,985
2009
$ 534,294
92,094
85,499
—
22
344
54,677
101,499
—
61,673
—
59,509
3,789
$ 993,400
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2011, three of our customers accounted for approximately 13%, 12% and 10% of our consolidated
revenues. During 2010, five of our customers accounted for approximately 19%, 13%, 12%, 12% and 11% of our
consolidated revenues. During 2009, three of our customers accounted for approximately 22%, 16% and 10% of our
consolidated revenues.
17. Related Party Transactions
Transactions with Affiliates
Telesat
As described in Note 7, we own 64% of Telesat and account for our ownership interest under the equity
method of accounting.
In connection with the acquisition of our ownership interest in Telesat (which we refer to as the Telesat
transaction), Loral and certain of its subsidiaries, our Canadian partner, 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 has not been completed by October 31, 2011,
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, 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.
F-49
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2011, SS/L had contracts with Telesat for the construction of the Nimiq 6 and Anik G1
satellites. Information related to satellite construction contracts with Telesat is as follows:
2011
For Year Ended December 31,
2010
(In thousands)
2009
Revenues from Telesat satellite construction contracts
Milestone payments received from Telesat
$
139,911 $
126,579
137,195 $
168,130
92,095
89,419
Amounts receivable by SS/L from Telesat related to satellite construction contracts as of December 31, 2011
and 2010 were $4.6 million and nil, 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 each of the years ended December 31,
2011, 2010 and 2009, included income of $5.0 million related to the Consulting Agreement. We also had a long-
term receivable related to the Consulting Agreement from Telesat of $20.7 million and $17.6 million as of
December 31, 2011 and 2010, respectively. We received payments from Telesat of $3.2 million under this
agreement for the year ended December 31, 2011. No payments were received from Telesat for the years ended
December 31, 2010 and 2009.
In connection with the Telesat transaction, Loral has retained the benefit of tax recoveries related to the
transferred assets and has indemnified Telesat for certain liabilities including Loral Skynet’s tax liabilities arising prior
to January 1, 2007. As of December 31, 2011 and 2010, we had recognized a net receivable from Telesat of $0.5
million, representing our estimate of the probable outcome of these tax matters, which is included as other assets of
$2.6 million and long-term liabilities of $2.1 million in the consolidated balance sheet as of December 31, 2011. There
can be no assurance, however, that these tax matters will be ultimately settled for the net amount recorded.
In June 2011, Loral, along with Telesat Holdco, Telesat, PSP and 4440480 Canada Inc., an indirect wholly-
owned subsidiary of Loral (the “Special Purchaser”), entered into Grant Agreements (the “Grant Agreements”) with
Daniel Goldberg, Michael C. Schwartz and Michel G. Cayouette (each, a “Participant” and collectively, the
“Participants”). Each of the Participants is an executive of Telesat, which is owned by the Company together with its
Canadian partner, PSP, through their ownership of Telesat Holdco. The Grant Agreements document grants
previously approved and made in September 2008. Mr. Goldberg’s agreement is effective as of May 20, 2011, and
the agreements for each of Messrs. Schwartz and Cayouette are effective as of May 31, 2011.
The Grant Agreements confirm grants of Telesat Holdco stock options (including tandem SAR rights) to the
Participants and provide for certain rights, obligations and restrictions related to such stock options, which include,
among other things: (w) the right of each Participant to require the Special Purchaser to purchase a portion of the
shares in Telesat Holdco owned by him in the event of exercise after termination of employment to cover taxes that
are greater than the minimum withholding amount; (x) the possible obligation of the Special Purchaser to purchase
the shares in the place of Telesat Holdco should Telesat Holdco be prohibited by applicable law or under the terms
of any credit agreement applicable to Telesat Holdco from purchasing such shares, or otherwise default on such
purchase obligation, pursuant to the terms of the Grant Agreements; (y) the obligation of the Special Purchaser to
purchase shares upon exercise by Telesat Holdco of its call right under Telesat Holdco’s Management Stock
Incentive Plan in the event of a Participant’s termination of employment; and (z) the right of each Participant to
require Telesat Holdco to cause the Special Purchaser or Loral to purchase a portion of the shares in Telesat Holdco
owned by him, or that are issuable to him under Telesat Holdco’s Management Stock Incentive Plan at the relevant
time, in the event that more than 90% of Loral’s common stock is acquired by an unaffiliated third party that does
not also purchase all of PSP’s and its affiliates’ interest in Telesat Holdco.
F-50
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Grant Agreements further provide that, in the event the Special Purchaser is required to purchase shares,
such shares, together with the obligation to pay for such shares, shall be transferred to a subsidiary of the Special
Purchaser, which subsidiary shall be wound up into Telesat Holdco, with Telesat Holdco agreeing to the acquisition
of such subsidiary by Telesat Holdco from the Special Purchaser for nominal consideration and with the purchase
price for the shares being paid by Telesat Holdco within ten (10) business days after completion of the winding-up
of such subsidiary into Telesat Holdco.
ViaSat/Telesat
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 invested in the Canadian coverage portion of the
ViaSat-1 satellite. Michael B. Targoff and another Loral director serve as members of the ViaSat Board of Directors.
A Beam Sharing Agreement between us and ViaSat provided 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. SS/L commenced construction of the Viasat-1 satellite in January 2008.
We recorded sales to ViaSat under this contract of $17.7 million, $34.6 million and $86.6 million for the years
ended December 31, 2011, 2010 and 2009, respectively.
On April 11, 2011, Loral assigned to Telesat and Telesat assumed from Loral all of Loral’s rights and
obligations with respect to the Loral Payload and all related agreements. In consideration for the assignment, Loral
received $13 million from Telesat and was reimbursed by Telesat, for approximately $48.2 million of net costs
incurred through closing of the sale, including costs for the satellite, launch and insurance, and costs of the gateways
and related equipment. Also, in connection with the assignment if Telesat agreed that if it obtains certain
supplemental capacity on the payload, Loral will be entitled to receive one-half of any net revenue actually earned
by Telesat in connection with the leasing of such supplemental capacity to its customers during the first four years
after the commencement of service using the supplemental capacity. In connection with the sale, Loral also assigned
to Telesat and Telesat assumed Loral’s 15-year contract with Xplornet Communications, Inc. (“Xplornet”) (formerly
known as Barrett Xplore Inc.) for delivery of high throughput satellite Ka-band capacity and gateway services for
broadband services in Canada. Our consolidated statements of operations for the year ended December 31, 2011
included a $6.9 million gain on this transaction representing the $13 million of proceeds in excess of costs adjusted
for cumulative intercompany profit eliminations and our retained ownership interest in Telesat. During 2010, a
subsidiary of Loral entered into contracts with ViaSat for procurement of equipment and services and with Telesat
for consulting, management, engineering and integration services related to the gateways that enable commercial
services using the Loral Payload. Prior to April 11, 2011, we had made cumulative payments of $3.9 million to
ViaSat and $1.4 million to Telesat under these agreements.
Costs of satellite manufacturing for sales to related parties were $124.5 million, $140.5 million and $153.5
million for the years ended December 31, 2011, 2010 and 2009, 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, 2011 and 2010, our
consolidated balance sheets included a liability of $3.7 million and $6.0 million, respectively, for the future use of
these transponders. Interest expense on this liability was $0.5 million, $0.7 million and $0.9 million for the years
ended December 31, 2011, 2010 and 2009, respectively. For the year ended December 31, 2011, we made payments
of $2.7 million to Telesat pursuant to the agreement.
F-51
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
XTAR
As described in Note 7, we own 56% of XTAR, a joint venture between Loral and Hisdesat and account for
our investment in XTAR under the equity method of accounting. SS/L constructed XTAR’s satellite, which was
successfully launched in February 2005. XTAR and Loral have entered into a management agreement whereby
Loral provides general and specific services of a technical, financial, and administrative nature to XTAR. For the
services provided by Loral, XTAR is charged a quarterly management fee equal to 3.7% of XTAR’s quarterly gross
revenues. Amounts due to Loral primarily due to the management agreement as of December 31, 2011 and 2010
were $4.2 million and $3.0 million, respectively. Beginning in 2008, Loral and XTAR agreed to defer amounts
owed to Loral under this agreement, and XTAR has agreed that its excess cash balance (as defined), will be applied
at least quarterly towards repayment of receivables owed to Loral, as well as to Hisdesat and Telesat. No cash was
received under this agreement for the years ended December 31, 2011 and 2010. Our selling, general and
administrative expenses included offsetting income to the extent of cash received under this agreement of $1.2
million for the year ended December 31, 2009.
MHR Fund Management LLC
Two of the managing principals of MHR, Mark H. Rachesky and Hal Goldstein are members of Loral’s board
of directors. A former managing principal of MHR, Sai S. Devabhaktuni, was a member of the Loral Board until his
resignation in January 2012.
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 and Dr. Rachesky, which registration statement was declared
effective in July 2009. Various funds affiliated with MHR and Dr. Rachesky held, as of December 31, 2011 and
2010, approximately 38.6% and 38.9%, respectively, of the outstanding voting common stock and as of
December 31, 2011 and 2010 had a combined ownership of outstanding voting and non-voting common stock of
Loral of 57.7% and 58.0%, respectively.
Funds affiliated with MHR were 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 owned certain equity
interests in Protostar. During July 2009, Protostar filed for bankruptcy protection under chapter 11 of the
Bankruptcy Code. The United States Bankruptcy Court for the District of Delaware entered an order confirming the
plan of reorganization for Protostar and its affiliated debtors on October 6, 2010. The plan provided for the
establishment of liquidating trusts for the Protostar debtors’ remaining assets, and Protostar commenced
distributions on October 21, 2010 to the agent under the above-referenced facility for the benefit of its lenders. The
plan of reorganization provided for no recovery by holders of equity interests in Protostar, and all equity interests
were deemed cancelled as of the effective date of the plan.
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, 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.
As of December 31, 2010, funds affiliated with MHR held $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. As of
December 31, 2011, MHR did not own any Telesat Senior Notes or Senior Subordinated Notes.
F-52
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. Selected Quarterly Financial Information (unaudited, in thousands, except per share amounts)
Year ended December 31, 2011
Revenues
Operating income
Income before income taxes and equity in
net income (losses) of affiliates
Equity in net income (losses) of affiliates
Net income (loss)
Net income (loss) attributable to Loral
common shareholders
Basic and diluted income (loss) per share(1):
Basic income (loss) per share
Diluted income (loss) per share
Year ended December 31, 2010
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)
Net income (loss) attributable to Loral
common shareholders
Basic and diluted income (loss) per share(1):
Basic income (loss) per share
Diluted income (loss) per share
March 31,
June 30,
September 30,
December 31,
Quarter Ended
$
279,899
27,452
$
252,422
23,484
$
268,845 $
14,371
36,912
46,246
67,795
26,105
23,940
29,626
67,819
29,333
2.21
2.10
0.96
0.91
17,189
(77,262)
(77,298)
(77,368)
(2.52)
(2.52)
306,199
28,127
29,784
113,405
107,051
106,893
3.48
3.28
March 31,
June 30,
September 30,
December 31,
Quarter Ended
$
228,914
(16,267)
$
279,962
23,098
$
323,438
39,621
$
(13,704)
44,592
29,373
26,355
(44,374)
(19,665)
29,373
(19,665)
0.98
0.97
(0.66)
(0.66)
41,462
40,011
72,392
72,392
2.40
2.29
326,671
34,156
38,981
45,396
405,241
404,746
13.36
12.87
(1)
The quarterly earnings per share information is computed separately for each period. Therefore, the sum of
such quarterly per share amounts may differ from the total for the year.
F-53
SCHEDULE II
LORAL SPACE & COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2011, 2010 and 2009
(In thousands)
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Additions
Charged to
Other
Accounts(1)
Deductions
From
Reserves(2)
Balance at
End of
Period
$
$
923
27,200
$
$
2,759
1,042
$
487,762
$
(96,617)
$
$
3,682
28,297
$
$
—
4,297
$
$
$
$
$
—
55
$
$
— $
— $
3,682
28,297
22,893
$
— $
414,038
—
—
$
$
(3,459) $
(1,224) $
223
31,370
$
414,038
$
(402,809)(3)
$
—
$
— $
11,229
$
$
$
223
31,370
$
$
—
(10)
11,229
$
(375)
$
$
$
—
—
$
$
— $
— $
223
31,360
33
$
— $
10,887
Description
Year ended 2009
Allowance for billed
receivables
Inventory allowance
Deferred tax valuation
allowance
Year ended 2010
Allowance for billed
receivables
Inventory allowance
Deferred tax valuation
allowance
Year ended 2011
Allowance for billed
receivables
Inventory allowance
Deferred tax valuation
allowance
(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 loss and other deferred tax assets.
(2) Deductions from reserves reflect write-offs of uncollectible billed receivables and disposals of inventory.
(3) During the fourth quarter of 2010, we determined, based on all available evidence, that a full valuation
allowance was no longer required on our deferred tax assets and, therefore, $335.3 million of the valuation
allowance was reversed as an income tax benefit. In addition, the valuation allowance was reduced by $67.5
million recorded as benefit to continuing operations.
F-54
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of Telesat Holdings Inc.
We have audited the accompanying consolidated financial statements of Telesat Holdings Inc. and subsidiaries (the
“Company”), which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and
January 1, 2010 and the consolidated statements of income, statements of comprehensive income, statements of
changes in shareholders’ equity and statements of cash flows for the years ended December 31, 2011 and
December 31, 2010, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards
Board and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated 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 comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Telesat Holdings Inc. and subsidiaries as at December 31, 2011, December 31, 2010 and January 1, 2010 and their
financial performance and cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
February 21, 2012
Toronto, Canada
F-55
Telesat Holdings Inc.
Consolidated Statements of Income
For the year ended December 31
(in thousands of Canadian dollars)
Notes
2011
Revenue
Operating expenses
Depreciation
Amortization
Other operating gains, net
Operating income
Interest expense
Interest and other income
Gain (loss) on changes in fair value of financial instruments
(Loss) gain on foreign exchange
Income before tax
Tax expense
Net income
6
7
14
8
9
10
808,361
(187,765)
620,596
(198,626)
(41,021)
114,068
495,017
(227,051)
1,554
98,585
(78,844)
289,261
(51,986)
237,275
2010
(Note 5)
821,361
(206,464)
614,897
(202,183)
(45,468)
83,018
450,264
(256,582)
5,752
(11,168)
163,966
352,232
(66,131)
286,101
See accompanying notes to the consolidated financial statements
F-56
Telesat Holdings Inc.
Consolidated Statements of Comprehensive Income
For the year ended December 31
(in thousands of Canadian dollars)
Notes
2011
Net income
Other comprehensive loss:
Foreign currency translation adjustments, net of tax
Actuarial losses on defined benefit plans, net of tax
Other comprehensive loss
Total comprehensive income
25
237,275
(3,541)
(31,077)
(34,618)
202,657
2010
(Note 5)
286,101
(1,692)
(9,450)
(11,142)
274,959
See accompanying notes to the consolidated financial statements
F-57
Telesat Holdings Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Year ended December 31
Notes
Common
shares
Preferred
shares
Total
share capital
Accumulated
earnings
(deficit)
Equity-settled
employee
benefits reserve
Foreign
currency
translation
reserve
Total
reserves
Total
shareholders’
equity
5
756,414
541,764
1,298,178
(112,817)
19,906
—
19,906
1,205,267
286,101
(30)
286,101
(30)
24
4,667
4,667
4,667
(9,450)
(1,692)
(1,692)
(11,142)
5
756,414
541,764
1,298,178
163,804
24,573
(1,692)
22,881
1,484,863
5
756,414
541,764
1,298,178
163,804
24,573
(1,692)
22,881
1,484,863
237,275
(10)
237,275
(10)
24
2,654
2,654
2,654
(31,077)
(3,541)
(3,541)
(34,618)
756,414
541,764
1,298,178
369,992
27,227
(5,233)
21,994
1,690,164
(in thousands of
Canadian dollars)
Balance at January 1,
2010
Net income for the
year
Dividends declared
on preferred
shares
Other
comprehensive
loss, net of tax
of $3,357
Share based
payments
Balance at December 31,
2010
Balance at January 1,
2011
Net income for the
year
Dividends declared
on preferred
shares
Other
comprehensive
loss, net of tax
of $10,486
Share based
payments
Balance at December 31,
2011
See accompanying notes to the consolidated financial statements
F-58
Telesat Holdings Inc.
Consolidated Balance Sheets
(in thousands of Canadian dollars)
Notes
December 31,
2011
Assets
Cash and cash equivalents
Trade and other receivables
Other current financial assets
Prepaid expenses and other current assets
Total current assets
Satellites, property and other equipment
Other long-term financial assets
Other long-term assets
Intangible assets
Goodwill
Total assets
Liabilities
Trade and other payables
Other current financial liabilities
Other current liabilities
Current indebtedness
Total current liabilities
Long-term indebtedness
Deferred tax liabilities
Other long-term financial liabilities
Other long-term liabilities
Senior preferred shares
Total liabilities
Shareholders’ Equity
Share capital
Accumulated earnings (deficit)
Reserves
Total shareholders’ equity
Total liabilities and shareholders’ equity
26
11
23
12
6, 14
23
13
6, 15
16
17
19
19
10
18
20
21
277,962
46,789
7,010
22,126
353,887
2,151,915
142,408
5,536
896,078
2,446,603
5,996,427
45,156
82,988
67,877
86,495
282,516
2,748,131
451,896
259,783
422,502
141,435
4,306,263
1,298,178
369,992
21,994
1,690,164
5,996,427
December 31,
2010
(Note 5)
January 1,
2010
(Note 5)
220,295
44,083
6,944
20,937
292,259
1,978,789
78,631
12,027
945,547
2,446,603
5,753,856
49,974
104,082
62,645
96,848
313,549
2,771,802
414,717
265,629
361,861
141,435
4,268,993
1,298,178
163,804
22,881
1,484,863
5,753,856
154,189
70,200
7,317
23,001
254,707
1,898,898
21,733
19,031
925,921
2,446,603
5,566,893
43,413
102,124
72,121
23,602
241,260
3,021,820
353,637
239,825
363,649
141,435
4,361,626
1,298,178
(112,817)
19,906
1,205,267
5,566,893
See accompanying notes to the consolidated financial statements
F-59
Telesat Holdings Inc.
Consolidated Statements of Cash Flows
For the year ended December 31
(in thousands of Canadian dollars)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash flows from operating
activities:
Amortization and depreciation
Deferred tax expense
Unrealized foreign exchange loss (gain)
Unrealized loss (gain) on derivatives
Dividends on senior preferred shares
Share-based compensation
Loss (gain) on disposal of assets
Impairment loss on intangible assets
Reversal of impairment loss on satellites, property and other
equipment
Reversal of impairment loss on intangible assets
Insurance proceeds
Other
Customer prepayments on future satellite services
Insurance proceeds
Operating assets and liabilities
Net cash from operating activities
Cash flows used in investing activities
Satellite programs
Purchase of other property and equipment
Purchase of intangible assets
Insurance proceeds
Proceeds from sale of assets
Net cash used in investing activities
Cash flows used in financing activities
Repayment of indebtedness
Dividends paid on preferred shares
Satellite performance incentive payments
Net cash used in financing activities
Effect of changes in exchange rates on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information
Interest received
Interest paid
Income taxes paid
Notes
2011
2010
(Note 5)
237,275
286,101
10
23
20
24
8
8
8
8
8
26
29
8
19
26
239,647
51,854
67,706
(87,914)
1,650
2,654
1,483
19,468
—
—
(135,019)
(30,801)
57,768
11,228
(13,113)
423,886
(356,199)
(17,566)
(12,618)
135,019
148
(251,216)
(108,741)
(10)
(5,928)
(114,679)
(324)
57,667
220,295
277,962
247,651
63,852
(170,016)
13,955
2,075
4,667
(3,826)
—
(7,923)
(71,269)
—
(24,930)
30,982
—
(29,815)
341,504
(257,725)
(3,966)
—
—
26,926
(234,765)
(34,946)
(30)
(5,099)
(40,075)
(558)
66,106
154,189
220,295
2,121
242,905
2,329
2,404
279,053
3,391
See accompanying notes to the consolidated financial statements
F-60
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
1. BACKGROUND OF THE COMPANY
Telesat Holdings Inc. (the “Company” or “Telesat”) is a Canadian corporation. Telesat is a global fixed
satellite services operator providing secure satellite-delivered communications solutions worldwide to broadcast,
telecom, corporate and government customers. The Company has a fleet of 12 satellites plus the Canadian Ka-band
payload on ViaSat-1 with two more satellites under construction. Telesat also manages the operations of additional
satellites for third parties. Telesat is headquartered at 1601 Telesat Court, Ottawa, Ontario, Canada, KIB 5P4 with
offices and facilities around the world.
On October 31, 2007, Canada’s Public Sector Pension Investment Board (“PSP Investments”) and Loral
Space & Communications Inc. (“Loral”), through a newly formed entity called Telesat Holdings Inc. completed the
acquisition of Telesat Canada from BCE Inc. Loral and PSP Investments 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 including
the election of directors. PSP Investments 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. The remaining voting interest of
36 2/3% for the election of directors is held by shareholders of the Company’s director voting preferred shares.
2. BASIS OF PRESENTATION
Statement of Compliance
The consolidated financial statements were prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Company, as a first-
time adopter of IFRS, has followed the requirements of IFRS 1 , First-time Adoption of International Financial
Reporting Standards (“IFRS 1”). The first date on which IFRS was applied was January 1, 2010. The accounting
policies described in note 3 were consistently applied to all the periods presented.
Approval of Financial Statements
These financial statements were approved by the Company’s Board of Directors and authorized for issue on
February 21, 2012.
Transition to International Financial Reporting Standards (“IFRS”)
The Company’s consolidated financial statements were previously prepared in accordance with Canadian
generally accepted accounting principles (“Canadian GAAP”). Canadian GAAP differs in some areas from IFRS. In
preparing these consolidated financial statements, the Company has amended certain accounting and measurement
methods previously applied in the Canadian GAAP financial statements to comply with IFRS. Note 5 of these
consolidated financial statements contains reconciliations and descriptions of the impact of the transition from
Canadian GAAP to IFRS on equity, income and comprehensive income as at December 31, 2010. Note 5 also has
the January 1, 2010 reconciliation of shareholders’ equity. In addition the note discloses the reconciliation for the
consolidated statement of income and consolidated statement of comprehensive income for the year ended
December 31, 2010 and a line by line reconciliation of the consolidated balance sheets as at January 1, 2010 and
December 31, 2010.
Basis of Consolidation
These consolidated financial statements include the results of the Company and subsidiaries controlled by the
Company. Control is achieved when the Company has the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities. The most significant wholly owned subsidiaries are listed in note 28.
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the historical cost basis except for financial
instruments which are measured at fair values, as explained in the accounting policies below. Historical cost is based
on the fair value of the consideration given in exchange for assets.
F-61
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
Segment Reporting
The Company’s operating segments are organized around the group’s service lines, which represent the
group’s business activities. The operating segments are reported in a manner consistent with the internal reporting
provided to the Company’s Chief Operating Decision Maker (the “CODM”), who is the Company’s Chief Executive
Officer. To be reported, a segment is usually based on quantitative thresholds but can also encompass qualitative
factors management deems significant. The Company operates in a single industry segment, in which it provides
satellite-based services to its broadcast, enterprise and consulting customers around the world.
Foreign Currency Translation
Unless otherwise specified, all figures reported in the consolidated financial statements and associated note
disclosures are presented in Canadian dollars, which is the functional and presentation currency of the Company.
Each of the subsidiaries of the Company determines its own functional currency and uses that currency to measure
items on its separate financial statements.
Upon consolidation of the Company’s foreign operations having a functional currency other than the Canadian
dollar, assets and liabilities are translated at the period-end exchange rate, and revenue and expenses are translated at
average exchange rates for the period. Gains or losses on translation of foreign subsidiaries are recognized in other
comprehensive income (“OCI”).
On the financial statements of the Company and its subsidiaries, foreign currency non-monetary assets and liabilities
are translated at their historical exchange rates, foreign currency monetary assets and liabilities are translated at the
period-end exchange rates, and foreign denominated revenue and expenses are translated at average exchange rates
for the period. Gains or losses on translation of these items are recognized as a component of net income.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less are classified as cash and cash
equivalents. Cash and cash equivalents are comprised of cash on hand, demand deposits and short term investments.
Restricted cash expected to be used within the next twelve months has been classified as cash and cash equivalents.
Revenue Recognition
Telesat recognizes revenue when earned, as services are rendered or as products are delivered to customers.
Revenue is measured at the fair value of the consideration received or receivable. There must be clear evidence that
an arrangement exists, the amount of revenue must be known or determinable and collectability must be reasonably
assured. Revenue from a contract to sell services is recognized as follows:
•
•
Consulting revenue 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. Percentage
of completion is measured by comparing actual cost incurred to total cost expected.
Equipment sales revenue is 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 products are delivered or as services
are provided over the term of the 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.
F-62
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
Deferred Revenue
Deferred revenue represents the Company’s liability for the provision of future services and is classified on
the balance sheet in other current liabilities and other long-term liabilities. Deferred revenue consists of
remuneration received in advance of the provision of service and is recognized in income on a straight-line basis
over the term of the related customer contract.
Borrowing Costs
Borrowing costs are incurred on the Company’s debt financing. Borrowing costs directly attributable to the
acquisition, production or construction of a qualifying asset are added to the cost of that asset. The Company has
defined a qualifying asset as an asset that takes longer than twelve months to get ready for its intended use or sale.
Capitalization of borrowing costs continues until such time as the asset is substantially ready for its intended use or
ready for sale. Borrowing costs are determined based on specific financing related to the asset or in the absence of
specific financing, the borrowing costs are calculated on the basis of a capitalization rate which is equal to the
Company’s average cost of debt. All other borrowing costs are expensed in the period in which they are incurred.
Satellites, Property and Other Equipment
Satellites, property and other equipment, which are carried at cost, less accumulated depreciation and any
accumulated impairment losses, include the contractual cost of equipment, capitalized engineering costs, and with
respect to satellites, the cost of launch services, launch insurance and capitalized borrowing costs during
construction.
Depreciation is calculated using the straight-line method over the respective estimated useful lives of the
assets. The estimates of useful lives are reviewed at least annually and adjusted prospectively if necessary. Below
are the estimated useful lives in years of satellites, property and other equipment as of December 31, 2011.
Satellites
Property and other equipment
Years
12 – 15
3 – 30
Construction in progress is not depreciated as depreciation only starts when the asset is ready for its intended
use. For satellites, depreciation commences on the day the satellite becomes available for service and continues until
the accumulated depreciation equals the amount of the cost.
Liabilities related to decommissioning and restoration of retiring property and equipment are measured at fair
value with a corresponding increase to the carrying amount of the related asset. The liability is accreted over the
period of expected cash flows with a corresponding charge to interest expense. The liabilities recorded to date have
not been significant and are reassessed at the end of each reporting period. There are no decommissioning or
restoration obligations for satellites.
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
depreciated and is no longer in service. When other property is retired from operations at the end of its useful life,
the amount of the asset and accumulated depreciation 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 income immediately.
Impairment of Long-Lived Assets
Tangible fixed assets and finite life intangible assets are assessed for impairment on a quarterly basis or more
frequently when events or changes in circumstances indicate that the carrying value of assets exceeds the
recoverable amount.
F-63
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
An impairment test consists of assessing the recoverable amount of an asset, which is the higher of its fair
value less cost to sell and its value in use. If it is not practicable to estimate the recoverable amount for a particular
asset, the Company determines the recoverable amount of the cash generating unit (“CGU”) with which it is
associated. A cash generating unit is the smallest identifiable group of assets that generates cash inflows which are
largely independent of the cash inflows from other assets or groups of assets.
The Company estimates value in use on the basis of the estimated future cash flows to be generated by an
asset or CGU. These future cash flows are based on the Company’s latest business plan information approved by
senior management and are discounted using rates that best reflect the time value of money and the specific risks
associated with the underlying asset or assets in the CGU.
The fair value less cost to sell is the amount obtainable from the sale of the asset or CGU in the course of an
arm’s length transaction between interested, knowledgeable and willing parties, less selling costs.
An impairment loss is the amount by which the carrying amount of an asset or CGU exceeds its recoverable
amount. Impairment losses and reversals of impairment losses are recognized in Other operating gains (losses).
When an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the
revised estimate of its recoverable amount, so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognized for the asset (or CGU) in prior
years. A reversal of an impairment loss is recognized immediately in Other operating gains (losses).
Deferred Satellite Performance Incentive Payments
Deferred satellite performance incentive payments are obligations payable to satellite manufacturers over the
lives of certain satellites. The present value of the payments are capitalized as part of the cost of the satellite and
recognized in income as part of the depreciation of the satellite.
Goodwill and Intangible Assets
The Company accounts for business combinations using the acquisition method of accounting, which
establishes specific criteria for the recognition of intangible assets separately from goodwill. Goodwill represents the
excess between the total of the consideration transferred over the fair value of net assets acquired. After initial
recognition at cost, goodwill is measured at cost less any cumulative impairment charge. The Company
distinguishes intangible assets between assets with finite and indefinite useful lives. Intangible assets with indefinite
useful lives are comprised of the Company’s trade name and orbital slots.
Finite life intangible assets, which are carried at cost less accumulated amortization, consist of revenue
backlog, customer relationships, customer contract, concession rights, transponder rights and patents. Intangible
assets with finite lives are amortized over their estimated useful lives using the straight-line method of amortization,
except for revenue backlog which is based on the expected period of recognition of the related revenue.
Revenue backlog
Customer relationships
Customer contract
Concession rights
Transponder rights
Patents
The estimates of useful lives are reviewed every year and adjusted prospectively if necessary.
Years
4 to 17
11 to 21
15
15
6 to 14
18
F-64
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
Impairment of Goodwill and Indefinite Life Intangible Assets
An assessment for impairment of goodwill and indefinite life intangible assets is performed annually, or more
frequently whenever events or changes in circumstances indicate that the carrying amount of these assets are likely
to exceed their recoverable amount, which is the higher of fair value less cost to sell and value in use. Goodwill is
tested for impairment at the entity level as this represents the lowest level within the entity at which the goodwill is
monitored for internal management purposes, and is not larger than an operating segment. Indefinite life intangibles
have not been allocated to any CGU and are tested for impairment at the asset level.
An impairment test consists of assessing the recoverable amount of an asset, which is the higher of its fair
value less cost to sell and its value in use.
Goodwill
In performing the goodwill impairment analysis, the Company uses the income approach as well as the market
approach in the determination of the fair value of goodwill at the entity level. Under the income approach, the sum
of the projected discounted cash flows for the next five years in addition to a terminal value are used to determine
the fair value at the entity level. In this model, significant assumptions used include: revenue, expenses, capital
expenditures, working capital, terminal growth rate and discount rate.
Under the market based approach, the fair value of the reporting unit is determined based on market multiples
derived from comparable public companies. As part of that analysis, assumptions are made regarding comparability
of selected companies including revenue, earnings before interest, taxes, depreciation and amortization multiples for
valuation purposes, growth rates, size and overall profitability.
Under both approaches, all assumptions used in the model, with the exception of the discount rate, are based
on management’s best estimates. The discount rates are consistent with external sources of information.
Trade name
For the purposes of impairment testing, the fair value of the trade name was determined using an income
approach, specifically the relief from royalties method. The relief from royalty method is comprised of two major
steps: i) a determination of the hypothetical royalty rate, and ii) the subsequent application of the royalty rate to
projected revenue. In determining the hypothetical royalty rate in the relief from royalty approach, the Company
considered comparable license agreements, operating earnings benchmark rule of thumb, an excess earnings analysis
to determine aggregate intangible asset earnings, and other qualitative factors. The key assumptions used included
the tax rate and discount rate.
Orbital slots
In performing the orbital slots impairment analysis, the Company estimated fair value using the build up
method to determine the cash flows for the income approach, with the resulting projected cash flows discounted at
an appropriate weighted average cost of capital. In instances where the build up method did not generate positive
value for an orbital slot, but the orbital slot was expected to generate revenue, a value was assigned based upon
independent source data for recent transactions of similar orbital slots.
Under the build up approach, the amount an investor would be willing to pay for an orbital slot to operate a
satellite business is calculated by first estimating the cash flows that typical market participants would assume could
be available from the operation of satellites using the subject slot in a similar market. It was assumed that rather than
acquiring such a business as a going concern, the buyer would hypothetically obtain a slot and build a new operation
with similar attributes from scratch. Thus the buyer or builder is considered to incur the start-up costs and losses
typically associated with the going concern value and pay for all other tangible and intangible assets.
The key assumptions used in estimating the recoverable amounts of the orbital slots included i) market
penetration leading to revenue growth, ii) profit margin, iii) duration and profile of the build up period, iv) estimated
start-up costs and losses incurred during the build up period and v) the weighted average cost of capital.
F-65
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
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. 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 income and included as part of gain (loss) on
changes in fair value of financial instruments.
Financial assets and financial liabilities that are classified as held-for-trading (“HFT”) are measured at fair
value. The unrealized gains and losses relating to the HFT assets and liabilities are recorded in the consolidated
statement of income included in gain (loss) on changes in fair value of financial instruments. Loans and receivables
and other liabilities are recorded at amortized cost in accordance with the effective interest rate method.
Derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value
on the consolidated balance sheet at inception and marked to market at each reporting period thereafter. Derivatives
embedded in other financial instruments are treated as separate derivatives when their risk and characteristics are not
closely related to those of the host contract and the host contract is measured separately according to its
characteristics.
The Company accounts 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 for financial instruments classified as HFT are expensed as incurred. Transaction costs that
are directly attributable to the acquisition of the financial assets and financial liabilities (other than HFT) are added
or deducted from the fair value of the financial asset and financial liability on initial recognition.
Financing Costs
The debt issuance costs related to the revolving Canadian dollar denominated credit facility and the Canadian
term loan facility are accounted for as short-term and long-term deferred charges and included in Prepaid expenses
and other current assets and Other long-term assets. The deferred charges 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.
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 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 the present value of its obligations under employee benefit plans and
the related costs, adjusted for any unrecognized past service cost and reduced by the fair value of plan assets. Any
asset resulting from this calculation is limited to any unrecognized past service cost plus the present value of
available refunds and reductions in future contributions to the plan. 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.
F-66
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
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 bonds as determined in
accordance with guidance described by the Canadian Institute of Actuaries in an Educational Note dated September
2011. Past service costs arising from plan amendments are recognized immediately to the extent that the benefits are
already vested, and otherwise are amortized on a straight-line basis over the average remaining vesting period. All
actuarial gains and losses are recognized immediately in other comprehensive income in the period in which they
occur and recognized in accumulated earnings (deficit). A valuation is performed at least every three years to
determine the present value of the accrued pension and other retirement benefits. The 2010 pension expense
calculations are extrapolated from a valuation performed as of January 1, 2007 while the 2011 pension expense
calculations are extrapolated from the calculation performed as of January 1, 2010. The accrued benefit obligation is
extrapolated from an actuarial valuation as of January 1, 2010. The most recent valuation of the pension plans for
funding purposes was as of January 1, 2011, and the next required valuation is as of January 1, 2012.
In addition, Telesat provides certain health care and life insurance benefits for retired employees. 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. Payments to defined contribution retirement benefit plans
are recognized as an expense when employees have rendered service entitling them to the contributions.
Share-Based Compensation Plan
The Company offers an equity-settled share-based incentive plan for certain key employees under which it
receives services from employees in exchange for equity instruments of the Company. The expense is based on fair
value of the awards granted using the Black-Scholes option pricing model. The expense is recognized over the
vesting period, which is the period over which all of the specified vesting conditions are satisfied, with a
corresponding increase in equity. For awards with graded vesting, the fair value of each tranche is recognized over
the respective vesting period.
Inventory
Inventories are valued at lower of cost and net realizable value and consist of finished goods and work in
process. Cost for substantially all network equipment inventories is determined on a weighted average cost basis.
Cost for work in process and certain one-of-a-kind finished goods is determined using the specific identification
method.
Income Taxes
Current income tax is measured at the amount expected to be paid to the taxation authorities, net of recoveries,
based on the tax rates and laws enacted or substantively enacted at the balance sheet date.
Income tax expense, comprised of current and deferred income tax, is recognized in income except to the
extent it relates to items recognized in other comprehensive income or equity, in which case the income tax expense
is recognized in other comprehensive income or equity, respectively.
Deferred taxes are the result of temporary differences arising between the tax bases of assets and liabilities and
their carrying amount. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in
the period where the asset is realized or the liability is settled, based on tax rates and laws that have been enacted or
substantively enacted at the balance sheet date.
Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary difference can be utilized.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent
that it is no longer probable that the deferred tax assets will be realized. Unrecognized deferred tax assets are
reassessed at each balance sheet date and recognized to the extent that it has become probable that future taxable
profit will allow the deferred tax assets to be recovered.
F-67
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
3. SIGNIFICANT ACCOUNTING POLICIES—(continued)
Deferred tax liabilities are recognized for all taxable temporary differences except when the deferred tax
liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction
which is not a business combination. For taxable temporary differences associated with investments in subsidiaries,
a deferred tax liability is recognized unless the parent can control the timing of the reversal of the temporary
difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Future Changes in Accounting Policies
The IASB recently issued a number of new accounting standards. The new standards determined to be
applicable to the Company are disclosed below. The remaining standards have been excluded as they are not
applicable.
Financial instruments
IFRS 9, Financial Instruments (“IFRS 9”) was issued by the International Accounting Standards Board
(“IASB”) on October 28, 2010, and will replace IAS 39, Financial Instruments: Recognition and Measurement
(“IAS 39”). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or
fair value, replacing multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its
financial instruments in the context of its business model and the contractual cash flow characteristics of the
financial assets. Two measurement categories continue to exist to account for financial liabilities in IFRS 9, fair
value through profit or loss (“FVTPL”) and amortized cost. Financial liabilities held for trading are measured at
FVTPL, and all other financial liabilities are measured at amortized cost unless the fair value option is applied. The
treatment of embedded derivatives under the new standard is consistent with IAS 39 and is applied to financial
liabilities and non-derivative hosts not within the scope of this standard.
IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company is currently
evaluating the impact of IFRS 9 on its consolidated financial statements.
Accounting for post employment benefits
On June 16, 2011, the IASB issued the amended version of IAS 19, Employee Benefits (“IAS 19”). The
amendments make changes in eliminating the accounting option to defer the recognition of actuarial gains and
losses, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans as well as
amendments to disclosure requirements. Changes in the defined benefit obligation and plan assets are disaggregated
into three components: service costs, net interest on the net defined benefit obligation (asset) and remeasurements of
the net defined benefit obligation (asset). The revised standard is effective for annual periods beginning on or after
January 1, 2013 with earlier application permitted. The Company is currently evaluating the impact of revised IAS
19 on its consolidated financial statements.
Fair value measurement and disclosure requirements
IASB issued IFRS 13, Fair value measurement (“IFRS 13”) on May 12, 2011. IFRS 13 provides guidance on
how fair value measurement should be applied whenever its use is already required or permitted by other standards
within IFRS. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application
permitted. The Company is currently evaluating the impact of revised IFRS 13 on its consolidated financial statements.
4. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Critical judgments in applying accounting policies
The following are the critical judgments made in applying the Company’s accounting policies which have the
most significant effect on the amounts reported in the financial statements:
Revenue recognition
The Company’s accounting policy relating to revenue recognition is described in note 3. The percentage of
completion method is used for fixed price consulting revenue contracts and requires judgment by management to
determine the appropriateness of using the method for revenue recognition as this method requires the ability to
accurately estimate costs incurred and accurately estimate costs required to complete contracts.
F-68
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
4. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES—(continued)
Uncertain income tax positions
The Company operates in numerous jurisdictions and is subject to country-specific tax laws. Management
uses significant judgment when determining the worldwide provision for tax and estimates provisions for uncertain
tax positions as the amounts expected to be paid based on a qualitative assessment of all relevant factors. In the
assessment, management considers risk with respect to tax matters under active discussion, audit, dispute or appeal
with tax authorities, or which are otherwise considered to involve uncertainty. Management reviews the provisions
at each balance sheet date.
IFRIC 4 — Determining whether an arrangement contains a lease
The Company assesses for each new arrangement whether it contains a lease based on IFRIC 4. The
determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at
inception date or whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or
the arrangement conveys a right to use the asset. If contracts contain a lease arrangement, the leases are classified as
finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
Critical accounting estimates and assumptions
The Company makes accounting estimates and assumptions that affect the carrying value of assets and
liabilities, reported net income and disclosure of contingent assets and liabilities. Estimates and assumptions are
based on historical experience, current events and other relevant factors, therefore, actual results will differ and
could be material. The accounting estimates and assumptions critical to the determination of the amounts reported in
the financial statements are as follows:
Derivative financial instruments measured at fair value
Derivative financial assets and liabilities measured at fair value were $134.4 million and $213.5 million at
December 31, 2011 (December 31, 2010 — $72.4 million and $244.5 million, January 1, 2010 — $15.9 million and
$185.3 million). Quoted market values are unavailable for the Company’s financial instruments and in the absence
of an active market, the Company determines fair value for financial instruments 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. The determination of fair value is affected significantly by the assumptions used for the
amount and timing of estimated future cash flows and discount rates. As a result, the fair value of financial assets
and liabilities and the amount of gains or losses on changes in fair value recorded to net income could vary.
Impairment of goodwill
Goodwill represents approximately $2.4 billion of total assets at December 31, 2011 and at each of the prior
balance sheet dates. Determining whether goodwill is impaired requires an estimation of the Company’s value. The
Company’s value requires management to estimate the future cash flows expected to arise from operations and to
make assumptions regarding economic factors, tax rates, and annual growth rates. Actual operating results and the
related cash flows of the Company could differ from the estimates used for the impairment analysis.
F-69
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
4. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES—(continued)
Impairment of intangible assets
Intangible assets represent approximately $896 million of total assets at December 31, 2011 (December 31,
2010 — $946 million, January 1, 2010 — $926 million). Impairment of intangible assets is tested annually or more
frequently if indicators of impairment exist. The impairment analysis requires the Company to estimate the future
cash flows expected to arise from operations and to make assumptions regarding economic factors, discount rates,
tax rates, and annual growth rates. Actual operating results and the related cash flows of the Company could differ
from the estimates used for the impairment analysis.
Where an impairment loss subsequently reverses, the carrying amount of the CGU or individual asset is
increased to the revised estimate of its recoverable amount, so long as the increased carrying amount does not
exceed the carrying amount that would have been determined had no impairment loss been recognised for the CGU
or individual asset in prior years.
The reversal of an impairment requires management to re-assess several indicators that led to the impairment.
It requires the valuation of the recoverable amount by estimating the future cash flows expected to arise from the
CGU or individual asset and the determination of a suitable discount rate in order to calculate its present value.
Significant judgment is made in establishing these assumptions.
Employee Benefit
The cost of defined benefit pension plans and other post employment medical benefits and the present value of
the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various
assumptions which may differ from actual developments in the future. These include the determination of the
discount rate, future salary increases, mortality rates, future pension increases and return on plan assets. Due to the
complexity of the valuation, the underlying assumptions, and its long term nature, a defined benefit obligation is
highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
Determination of useful life of satellites and finite life intangible assets
The estimated useful life and depreciation method for satellites and finite life intangible assets are reviewed at
the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective
basis. Any change in these estimates may have a significant impact on the amounts reported.
Income taxes
Management assesses the recoverability of deferred tax assets based upon an estimation of the Company’s
projected taxable income using existing tax laws, and its ability to utilize future tax deductions before they expire.
Actual results could differ from expectations.
5. TRANSITION TO IFRS
The Company adopted IFRS on January 1, 2011 with a transition date of January 1, 2010 (the “opening
balance sheet”). Prior to the adoption of IFRS the Company prepared its consolidated financial statements in
accordance with previous Canadian GAAP and applied Part V of the Canadian Institute of Chartered Accountants
handbook. The Company’s consolidated financial statements for the year ended December 31, 2011 are the first
annual consolidated financial statements that comply with IFRS and these consolidated financial statements were
prepared as described in note 2, including the application of IFRS 1. IFRS 1 provides for certain mandatory
exceptions and provides for certain elective exemptions for first time adopters. These consolidated financial
statements have been prepared in accordance with those IFRS standards and International Financial Reporting
Interpretation Committee (“IFRIC”) interpretations issued and effective or issued and early adopted as at the timing
of preparing these consolidated financial statements.
F-70
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
Initial elections upon adoption of IFRS 1
The basic principles of IFRS 1 assume that on the initial adoption of IFRS standards, these will be applied
retrospectively as if the standards had been applied and effective from the date of inception. However, the IASB has
determined that retrospective application in certain situations cannot be performed with sufficient reliability or
significant cost. Therefore, IFRS 1 offers mandatory exceptions and elective exemptions to facilitate conversion
from Canadian GAAP to IFRS. Below are the mandatory exceptions and elective exemptions applicable to the
Company.
A. Mandatory exceptions
Estimates
The estimates made in the opening IFRS balance sheet reflect conditions that existed at the date of the
underlying transaction or January 1, 2010, as required by each specific IFRS standard. Hindsight was not used to
create or revise estimates. All estimates used in the preparation of the opening balance sheet reflect the facts and
circumstances at the date of the underlying transaction or January 1, 2010, as may be the case.
B. Elective exemptions
Business combinations
IFRS 1 provides the Company with the option to apply IFRS 3R, Business Combinations , retrospectively or
prospectively from the transition date of January 1, 2010. The retrospective application requires the restatement of
business combinations that occurred prior to the transition date. The Company elected to apply IFRS 3R
prospectively to business combinations that occurred on or after the date of transition of January 1, 2010.
Fair value or revaluation as deemed cost
IFRS 1 provides an exemption to measure property, plant and equipment, intangible assets, and investment
property at its fair value and use that fair value as its deemed cost at that date and an exemption to use a previous
Canadian GAAP revaluation as deemed cost if it is comparable to fair value or reflects the cost or depreciated cost
under IFRS. If no election is made, retrospective application is required in accordance with IAS 16, Property, Plant
and Equipment , IAS 38, Intangible Assets , and IAS 40, Investment Property . The Company has elected to use a
previous Canadian GAAP revaluation as deemed cost. The previous revaluation was required as part of the
October 31, 2007 acquisition of Telesat Canada and Loral Skynet. This election had no impact on the Company’s
opening balance sheet.
Employee benefits
IFRS 1 provides the option to retrospectively apply the corridor approach under IAS 19, Employee Benefits ,
for the recognition of actuarial gains and losses, or alternatively recognize all cumulative actuarial gains and losses
deferred under Canadian GAAP in opening accumulated deficit at the transition date. The Company has elected to
recognize all cumulative actuarial gains and losses in opening accumulated deficit for all of its employee benefit
plans at the date of transition. This election resulted in a decrease to other long-term assets of $15.4 million, a
decrease to deferred tax liability of $3.5 million, a decrease to other long-term liabilities of $1.4 million and an
increase to accumulated deficit of $10.5 million.
Cumulative currency translation differences
IFRS 1 permits cumulative translation gains and losses to be reset to zero at the transition date. The Company
has elected to reset all cumulative translation gains and losses to zero in opening accumulated deficit at January 1,
2010. The impact was a decrease in accumulated other comprehensive loss of $7.4 million and an increase to
accumulated deficit of $7.4 million after adjusting for changes in functional currency as determined under IAS 21,
The Effects of Changes in Foreign Exchange Rates . There was no impact to the shareholders’ equity.
F-71
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
Borrowing costs
IAS 23, Borrowing Costs , requires an entity to capitalize the borrowing costs related to all qualifying assets.
IFRS 1 allows the Company the option to apply this standard retrospectively or prospectively from the date of
transition. The Company has elected to apply IAS 23 prospectively.
Leases
IFRS 1 provides the option to apply the transitional provisions under IFRIC 4, Determining whether an
Arrangement contains a Lease , to determine whether an arrangement contains a lease on the basis of facts and
circumstances existing at the date of transition. The Company has made this election in its evaluation of contracts
existing at the transition date. As a result of the application of IFRIC 4, management determined that certain
agreements were incorrectly accounted for as leases under Canadian GAAP. These immaterial errors were corrected
as part of the IFRS transition as permitted under IFRS 1 with prior periods adjusted in these financial statements and
the agreements are now accounted for as service agreements which do not contain a lease under IFRIC 4. The
impact to the opening balance sheet was a decrease in satellite, property and other equipment of $19.5 million, a
decrease to other current liabilities of $3.5 million, a decrease to other long-term liabilities of $17.8 million, a
decrease to deferred tax liability of $6.1 million and a decrease to opening accumulated deficit of $7.9 million.
C. Reconciliation of Canadian GAAP to IFRS
The following represents the reconciliations from Canadian GAAP to IFRS for the respective periods noted
for shareholders’ equity, net income and total comprehensive income. The first-time adoption of IFRS did not have a
material impact on total operating, investing or financing cash flows.
Reconciliation of Shareholders’ Equity
As at
Shareholders’ equity under Canadian GAAP
Differences increasing (decreasing) reported shareholders’ equity (a) :
1. Impairment – Tangible assets
2. Impairment – Intangible assets
3. Employee benefits
4. Foreign currency translation
5. Share based compensation
6. Leases
Total shareholder’s equity under IFRS
December 31, 2010
1,132,325
January 1,
2010
897,296
—
365,183
(20,100)
1,634
—
5,821
1,484,863
(5,921)
312,725
(10,489)
3,745
—
7,911
1,205,267
(a) Differences increasing (decreasing) reported shareholders’ equity are disclosed net of tax.
F-72
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
Reconciliation of Net Income
Net income under Canadian GAAP
Differences increasing (decreasing) reported net income:
1. Impairment – Tangible assets
2. Impairment – Intangible assets
3. Employee benefits
4. Foreign currency translation
5. Share based compensation
6. Leases
7. Income taxes
Total net income under IFRS
Reconciliation of Comprehensive Income
Comprehensive income under Canadian GAAP
Differences increasing (decreasing) reported comprehensive income:
Differences in net income
Foreign currency translation adjustment
Actuarial loss on defined benefit plans
Comprehensive income under IFRS
D. Changes in accounting policies from Canadian GAAP to IFRS
For the year ended
December 31, 2010
228,191
7,924
71,269
(192)
(32)
987
68
(22,114)
286,101
For the year ended
December 31, 2010
229,406
57,910
(2,907)
(9,450)
274,959
In addition to the mandatory exceptions and elective exemptions for retrospective application of IFRS, the
following narratives explain the significant differences, as identified in the tables above, between previously adopted
Canadian GAAP accounting policies and the current IFRS accounting policies adopted by the Company.
(1) Impairment—Tangible assets
A recoverability test, under Canadian GAAP, is a two step process whereby the first test is performed by
comparing the undiscounted cash flows expected to be generated from the asset to its carrying amount. If the asset
does not recover its carrying value, an impairment loss is determined as the excess of the asset’s carrying amount
over its fair value. Fair value is calculated as the present value of expected cash flows derived from the asset.
The impairment test under IAS 36, Impairment of Assets , is a one step process whereby impairment is
calculated as the excess of the asset’s carrying amount over its recoverable amount. The recoverable amount is the
higher of the asset’s fair value less cost to sell and its value in use. Value in use is defined as the present value of the
future cash flows expected to be derived from the asset. As a result of the differences in measurement, the Company
recognized an impairment under IFRS, on the transition date, as the carrying amount of a certain satellite was in
excess of its value in use.
The impairment resulted in the following adjustments to the opening IFRS balance sheet: a reduction to
satellites, property and other equipment of $7.9 million, a reduction to deferred tax liability of $2.0 million and an
increase in opening accumulated deficit of $5.9 million. The impairment recorded on the transition date was
subsequently reversed in 2010 due to changes in revenue assumptions.
F-73
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
(2) Impairment—Intangible assets
Impairment losses cannot be reversed under Canadian GAAP.
IFRS requires impairment losses other than those related to goodwill, to be reversed if certain criteria are met
in accordance with IAS 36, Impairment of Assets . As a result, the Company reversed an impairment relating to its
orbital slot intangible assets at the transition date. The reversal of the impairment was mainly the result of the
variations in the discount rate applied. The reversal resulted in an increase to intangible assets of $411.6 million, an
increase to deferred tax liability of $98.9 million and a decrease to opening accumulated deficit of $312.7 million on
the opening IFRS balance sheet.
At the end of 2010 the impairment reversal resulted in an increase to intangible assets of $483.0 million, an
increase to deferred tax liability of $117.8 million and an increase in accumulated earnings of $365.2 million. In the
2010 statement of income under IFRS compared to Canadian GAAP an additional $71.3 million of other operating
gains was recorded, reduced by additional tax expense of $18.8 million.
(3) Employee benefits—actuarial gains and losses
Under Canadian GAAP actuarial gains and losses arising from the calculation of the present value of the
defined benefit obligation and the fair value of plan assets are recognized on a systematic and consistent basis,
subject to a minimum required amortization based on a corridor approach. The corridor was 10% of the greater of
the accrued benefit obligation and the fair value of plan assets at the beginning of the year. The excess of 10% is
amortized as a component of pension expense on a straight-line basis over the expected average remaining service
period of active participants. Actuarial gains and losses below the 10% corridor are deferred.
Under IFRS, the Company elected to recognize all actuarial gains and losses immediately in other
comprehensive income without recycling to the income statement in subsequent periods. As a result, actuarial gains
and losses are not amortized to the statement of income but instead recorded directly to other comprehensive income
at the end of each period.
The recognition of actuarial gains and losses as per the opening IFRS balance sheet date resulted in a decrease
to other long-term assets of $15.4 million, a decrease of $1.4 million to other long-term liabilities, a decrease to
deferred tax liabilities of $3.5 million and a corresponding increase to accumulated deficit of $10.5 million. The
change in accounting policy regarding the recognition of actuarial gains and losses had the following impact on the
December 31, 2010 balance sheet: a decrease to other long-term assets of $29.5 million, a decrease of $2.6 million
to other long-term liabilities, a decrease to deferred tax liabilities of $6.8 million and a corresponding decrease to
accumulated earnings of $20.1 million. The operating expense increased by $0.2 million in 2010 under IFRS
compared to Canadian GAAP as a result of the different accounting policies. The impact on the 2010 other
comprehensive income resulted in a decrease of $9.5 million.
(4) Foreign currency translation
Under Canadian GAAP, foreign currency translation of subsidiaries depends on the criteria provided in
determining self-sustaining foreign operations and integrated foreign operations.
IFRS requires each entity in a consolidated group to determine its functionally currency in isolation in
accordance with primary and secondary indications. As a result of this difference, certain subsidiaries that were
previously accounted for as integrated foreign operations under Canadian GAAP were revised to have their
functional currency as a foreign currency. The impact on the transition date was an increase to satellites, property
and other equipment of $0.1 million, a $3.6 million increase to intangible assets, a $0.8 million reduction in
accumulated other comprehensive loss and a $2.9 million reduction of accumulated deficit. The resulting foreign
currency translation adjustment was then cleared to accumulated deficit using the IFRS 1 exemption for IAS 21.
F-74
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
5. TRANSITION TO IFRS—(continued)
The impact on the December 31, 2010 balance sheet was an increase to satellites, property and other
equipment of $0.1 million, a $1.5 million increase to intangible assets, a $0.8 million reduction in accumulated other
comprehensive loss and a $0.8 million increase of accumulated earnings. The difference in foreign currency
translation of subsidiaries between IFRS and Canadian GAAP resulted in a decrease of gain (loss) on foreign
exchange of $0.03 million in the 2010 statement of income. Other comprehensive income decreased by $2.9 million
as a result of the foreign currency translation difference.
(5) Share-based compensation
The Company has equity-settled share-based compensation transactions with certain key employees. The
vesting conditions embedded in these compensation plans are time and performance based. Under Canadian GAAP,
the total fair value of these awards is recognized on a straight line basis throughout the vesting period.
Under IFRS, each tranche of the option grant is considered a separate grant and fair value is determined for
each tranche of the option grant. As a result of this difference, the Company recorded a transitional adjustment to its
opening IFRS balance sheet which resulted in an increase to reserves of $8.8 million and an increase to accumulated
deficit of $8.8 million, with no overall impact on net equity. The Company recorded an adjustment to its
December 31, 2010 balance sheet which resulted in an increase to reserves of $7.8 million and a decrease to
accumulated earnings of $7.8 million, with no overall impact on net equity. The operating expense decreased by
$1.0 million in the 2010 statement of income under IFRS compared to Canadian GAAP.
(6) Leases
As a result of the application of IFRIC 4, management determined that certain agreements were incorrectly
accounted for as leases under Canadian GAAP. These immaterial errors were corrected as part of the IFRS transition
as permitted under IFRS 1 with prior periods adjusted in these consolidated financial statements and the agreements
are now accounted for as service agreements under IFRIC 4. The impact to the opening balance sheet was a decrease
in satellites, property and other equipment of $19.5 million, a decrease to other current liabilities of $3.5 million, a
decrease to other long-term liabilities of $17.8 million, a decrease to deferred tax liability of $6.1 million and a
decrease to opening accumulated deficit of $7.9 million. The impact to the December 31, 2010 balance sheet was a
decrease in satellites, property and other equipment of $15.4 million, a decrease to other current liabilities of $3.6
million, a decrease to other long-term liabilities of $13.2 million, a decrease to deferred tax liability of $4.4 million
and an increase to accumulated earnings of $5.8 million. The difference between IFRS and Canadian GAAP resulted
in an increase of $5.2 million of operating expenses, decrease of $3.4 million of depreciation, decrease of $1.7
million of net interest expense and an increase of tax expense of $1.2 million in the 2010 statement of income.
(7) Income taxes
Differences for income taxes represent the effect of recording, where applicable, the deferred tax impact of
other differences between Canadian GAAP and IFRS.
E. Presentation and Reclassification Differences
Consolidated Balance Sheet
Aggregation / disaggregation of balance sheet line items
i.
ii.
Under Canadian GAAP, common shares, preferred shares, accumulated other comprehensive loss, and
contributed surplus were presented separately. Under IFRS, common shares and preferred shares have
been aggregated into the line item share capital while accumulated other comprehensive loss and
contributed surplus have been aggregated into the line item reserves.
For Canadian GAAP presentation, various balance sheet accounts were aggregated. IFRS has certain
minimum presentation requirements for the balance sheet and as a result additional balance sheet line
items were presented.
F-75
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
Reclassification of pension asset / liability
Under Canadian GAAP there was an asset recorded related to the post employment benefit plans. Upon
transition to IFRS, all cumulative actuarial gains or losses deferred under Canadian GAAP were recognized in
opening accumulated deficit as of the date of transition to IFRS and subsequently recognized in other
comprehensive income. As a result of this accounting difference, the net amount related to the post employment
benefit plans represents a liability under IFRS.
Tax reclassification
Under Canadian GAAP, deferred taxes were classified as current and non-current on the basis of either the
underlying asset or the liability or the expected reversal of items not related to an asset or liability. For IFRS
purposes, all deferred tax assets and liabilities are classified as non-current. All deferred tax assets and liabilities are
netted.
Reclassification of Derivatives
Under Canadian GAAP the derivatives were categorized between current and non-current based on maturity.
For IFRS purposes derivatives are separated into a current and non-current portion based on an assessment of the
facts and circumstances (i.e. the underlying contracted cash flows).
Consolidated Statement of Income
Aggregation / disaggregation of statement of income line items
i.
Under Canadian GAAP, revenue was presented for service revenue and equipment sales revenue. Under
IFRS, the revenue streams are presented as a single line revenue.
ii. Under Canadian GAAP, the consolidated statement of income presented amortization for the
depreciation of satellites, property and other equipment and intangible assets as one line item. For IFRS
the expenses were disaggregated to present 1) depreciation of satellites, property and other equipment
(depreciation) and 2) amortization of intangible assets (amortization).
iii. Under Canadian GAAP, cost of equipment sales and other income were presented separately from
operations and administration expenses. Under IFRS, the consolidated statement of income combines
those expenses and presents one line item operating expenses.
iv. Under Canadian GAAP, interest income and expenses were presented as one line item interest expense.
For IFRS presentation interest expense is disaggregated to present 1) interest expense and 2) interest and
other income.
F-76
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
F. Adjusted Telesat Holdings Inc. financial statements
The following are reconciliations of the financial statements previously presented under Canadian GAAP to the
consolidated financial statements prepared under IFRS.
Reconciliation of Consolidated Balance Sheet as of December 31, 2010
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
IFRS accounts
Canadian GAAP accounts
Current assets
Cash and cash equivalents
Accounts receivable, net
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
Preferred shares
Canadian
GAAP
balance
220,295
44,109
1,900
26,476
292,780
1,994,122
—
112,816
461,060
2,446,603
5,307,381
49,906
—
128,296
96,848
275,050
2,771,802
310,552
—
676,217
141,435
4,175,056
756,414
541,764
1,298,178
—
—
—
—
—
(15,333
—
(29,487)
484,487
—
439,667
68
—
(3,657)
—
(3,589)
—
106,565
—
(15,847)
—
87,129
—
—
—
Accumulated deficit
Accumulated other comprehensive
(176,396 )
(6,207 )
340,200
6,207
loss
Contributed surplus
Total shareholders’ equity
(182,603 )
346,407
16,750
6,131
1,132,325
352,538
—
(26)
5,044
(5,539)
(521)
—
78,631
(71,302)
—
—
6,808
Assets
220,295 Cash and cash equivalents
44,083 Trade and other receivables
6,944 Other current financial assets
20,937
Prepaid expenses and other current
assets
292,259 Total current assets
1,978,789 Satellites, property and other
equipment
78,631 Other long-term financial assets
12,027 Other long-term assets
Intangible assets
945,547
2,446,603 Goodwill
5,753,856 Total assets
Liabilities
—
49,974
104,082
(61,994)
—
42,088
—
(2,400)
265,629
(298,509)
—
6,808
541,764
(541,764)
—
—
—
—
—
—
Trade and other payables
104,082 Other current financial liabilities
62,645 Other current liabilities
96,848 Current indebtedness
313,549 Total current liabilities
2,771,802 Long-term indebtedness
414,717 Deferred tax liabilities
265,629 Other long-term financial liabilities
361,861 Other long-term liabilities
141,435 Senior preferred shares
4,268,993 Total liabilities
Shareholders’ Equity
1,298,178 Share capital
—
1,298,178
163,804 Accumulated earnings (deficit)
—
163,804
22,881 Reserves
1,484,863 Total shareholders’ equity
Total liabilities and shareholders’ equity
5,307,381
439,667
6,808
5,753,856
Total liabilities and shareholders’
equity
F-77
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
5. TRANSITION TO IFRS—(continued)
Reconciliation of Consolidated Balance Sheet as of January 1, 2010
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
IFRS accounts
Canadian GAAP accounts
Current assets
Cash and cash equivalents
Accounts receivable, net
Current future tax asset
Other current assets
Total current assets
Satellites, property and other equipment, net
Canadian
GAAP
balance
154,189
70,203
2,184
29,018
255,594
1,926,190
—
—
—
—
—
(27,292)
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
Preferred shares
Accumulated deficit
Accumulated other comprehensive loss
Contributed surplus
Total shareholders’ equity
—
—
56,924
510,675
2,446,603
5,195,986
43,413
—
127,704
23,602
194,719
3,021,820
269,193
—
671,523
141,435
4,298,690
756,414
541,764
1,298,178
(404,557)
(7,422)
(411,979)
11,097
(15,560)
415,246
—
372,394
—
—
(3,527)
—
(3,527)
—
87,162
—
(19,212)
—
64,423
—
—
—
291,740
7,422
299,162
8,809
897,296
307,971
—
(3)
5,133
(6,017)
(887)
—
21,733
(22,333)
—
—
(1,487)
—
102,124
(52,056)
—
50,068
—
(2,718)
239,825
(288,662)
—
(1,487)
541,764
(541,764)
—
—
—
—
—
—
Assets
154,189 Cash and cash equivalents
70,200 Trade and other receivables
7,317 Other current financial assets
Prepaid expenses and other
23,001
current assets
254,707 Total current assets
1,898,898 Satellites, property and other
equipment
21,733 Other long-
19,031 Other long-term assets
925,921 Intangible assets
term financial assets
2,446,603 Goodwill
5,566,893 Total assets
Liabilities
43,413 Trade and other payables
102,124 Other current financial
liabilities
72,121 Other current liabilities
23,602 Current indebtedness
241,260 Total current liabilities
3,021,820 Long-term indebtedness
353,637 Deferred tax liabilities
239,825 Other long-term financial
363,649 Other long-term liabilities
141,435 Senior preferred shares
liabilities
4,361,626 Total liabilities
Shareholders’ Equity
1,298,178 Share capital
—
1,298,178
(112,817) Accumulated earnings (deficit)
—
(112,817)
19,906 Reserves
1,205,267 Total shareholders’ equity
Total liabilities and shareholders’ equity
5,195,986
372,394
(1,487)
5,566,893
Total liabilities and
shareholders’ equity
F-78
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
5. TRANSITION TO IFRS—(continued)
Reconciliation of Consolidated Statement of Income for the year ended December 31, 2010
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
IFRS accounts
Canadian GAAP accounts
Operating revenues
Service revenues
Equipment sales revenues
Total operating revenues
Amortization
Operations and administration
Cost of equipment sales
Total operating expenses
Canadian
GAAP
balance
801,144
20,217
821,361
—
—
—
—
(4,422)
—
(251,194)
(186,467)
(15,575)
(453,236)
3,543
—
—
—
—
—
79,192
Earnings (loss) from operations
Interest expense
Loss on changes in fair value of financial
instruments
Gain (loss) on foreign exchange
Other income (expense)
Earnings (loss) before income taxes
Income tax expense
Net earnings
—
368,125
(253,086)
—
(11,168)
163,998
4,339
272,208
(44,017)
228,191
—
—
1,743
—
—
(32)
—
—
(22,114)
57,910
20,217
(20,217)
—
(202,042)
(205,726)
205,726
186,467
15,575
—
3,826
—
—
(5,239)
5,752
—
—
821,361 Revenue
—
—
(206,464) Operating expenses
(202,183) Depreciation
(45,468) Amortization
—
—
—
83,018 Other operating gains (losses), net
450,264 Operating income
—
(256,582)
5,752
(11,168)
Interest expense
Interest and other income
Loss on changes in fair value of
financial instruments
163,966 Gain (loss) on foreign exchange
(4,339)
—
—
—
—
352,232
Income before tax
(66,131) Tax expense
286,101 Net income
Reconciliation of Consolidated Statement of Comprehensive Income for the year ended December 31, 2010
Canadian GAAP accounts
Net earnings
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) of self
sustaining foreign operations net of related taxes
Comprehensive income (loss)
Canadian
GAAP
balance
228,191
IFRS
adjustments
57,910
IFRS
balance
286,101 Net income
IFRS accounts
1,215
(2,907)
(1,692) Foreign currency translation
Other comprehensive income (loss):
adjustments, net of tax
Actuarial gains (losses) on
defined benefit plans, net
of tax
(9,450)
(9,450)
(12,357)
(11,142) Other comprehensive income (loss)
—
1,215
229,406
45,553
274,959 Total comprehensive income
G. Adjustments to previously reported unaudited comparative figures under IFRS
The Company has adjusted its comparative consolidated financial statements and the reconciliation of equity
as at January 1, 2010 and December 31, 2010 and the reconciliation of comprehensive income for the year ended
December 31, 2010 to reflect the correction of amounts recorded for the reversal of impairments on tangible and
intangible assets.
Intangible assets
These adjustments impacted intangible assets, deferred tax liabilities and accumulated earnings (deficit) and
were identified through the completion of the Company’s transition to IFRS as a basis of accounting. The
comparative amounts had been previously disclosed in the Company’s unaudited 2011 interim condensed
consolidated financial statements.
F-79
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
5. TRANSITION TO IFRS—(continued)
The impact on the Company’s comparative consolidated balance sheet as at January 1, 2010 was a decrease of
intangible assets of $71.3 million, a decrease of deferred tax liabilities of $18.8 million, and an increase of
accumulated deficit of $52.5 million.
The impact of the Company’s comparative consolidated balance sheet as at December 31, 2010 was a
decrease of intangible assets of $0.1 million, a decrease of deferred tax liabilities of a nominal amount, and a
decrease of accumulated earnings of $0.1 million.
The impact on the Company’s comparative consolidated statement of income for the year ended December 31,
2010 was an increase in operating income of $71.3 million and an increase in net income of $52.5 million.
Tangible assets
This adjustment impacted satellites, property and other equipment, deferred tax liabilities and accumulated
earnings (deficit) and was identified through the completion of the Company’s transition to IFRS as a basis of
accounting. The comparative amounts had been previously disclosed in the Company’s unaudited 2011 interim
condensed consolidated financial statements.
The impact on the Company’s comparative consolidated balance sheet as at December 31, 2010 was an
increase of satellite, property and other equipment of $6.9 million, an increase of deferred tax liabilities of $1.8
million, and an increase of accumulated earnings of $5.1 million.
The impact on the Company’s comparative consolidated statement of income for the year ended December 31,
2010 was an increase in operating income of $6.9 million and an increase in net income of $5.1 million.
6. SEGMENT 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 revenue 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.
Revenue derived from the above service lines were as follows:
Revenue
Year ended December 31
Broadcast
Enterprise
Consulting and Other
Total revenue
2011
436,676
341,884
29,801
2010
454,216
334,983
32,162
808,361
821,361
F-80
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
6. SEGMENT INFORMATION—(continued)
Geographic Information
Revenue by geographic region was based on the point of origin of the revenue (destination of the billing
invoice), allocated as follows:
Revenue
Year ended December 31
Canada
United States
Europe, Middle East & Africa
Asia & Australia
Latin America & Caribbean
Total revenue
2011
411,185
247,924
75,887
19,254
54,111
808,361
2010
419,032
261,136
77,031
16,268
47,894
821,361
Telesat’s satellites are in geosynchronous orbit. For disclosure purposes, the satellites have been classified
based on ownership. Satellites, property and other equipment and intangible assets by geographic region are
allocated as follows:
Satellites, property and other equipment
Canada
United States
All others
December 31,
2011
1,809,152
276,211
66,552
December 31,
2010
1,644,049
327,608
7,132
January 1,
2010
1,519,663
370,664
8,571
Total satellites, property and other equipment
2,151,915
1,978,789
1,898,898
Intangible assets
Canada
United States
All others
Total intangible assets
December 31,
2011
848,898
33,257
13,923
December 31,
2010
909,744
33,094
2,709
January 1,
2010
886,965
36,066
2,890
896,078
945,547
925,921
Goodwill was not allocated to geographic regions in any of the periods.
Major Customers
For the year ended December 31, 2011, there were two significant customers each representing more than
10% of consolidated revenue (December 31, 2010 — two customers).
7. OPERATING EXPENSES
The Company’s operating expenses are comprised of the following:
Year ended December 31
Compensation and employee benefits (a)
Other operating expenses (b)
Cost of sales (c)
Total
2011
61,755
48,110
77,900
2010
66,438
52,341
87,685
187,765
206,464
a)
Compensation and employee benefits include salaries, commission, post-employment benefits and charges
arising from share-based payments.
F-81
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
7. OPERATING EXPENSES—(continued)
b) Other operating expenses include general and administrative expense, marketing expense, in-orbit insurance
expense, professional fees and facility costs.
c)
Cost of sales includes the rental of third-party capacity, the cost of equipment sales and costs directly
attributable to the facilitation of customer contracts.
8. OTHER OPERATING GAINS
Year ended December 31
Insurance proceeds (a)
Impairment (loss) reversal on intangible assets (note 15)
Impairment reversal on satellites, property and other equipment
(Loss) gain on disposal of assets
Total
2011
135,019
(19,468)
—
(1,483)
114,068
2010
—
71,269
7,923
3,826
83,018
(a) The Company has insurance policies that provide coverage for a total, constructive total, or partial loss of
Telstar 14R /Estrela do Sul 2. Following the launch of the satellite in May 2011, the Company determined that
the north solar array failed to fully deploy and promptly filed a notice of loss with its insurers. During the third
quarter of 2011, the Company filed a claim under its policies to its insurers. In December 2011, the Company
received insurance proceeds of U.S. $132.7 million from its insurers with respect to the claim. Based on
management’s best estimate and assumptions, there was no impairment in Telstar 14R/Estrela do Sul 2.
9. INTEREST EXPENSE
The components of interest expense are as follows:
Year ended December 31
Interest expense on indebtedness
Interest expense on derivative instruments
Interest expense on performance incentive payments
Interest expense on senior preferred shares (note 20)
Other expenses
Capitalized interest
Interest expense
10. INCOME TAXES
Year ended December 31
Current tax expense
Deferred tax expense
Tax expense
2011
182,719
62,124
4,361
9,869
—
(32,022)
227,051
2010
192,829
60,818
5,016
12,339
224
(14,644)
256,582
2011
132
51,854
51,986
2010
2,279
63,852
66,131
F-82
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
10. INCOME TAXES—(continued)
A reconciliation of the statutory income tax rate, which is a composite of Canadian federal and provincial
rates, to the effective income tax rate is as follows:
Year ended December 31
Income before tax
Multiplied by the statutory income tax rate of 28.11% (2010–30.49%)
Income tax recorded at rates different from the Canadian tax rate
Permanent differences
Origination and reversal of temporary differences
Previously unrecognized tax losses and credit
Other
Total tax expense in the statement of income
Effective income tax rate
2011
289,261
81,311
(408)
(9,316)
(10,145)
(8,977)
(479)
51,986
17.97%
2010
352,232
107,396
179
(17,811)
(24,880)
—
1,247
66,131
18.77%
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:
Deferred tax assets
Investment tax credit
Foreign tax credit
Financing charges
Deferred revenue
Loss carry forwards
Employee benefit
Other
Total deferred tax assets
Deferred tax liabilities
Capital assets
Intangibles
Finance charges
Reserves
Total deferred tax liabilities
Deferred tax liabilities, net
Losses and tax credits
December 31,
2011
December 31,
2010
January 1,
2010
2,702
11,289
5,439
4,065
25,538
15,250
471
64,754
(276,158)
(226,855)
(9,359)
(4,278)
(516,650)
(451,896)
556
26
5,495
2,063
53,344
5,860
585
67,929
661
3
5,465
2,455
76,900
4,441
956
90,881
(230,094)
(238,258)
(8,933)
(5,361)
(482,646)
(414,717)
(206,404)
(223,577)
(8,174)
(6,363)
(444,518)
(353,637)
At December 31, 2011, the Company had Canadian tax losses carried forward of $101.5 million and U.S. tax
losses carried forward of $26.7 million. The deferred tax asset not recognized in respect of the U.S. losses was $9.1
million. The Canadian and U.S. losses will expire between 2027 and 2030.
The Company has $25.5 million of Canadian capital losses carried forward which may only be used against
future capital gains. The deferred tax asset not recognized in respect of these losses was $3.3 million. These losses
may be carried forward indefinitely.
In addition, the Company has $14.0 million of investment tax credits and foreign tax credits which may only
be used to offset taxes payable. The deferred tax assets not recognized in respect of these credits is $3.2 million.
They will begin to expire in 2017.
F-83
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
10. INCOME TAXES—(continued)
Investments in subsidiaries
As at December 31, 2011 the Company had temporary differences of $31.0 million associated with
investments in subsidiaries for which no deferred tax liabilities have been recognized, as the Company is able to
control the timing of the reversal of these temporary differences and it is not probable that these differences will
reverse in the foreseeable future.
11. TRADE AND OTHER RECEIVABLES
Trade receivables
Trade receivables due from related parties
Less: Allowance for doubtful accounts
Net trade receivables
Other receivables (a)
Trade and other receivables
December 31,
2011
December 31,
2010
49,936
386
(3,740)
46,582
207
46,789
50,456
428
(7,128)
43,756
327
44,083
January 1,
2010
62,499
1,509
(8,708)
55,300
14,900
70,200
(a) The January 1, 2010 balance consists of the main following items:
$7.2 million receivable related to the sale of Telstar 10, $3.7 million receivable relating to the Company’s
tenancy arrangement and a $2.0 million receivable relating to a basis swap payment that was scheduled to
settle on December 31, 2009 but was received in the first week of January 2010.
Allowance for doubtful accounts
The movement in the allowance for doubtful accounts was as follows:
Allowance for doubtful accounts, at the beginning of the year
Provisions (reversal) for impaired receivables
Receivables written off during the period
Foreign currency exchange differences
Allowance for doubtful accounts, end of year
7,128
(136)
(3,050)
(202)
3,740
8,708
(1,134)
(256)
(190)
7,128
5,410
4,067
(769)
—
8,708
December 31,
2011
December 31,
2010
January 1,
2010
12. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses (a)
Current tax asset
Inventory (b)
Deferred charges (c)
Other
December 31,
2011
December 31,
2010
10,302
5,902
4,259
1,663
—
22,126
10,762
4,988
2,985
1,996
206
20,937
January 1,
2010
10,231
5,448
5,214
2,108
—
23,001
a)
Prepaid expenses are primarily comprised of prepaid satellite in-orbit insurance, prepaid interest on long-term
indebtedness, and prepaid license fees.
b) At December 31, 2011, inventory consists of $4.1 million of finished goods (December 31, 2010 — $2.4
million, January 1, 2010 — $2.9 million) and $0.2 million of work in process (December 31, 2010 — $0.6
million, January 1, 2010 — $2.3 million). During the period, $18.3 million was recognized as cost of
equipment sales and recorded as an operating expense (December 31, 2010 — $15.6 million).
c) Deferred charges include deferred financing charges relating to the revolving facility and Canadian term loan
facility (see note 19).
F-84
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
13. OTHER LONG-TERM ASSETS
Prepaid expenses (a)
Deferred charges
Other
December 31,
2011
December 31,
2010
January 1,
2010
4,921
87
528
5,536
9,785
1,751
491
12,027
13,233
5,244
554
19,031
a)
Prepaid expenses consist of prepaid satellite in-orbit insurance.
14. SATELLITES, PROPERTY AND OTHER EQUIPMENT
Cost at January 1, 2010
Additions
Disposals/retirements
Impact of currency translation
Cost at December 31, 2010
Additions
Disposals/retirements
Reclassifications and transfers from assets under
construction
Impact of currency translation
Cost at December 31, 2011
Accumulated depreciation and impairment at
January 1, 2010
Reversal of impairment
Depreciation
Disposals/retirements
Impact of currency translation
Accumulated depreciation and impairment at
December 31, 2010
Depreciation
Disposals/retirements
Impact of currency translation
Accumulated depreciation and impairment at
December 31, 2011
Net carrying values
At January 1, 2010
At December 31, 2010
At December 31, 2011
Satellites
2,018,872
—
—
—
2,018,872
—
(26,502)
321,743
—
2,314,113
(331,659)
7,923
(181,872)
—
—
(505,608)
(181,658)
26,502
—
Property and
other equipment
Assets under
construction
Total
199,923
(21,501)
(690)
72,366 2,291,161
6,184 282,376 288,560
(21,501)
(690)
183,916 354,742 2,557,530
1,368 371,997 373,365
(42,838)
—
—
(16,336)
—
24,791
(276)
(346,534)
—
—
(276)
193,463 380,205 2,887,781
(60,604)
—
(20,311)
7,654
128
(73,133)
(16,968)
14,769
230
— (392,263)
—
7,923
— (202,183)
—
7,654
—
128
— (578,741)
— (198,626)
—
41,271
—
230
(660,764)
(75,102)
— (735,866)
1,687,213
1,513,264
1,653,349
139,319
72,366 1,898,898
110,783 354,742 1,978,789
118,361 380,205 2,151,915
Substantially all of the Company’s satellites, property and other equipment have been pledged as security as a
requirement of our senior secured credit facilities (note 19).
Borrowing costs of $32.0 million arising on financing were capitalized for the year ended December 31, 2011
($14.6 million —December 31, 2010) and are included in Assets under construction. The average capitalization rate
was 8.0%, representing the Company’s weighted average cost of borrowing.
F-85
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
14. SATELLITES, PROPERTY AND OTHER EQUIPMENT—(continued)
The Company assesses impairment of its satellites, property and other equipment on a quarterly basis, or more
frequently if events or changes in circumstances indicate that the carrying values may not be recoverable. The
Company’s CGUs hold a combination of certain satellites, property and other equipment and finite life intangible
assets. Indefinite life intangible assets and goodwill have not been allocated to the CGUs. No impairment was
recognized for the periods ended December 31, 2011 and December 31, 2010.
In 2010, an impairment loss of $7.9 million was reversed on the satellites. The reversal of impairment was
mainly due to changes in revenue assumptions. The recoverable amount is calculated using the following
assumptions:
Discount rate
15. INTANGIBLE ASSETS
Cost at January 1, 2010
Disposals
Impact of currency translation
Orbital
slots
Indefinite life
Trade
Revenue
backlog
name
599,549 17,000 268,433
—
— —
(166)
(1,711 ) —
Customer
relationships
199,070
—
(1,044 )
2011
2010
10.75%
10.0%
Finite life
Customer
contract
—
—
—
Transponder
rights
29,550
(999)
(54)
Other
4,453
(2,966)
(29)
Total
Intangibles
1,118,055
(3,965)
(3,004)
Cost at December 31, 2010
597,838 17,000 268,267
198,026
—
28,497
1,458
1,111,086
Additions
Impact of currency translation
— —
615 —
—
70
—
51
12,618
—
—
—
—
(123)
12,618
613
Cost at December 31, 2011
598,453 17,000 268,337
198,077
12,618
28,497
1,335
1,124,317
Accumulated amortization
and impairment at
January 1, 2010
Amortization
Retirements
Reversal of impairment
Impact of currency translation
Accumulated amortization
and impairment at
December 31, 2010
(71,370 ) —
— —
— —
71,269 —
— —
(77,309)
(32,952)
—
—
34
(34,087 )
(11,021 )
—
—
937
—
—
—
—
—
(7,493)
(4,387)
999
—
38
(1,875)
(797)
2,468
—
7
(192,134)
(49,157)
3,467
71,269
1,016
(101 ) —
(110,227)
(44,171 )
—
(10,843)
(197)
(165,539)
Amortization
Impairment
Impact of currency translation
— —
(19,468 )
1 —
(27,930)
—
(55)
(11,005 )
—
(22 )
(39 )
—
—
(4,109)
—
—
(86)
—
13
(43,169)
(19,468)
(63)
Accumulated amortization
and impairment at
December 31, 2011
Net carrying values
At January 1, 2010
At December 31, 2010
At December 31, 2011
(19,568 ) —
(138,212)
(55,198 )
(39 )
(14,952)
(270)
(228,239)
528,179 17,000 191,124
597,737 17,000 158,040
578,885 17,000 130,125
164,983
153,855
142,879
—
—
12,579
22,057
17,654
13,545
2,578
1,261
1,065
925,921
945,547
896,078
F-86
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
15. INTANGIBLE ASSETS—(continued)
The orbital slots represent a right to operate satellites in a given longitudinal coordinate in space, where
geostationary orbit may be achieved. They are limited in availability and represent a scarce resource. Usage of
orbital slots is licensed through the International Telecommunications Union. Satellite operators can generally
expect, with a relatively high level of certainty, continued occupancy of an assigned orbital slot either during the
operational life of an existing orbiting satellite or upon replacement by a new satellite once the operational life of the
existing orbiting satellite is over. As a result of the “expectancy right” to maintain the once awarded orbital slots, an
indefinite life is typically associated with orbital slots.
The Company’s trade name has a long and established history, a strong reputation and has been synonymous
with quality and growth within the satellite industry. It has been assigned an indefinite life because of expected
ongoing future use.
The following are the remaining useful lives of significant intangible assets:
Revenue backlog
Customer relationships
Transponder rights
Customer contract
Concession rights
Patent
1 –13 years
7 –17 years
1 –10 years
15 years
12 years
14 years
Substantially all of the Company’s intangible assets have been pledged as security as a requirement of our
senior secured credit facilities.
Impairment
Finite life intangible assets are assessed annually and are included with the Company’s CGUs (see note 3).
Indefinite life intangible assets are tested for impairment at the individual asset level (see note 3). The annual
impairment test was performed in the fourth quarter of 2011 and 2010, and at the IFRS transition date.
In 2010, an impairment loss of $71.3 million was reversed on the orbital slots. The impairment was originally
recorded in 2008 when discount rates were high due to liquidity issues in the credit markets. The subsequent
decrease in discount rates, as well as changes in revenue projections and gross margin assumption positively
impacted the valuation of the orbital slots in 2010. In 2011, an impairment loss of $19.5 million was recognized on
the orbital slots (2010 — no impairment loss) mainly due to an increase in discount rates.
The recoverable amount is calculated using the following assumptions
Discount rate
16. GOODWILL
2011
2010
10.75%
10.0%
The Company carries goodwill at its cost of $2,446.6 million with no accumulated impairment losses since
acquisition.
Impairment
Goodwill is tested for impairment at the entity level because that represents the lowest level at which goodwill
supports the Company’s operations and is monitored internally. The annual impairment test on goodwill was
performed in the fourth quarter of 2011 and 2010 in accordance with the policy described in note 3. In addition,
goodwill was tested for impairment for purposes of the opening IFRS balance sheet. No impairment was recognized.
The Company’s recoverable amount exceeded the carrying value therefore, no impairment was recognized for the
period. The most significant assumptions used in the impairment test were as follows:
Discount rate
Terminal year growth rate
December 31,
2011
December 31,
2010
January 1,
2010
10.75%
3.0%
10.0%
3.0%
9.5%
3.0%
F-87
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
16. GOODWILL—(continued)
Some of the more sensitive assumptions used including the forecasted cash flows and the discount rate could
have yielded different estimates of recoverable amount. Actual operating results and the related cash flows of the
Company could differ from the estimated operating results and related cash flows used in the impairment analysis.
Had different estimates been used, it could have resulted in a lower fair value and there could have been a risk of
failing the goodwill impairment test.
17. OTHER CURRENT LIABILITIES
Deferred revenue
Decommissioning liabilities
Other
18. OTHER LONG-TERM LIABILITIES
Deferred revenue
Net defined benefit plan obligations (see note 25)
Uncertain tax positions
Unfavorable backlog
Unfavorable leases
Decommissioning liabilities
Other
19. INDEBTEDNESS
Senior secured credit facilities (a) :
Revolving facility
The Canadian term loan facility
The U.S. term loan facility (December 31, 2011 –
USD $1,684,800, December 31, 2010 – USD
$1,702,350, January 1, 2010 – USD $1,719,900)
The U.S. term loan II facility (December 31, 2011 –
USD $144,725, December 31, 2010 – USD
$146,225, January 1, 2010 – USD $147,725)
Senior Notes (USD $692,825) (b)
Senior Subordinated Notes (USD $217,175) (c)
Less: deferred financing costs and prepayment options (d)
Less: current portion (net of deferred financing costs)
Long-term portion
December 31,
2011
December 31,
2010
66,588
151
1,138
67,877
61,732
166
747
62,645
December 31,
2011
342,281
67,605
6,795
1,785
769
1,461
1,806
December 31,
2010
315,583
30,801
7,585
3,922
969
1,367
1,634
January 1,
2010
70,109
1,024
988
72,121
January 1,
2010
322,384
23,664
7,086
7,145
1,174
14
2,182
422,502
361,861
363,649
December 31,
2011
December 31,
2010
January 1,
2010
—
80,000
—
170,000
—
185,000
1,720,686
1,698,945
1,811,399
147,808
707,582
221,801
2,877,877
(43,251)
2,834,626
(86,495)
2,748,131
145,933
691,439
216,741
2,923,058
(54,408)
2,868,650
(96,848)
2,771,802
155,584
729,683
228,729
3,110,395
(64,973)
3,045,422
(23,602)
3,021,820
F-88
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
19. INDEBTEDNESS—(continued)
(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 tighten over the term of the credit facility. At December 31, 2011, Telesat was
in compliance with all of the required covenants.
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 $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 bear interest at the prime rate or LIBOR or Bankers’ Acceptance plus an
applicable margin of 125 to 225 basis points per annum. Undrawn amounts under the facility are subject
to a commitment fee. As of December 31, 2011, other than approximately $0.2 million in drawings
related to letters of credit, there were no borrowings under this facility.
(ii) The Canadian term loan facility was initially a $200 million facility denominated in Canadian dollars,
with a maturity date of October 31, 2012. Loans under this facility bear interest at a floating rate of the
Bankers’ Acceptance rate plus an applicable margin of 275 basis points per annum. The required
repayments on the Canadian term loan facility are as follows:
2012
Principal
Repayments
80,000
The payments are generally made quarterly in varying amounts. The average interest rate was 4.13% for
the year ended December 31, 2011 (December 31, 2010 — 3.63%). This facility had $80 million
outstanding at December 31, 2011.
(iii) The U.S. term loan was initially a $1,755 million facility denominated in U.S. dollars, bears interest at
LIBOR plus an applicable margin of 300 basis points per annum, and has a maturity of October 31,
2014. The weighted average effective interest rate was 3.72% for the year ended December 31, 2011
(December 31, 2010 — 3.76%). The loan had U.S. $1,685 million outstanding at December 31, 2011.
Principal repayments of U.S. $4.4 million 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 was initially a $150 million delayed draw facility denominated in U.S. dollars,
bears interest at LIBOR plus an applicable margin of 300 basis points per annum, and has a maturity of
October 31, 2014. The weighted average effective interest rate was 3.73% for the year ended
December 31, 2011 (December 31, 2010 — 3.77%). The facility had U.S. $145 million outstanding at
December 31, 2011. Principal repayments of U.S. $0.4 million are made on a quarterly basis, with a
lump sum repayment of the remaining balance payable on the maturity date.
(b) 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 weighted average effective
interest rate was 11.37% for the year ended December 31, 2011 (December 31, 2010 —11.56%).
F-89
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
19. INDEBTEDNESS—(continued)
(c) 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. The weighted average effective interest rate was 12.66% for the year ended
December 31, 2011 (December 31, 2010 —12.88%).
(d) The U.S. term loan facilities, Senior Notes and Senior Subordinated Notes are presented on the balance sheet
net of related deferred financing costs of $49.4 million (December 31, 2010 —$61.6 million, January 1,
2010 — $73.1 million). The indentures agreement for the Senior Notes and Senior Subordinated Notes
contain provisions for certain prepayment options which were fair valued at the time of debt issuance (note
23). The initial fair value impact of the prepayment options on the Senior Notes and Senior Subordinated
Notes was an increase to the liabilities of $6.5 million and $2.7 million, respectively. These liability amounts
are subsequently amortized using the effective interest rate method with carrying amounts of $4.1 million and
$2.1 million respectively, at December 31, 2011 (December 31, 2010 —$4.9 million and $2.3 million,
January 1, 2010 —$5.6 million and $2.5 million).
The short-term and long-term portions of deferred financing costs and prepayment options are as follows:
Short-term deferred financing costs
Long-term deferred financing costs
Long-term prepayment option – Senior Notes
Long-term prepayment option – Senior Subordinated Notes
Total deferred financing costs and prepayment options
December 31,
2011
December 31,
2010
12,961
36,468
49,429
(4,133)
(2,045)
(6,178)
43,251
12,165
49,433
61,598
(4,928)
(2,262)
(7,190)
54,408
January 1,
2010
11,462
61,593
73,055
(5,631)
(2,451)
(8,082)
64,973
The outstanding balance of indebtedness, excluding deferred financing costs and prepayment options, will be
repaid as follows (in millions of Canadian dollars):
2012
99.5
2013
19.4
2014
1,829.6
2015
707.6
Thereafter
221.8
Total
2,877.9
20. SENIOR PREFERRED SHARES
Telesat issued 141,435 senior preferred shares with an issue price of $1,000 per Senior Preferred Share on
October 31, 2007. The Senior Preferred Shares rank in priority, with respect to the payment of dividends and return
of capital upon liquidation, dissolution or winding-up, ahead of the shares of all other classes of Telesat stock which
have currently been created, as well as any other shares that may be created that by their terms rank junior to the
senior preferred shares. 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 Canada Business
Corporations Act (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 $1.7 million have been
accrued at December 31, 2011 (December 31, 2010 — $2.1 million, January 1, 2010 — $25.1 million).
F-90
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
20. SENIOR PREFERRED SHARES—(continued)
The Senior Preferred Shares may be submitted by the holder for redemption on or after the twelfth anniversary
of the date of issue, subject to compliance with law. Upon a change of control which occurs after the fifth
anniversary of the issue of the Senior Preferred Shares, or on the fifth anniversary if a change of control occurs prior
to the fifth anniversary of the issue, Telesat must make an offer of redemption to all holders of Senior Preferred
Shares, and must redeem any Senior Preferred Shares for which the offer of redemption is accepted within 25 days
of such offer. As a result, the Senior Preferred Shares have been classified as a liability on the consolidated balance
sheet and dividends have been classified as interest expense on the statement of income (note 9).
The holders of the Senior Preferred Shares are not entitled to receive notice of or to vote at any meeting of
shareholders of the Company except for meetings of the holders of the Senior Preferred Shares as a class, called to
amend the terms of the Senior Preferred Shares, or otherwise as required by law.
21. SHARE CAPITAL
There was no change in share capital in the period of January 1, 2010 to December 31, 2011.
At December 31, 2011
Common Shares
Voting Participating Preferred Shares
Non-Voting Participating Preferred Shares
Director Voting Preferred Shares
Total share capital
Number of
shares
74,252,460
7,034,444
35,953,824
1,000
Stated
Value
($)
756,414
117,388
424,366
10
1,298,178
The authorized share capital of the Company is comprised of: (i) an unlimited number of common shares, of
voting participating preferred shares, of non-voting participating preferred shares, of redeemable common shares,
and of redeemable non-voting participating preferred shares, (ii) 1,000 director voting preferred shares, and
(iii) 325,000 senior preferred shares (note 20). None of the redeemable common shares or redeemable non-voting
participating preferred shares have been issued as at December 31, 2011. The Company’s share based compensation
plan has authorized the grant of up to 8,824,646 options to purchase non-voting participating preferred shares (see
note 24).
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. The common shares have no par value.
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.
F-91
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
21. SHARE CAPITAL—(continued)
•
•
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).
The voting participating preferred shares have no par value.
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).
The non-voting participating preferred shares have no par value.
Director Voting Preferred Shares
The rights, privileges and conditions of the director voting preferred shares are identical in all respects to those
of the common shares, except for the following:
•
•
•
•
The holders of director voting preferred shares are entitled to receive notice of and to attend all meetings
of the shareholders of the Company at which directors of the Company are to be elected. The holders of
the director voting preferred shares are not entitled to attend meetings of the shareholders of the
Company and have no right to vote on any matter other than the election of directors of the Company.
The holders of director voting preferred shares are entitled to receive annual non-cumulative dividends
of $10 per share if declared by the Board of Directors of the Company, in priority to the payment of
dividends on the common shares, voting participating preferred shares, non-voting participating
preferred shares, redeemable common shares, and redeemable non-voting participating preferred shares,
but after payment of any accrued dividends on the senior preferred shares.
In the event of liquidation, wind-up or dissolution, the holders of director voting preferred shares are
entitled to receive $10 per share in priority to the payment of dividends on the common shares, voting
participating preferred shares, non-voting participating preferred shares, redeemable common shares,
and redeemable non-voting participating preferred shares, but after payment of any accrued dividends
on the senior preferred shares.
The director voting preferred shares are redeemable at the option of the Company, at any time, at a
redemption price of $10 per share.
The director voting preferred shares have a nominal stated value.
F-92
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
22. CAPITAL DISCLOSURES
Telesat 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 (see
note 19), and to maximize returns to its shareholders and other stakeholders. Telesat meets these objectives through
regular monitoring of its financial covenants and operating results on a quarterly basis. The Company’s overall
financial strategy remains unchanged from 2010.
Telesat defines its capital as shareholders’ equity (comprising issued share capital, accumulated earnings and
excluding reserves) and debt financing (comprising indebtedness and excluding deferred financing costs and
prepayment options as detailed in note 19).
The Company’s capital at the end of the year was as follows:
Shareholders’ equity (excluding reserves)
Debt financing (excluding deferred financing costs and
prepayment options)
December 31,
2011
1,668,170
December 31,
2010
1,461,982
January 1,
2010
1,185,361
2,877,877
2,923,058
3,110,395
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, 2011, 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, 2011, Telesat’s Consolidated Total Debt to Consolidated EBITDA for covenant purposes
ratio, for credit agreement compliance purposes, was 4.39:1 (December 31, 2010 — 4.59:1), which was less than the
maximum test ratio of 6.25:1. The Consolidated EBITDA for covenant purposes to Consolidated Interest Expense
ratio, for credit agreement compliance purposes, was 2.74:1 (December 31, 2010 — 2.63:1), which was greater than the
minimum test ratio of 1.70:1. The compliance test ratios become more restrictive over the term of the credit agreement.
The maximum Permitted Capital Expenditure Amount varies in each fiscal year with the opportunity to carry
forward or carry back unused amounts based on conditions specified in the credit agreement. An additional amount
of U.S. $500 million is also available over the term of the credit agreement for the construction or acquisition of up
to four new satellites. For the fiscal year ended December 31, 2011, the Company’s Capital Expenditure Amount, as
defined in the credit agreement, was $341.5 million and was in compliance with the credit agreement.
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 23), 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 23). In addition, the Company’s operating results are tracked against budget on a monthly
basis, and this analysis is reviewed by senior management.
23. FINANCIAL INSTRUMENTS
Measurement of Risks
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, 2011.
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, 2011, the maximum exposure to credit risk is equal to the carrying value of the
financial assets, $474 million (December 31, 2010 — $350 million, January 1, 2010 —$253 million). Cash and cash
equivalents 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
U.S. dollar and Canadian dollar denominated investments.
F-93
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
23. FINANCIAL INSTRUMENTS—(continued)
It is expected that the counterparties to the Company’s 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.
Telesat has a number of diverse customers, which limits the concentration of credit risk with respect to trade
receivables. 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, 2011, North American and International customers made up 36% and
64% of the outstanding trade receivable balance, respectively (December 31, 2010 —38% and 62%, January 1,
2010 — 39% and 61%). Anticipated bad debt losses have been provided for in the allowance for doubtful accounts.
The allowance for doubtful accounts at December 31, 2011 was $3.7 million (December 31, 2010 —$7.1 million,
January 1, 2010 — $8.7 million).
Foreign Exchange Risk
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 U.S. dollar denominated debt financing. At December 31, 2011, approximately $2,798
million of the $2,878 million total debt financing (before netting of deferred financing costs and prepayment
options) is the Canadian dollar equivalent of the U.S. dollar denominated portion of the debt.
The Company has entered into a cross currency basis swap to economically hedge the foreign currency risk on
a portion of its U.S. dollar denominated debt. At December 31, 2011, the Company had a cross currency basis swap
of $1,175 million (December 31, 2010 — $1,187 million, January 1, 2010 — $1,200 million) which required the
Company to pay Canadian dollars to receive U.S. $1,012 million (December 31, 2010 — U.S. $1,022 million,
January 1, 2010 — U.S. $1,033 million). At December 31, 2011, the fair value of this derivative contract was a
liability of $160.4 million (December 31, 2010 — liability of $192.5 million, January 1, 2010 — liability of $137.1
million). The non-cash 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, 2011, the Company had no outstanding foreign exchange contracts. At
December 31, 2010, the Company had nine outstanding foreign exchange contracts which required the Company to
pay $188.3 million Canadian dollars (January 1, 2010 — $21.5 million) to receive U.S. $185.0 million (January 1,
2010 — U.S. $20.0 million) for future capital expenditures and interest payments. At December 31, 2010, the fair
value of the derivative contracts was a liability of $2.6 million (January 1, 2010 —$0.4 million).
The Company’s main currency exposures as at December 31, 2011 lie in its U.S. dollar denominated cash and
cash equivalents, trade and other receivables, trade and other payables and indebtedness.
As at December 31, 2011, a 5 percent increase (decrease) in the Canadian dollar against the U.S. dollar would
have increased (decreased) the Company’s net income by approximately $158 million and increased (decreased)
other comprehensive income by $1 million. This analysis assumes that all other variables, in particular interest rates,
remain constant.
F-94
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
23. 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. At December 31, 2011, the Company had a series of three interest rate swaps to fix interest on $930
million of Canadian dollar denominated debt at average fixed rates ranging from 3.02% to 3.5%. As at
December 31, 2011, the fair value of these derivative contracts was a liability of $53.1 million (December 31,
2010 — liability of $49.4 million, January 1, 2010 — liability of $47.7). The contracts mature by 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 income of approximately $2.0 million for the year ended December 31, 2011.
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, 2011:
In millions of Canadian dollars
Trade and other payables
Customer and other
deposits
Deferred satellites
performance incentive
payments
Dividends payable on
senior preferred shares
(note 20)
Promissory note payable to
Loral (note 29)
Tax indemnification
payable to Loral
(note 29)
Other financial liabilities
Long-term indebtedness
Interest rate swaps
Cross currency basis swap
Carrying
amount
45,156
Contractual cash
flows
(undiscounted)
2013
2012
45,156 45,156 —
2014
—
2015
—
2016
—
After 2016
—
4,822
4,822 2,882
907
999
34
—
—
69,898
98,594 15,661 8,416
8,414 8,435
8,481 49,187
1,650
1,650 1,650 —
—
—
—
—
21,141
21,141 —
—
—
—
—
21,141
7,111
3,708
2,905,023
53,101
160,373
7,111 —
7,111
3,708 2,151 1,557
—
—
3,552,922 289,933 186,635 1,985,962 813,141 27,725 249,526
—
—
52,762 18,658 18,607
76,604 27,247 26,907
15,497 —
22,450 —
—
—
—
—
—
—
—
—
3,271,983
3,864,470 403,338 250,140 2,033,322 821,610 36,206 319,854
The carrying value of the deferred satellites performance incentive payments includes $2.5 million interest
payable. The carrying value of the long-term indebtedness includes $21.0 million of interest payable and excludes
$49.4 million of financing costs.
F-95
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
23. FINANCIAL INSTRUMENTS—(continued)
Financial assets and liabilities recorded in the balance sheet were as follows:
December 31, 2011
Cash and cash equivalents
Trade and other receivables
Other financial assets – current
Other financial assets – long-term
Trade and other payables
Other financial liabilities – current
Other financial liabilities – long-term
Indebtedness (excluding deferred
financing costs) (note 19)
Senior preferred shares (note 20)
Loans and
receivables
277,962
46,789
7,010
7,977
—
—
—
—
—
Held for
Trading –
FVTPL
Other financial
liabilities
—
—
—
134,431
—
(42,204)
(171,270)
—
—
—
—
(45,156)
(40,784)
(88,513)
—
—
(2,884,056)
(141,435)
Total
339,738
(79,043)
(3,199,944)
December 31, 2010
Cash and cash equivalents
Trade and other receivables
Other financial assets – current
Other financial assets – long-term
Trade and other payables
Other financial liabilities – current
Other financial liabilities – long-term
Indebtedness (excluding deferred
financing costs) (note 19)
Senior preferred shares (note 20)
Loans and
receivables
220,295
44,083
6,944
6,226
—
—
—
—
—
Held for
Trading –
FVTPL
Other financial
liabilities
—
—
—
72,405
—
(63,199)
(181,255)
—
—
—
—
(49,974)
(40,883)
(84,374)
—
—
(2,930,248)
(141,435)
Total
277,548
(172,049)
(3,246,914)
January 1, 2010
Cash and cash equivalents
Trade and other receivables
Other financial assets – current
Other financial assets – long-term
Trade and other payables
Other financial liabilities – current
Other financial liabilities – long-term
Indebtedness (excluding deferred
financing costs) (note 19)
Senior preferred shares (note 20)
Loans and
receivables
154,189
70,200
7,317
5,819
—
—
—
—
—
Held for
Trading –
FVTPL
Other financial
liabilities
—
—
—
15,914
—
(57,129)
(128,157)
—
—
—
—
(43,413)
(44,995)
(111,668)
—
—
(3,118,477)
(141,435)
Total
237,525
(169,372)
(3,459,988)
Total
277,962
46,789
7,010
142,408
(45,156)
(82,988)
(259,783)
Fair value
277,962
46,789
7,010
142,408
(45,156)
(85,549)
(255,225)
(2,884,056)
(141,435)
(2,939,249)
(2,943,132)
(143,265)
(2,998,158)
Total
220,295
44,083
6,944
78,631
(49,974)
(104,082)
(265,629)
Fair value
220,295
44,083
6,944
78,631
(49,974)
(104,012)
(263,456)
(2,930,248)
(141,435)
(3,141,415)
(3,067,412)
(153,978)
(3,288,879)
Total
154,189
70,200
7,317
21,733
(43,413)
(102,124)
(239,825)
Fair value
154,189
70,200
7,317
21,733
(43,413)
(102,470)
(237,226)
(3,118,477)
(141,435)
(3,391,835)
(3,104,151)
(174,466)
(3,408,287)
F-96
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
23. FINANCIAL INSTRUMENTS—(continued)
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. The fair value hierarchy is as follows:
Level 1 based on quoted prices in active markets for identical assets or liabilities.
Level 2 based on 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 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 of cash and cash equivalents, trade and other receivables, and trade and other payables
approximate fair value due to the short-term maturity of these instruments. Included in cash and cash equivalents are
$66.5 million (December 31, 2010 — $91.1 million, January 1, 2010 — $64.5 million) of short-term investments
classified as Level 2 in the fair value hierarchy. The fair value of the indebtedness is based on transactions and
quotations from third parties considering market interest rates and excluding deferred financing costs. The
indebtedness and senior preferred shares are classified as Level 2 in the fair value hierarchy.
Fair value of derivative financial instruments
The current and long term portions of the fair value of the Company’s derivative assets and liabilities, at each
of the balance sheet dates, and the fair value methodologies used to calculate those values were as follows:
December 31, 2011
Cross currency basis swap
Interest rate swaps
Forward foreign exchange contracts
Prepayment option embedded derivatives
Long-term
assets
—
—
—
Current
liabilities
(23,637)
(18,567)
134,431 —
Long-term
Fair value
liabilities
Total
hierarchy
(136,736) (160,373) Level 2
(34,534) (53,101) Level 2
— — Level 2
— 134,431 Level 2
134,431 (42,204)
(171,270) (79,043)
F-97
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
23. FINANCIAL INSTRUMENTS—(continued)
December 31, 2010
Cross currency basis swap
Interest rate swaps
Forward foreign exchange contracts
Prepayment option embedded derivatives
January 1, 2010
Cross currency basis swap
Interest rate swaps
Forward foreign exchange contracts
Prepayment option embedded derivatives
Long-term
assets
—
—
—
72,405
72,405
Long-term
assets
—
—
—
15,914
15,914
Current liabilities
(29,349)
(31,279)
(2,571)
—
(63,199)
Total
Long-term
liabilities
(163,107) (192,456)
(18,148) (49,427)
—
(2,571)
— 72,405
(181,255) (172,049)
Current liabilities
(16,763)
(39,930)
(436)
—
(57,129)
Total
Long-term
liabilities
(120,343) (137,106)
(7,814) (47,744)
—
(436)
— 15,914
(128,157) (169,372)
Fair value
hierarchy
Level 2
Level 2
Level 2
Level 2
Fair value
hierarchy
Level 2
Level 2
Level 2
Level 2
Reconciliation of fair value of derivative assets and liabilities
Opening fair value, January 1, 2010
Unrealized losses on derivatives
Realized gains on derivatives:
Cross currency basis swap
Interest rate swaps
Forward foreign exchange contracts
Impact of foreign exchange
Fair value, December 31, 2010
Unrealized gains on derivatives
Realized gains on derivatives:
Cross currency basis swap
Interest rate swaps
Forward foreign exchange contracts
Impact of foreign exchange
Fair value, December 31, 2011
24. SHARE BASED COMPENSATION PLANS
Telesat Holdings Stock Option Incentive Plan
(169,372)
(13,955)
1,183
—
1,604
8,491
(172,049)
87,914
1,895
—
8,776
(5,579)
(79,043)
On September 19, 2008, Telesat adopted a stock option incentive plan (the “stock option plan”) for certain key
employees of the Company and its subsidiaries. The stock option 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 stock option 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 October 31 st of each year, starting in 2008. The vesting amount is prorated for
optionees whose employment with the Company or its subsidiaries commenced after October 31, 2007. The
performance-vesting options become vested and exercisable over a five year period starting March 31, 2009,
provided 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-98
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
24. SHARE BASED COMPENSATION PLANS—(continued)
The Company expenses the fair value of stock options that are expected to vest over the vesting period using
the Black-Scholes option pricing model. The share-based compensation expense is included in operating expenses.
The exercise periods of the stock 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.
The movement in the number of stock options outstanding and their related weighted-average exercise prices
are as follows:
Outstanding December 31, 2011
Options exercisable at December 31, 2011
Weighted-average remaining life
Outstanding December 31, 2010
Options exercisable at December 31, 2010
Weighted-average remaining life
Outstanding January 1, 2010
Options exercisable at January 1, 2010
Weighted-average remaining life
Time Vesting
Option Plans
Performance Vesting
Option Plan
Weighted-Average
Exercise Price ($)
11.08
11.08
11.07
Number of
Options
7,265,952
5,666,287
6 years
7,265,952
4,173,018
7 years
7,303,705
2,740,969
8 years
Weighted- Average
Exercise Price ($)
11.12
11.12
11.07
Number of
Options
1,407,672
687,698
6 years
1,407,672
526,252
7 years
1,453,814
162,091
8 years
During 2011 no options were granted, forfeited, exercised or expired.
The compensation expense, number of stock options granted, weighted-average fair value per option granted
and the assumptions used to determine the share-based compensation expense using the Black-Scholes option
pricing model were as follows:
Compensation expense (credited to equity-settled employee benefits reserve)
Number of stock options granted
Weighted-average fair value per option granted ($)
Weighted average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (years)
25. EMPLOYEE BENEFIT PLANS
December 31,
2011
December 31,
2010
2,654
—
—
—
—
—
—
4,667
22,372
16.50
—
31.10%
3.85%
10
The Company’s net defined benefit plan expense included in operating expense consisted of the following
elements:
Year ended December 31,
Current service cost
Interest cost
Expected return on plan assets
Net defined benefit plan expense
Defined benefit
pension plans
2011
2010
Other post-employment
benefit plans
2011
2010
3,844
9,687
(10,708)
2,823
2,630
9,655
(10,231)
2,054
299
1,183
—
1,482
232
1,237
—
1,469
F-99
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
25. EMPLOYEE BENEFIT PLANS—(continued)
The Company’s funding policy is to make contributions to its pension funds based on 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.
The Company provides certain health care and life insurance benefits for some of its retired employees 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.
Balance sheet obligations for:
Pension benefits
Other post-employment benefits
December 31,
2011
December 31,
2010
January 1,
2010
43,266
24,339
67,605
9,209
21,592
30,801
1,231
22,433
23,664
The amounts recognized in the balance sheet are determined as follows:
Present value of funded obligations
Fair value of plan assets
Present value of unfunded obligations
December 31, 2011
Pension
Other
211,872
169,808
—
—
December 31, 2010
Other
Pension
—
—
174,662
166,235
January 1, 2010
Pension
Other
151,063
150,746
—
—
42,064
1,202
—
24,339
8,427
782
—
21,592
317
914
—
22,433
Liability in the balance sheet
43,266
24,339
9,209
21,592
1,231
22,433
F-100
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
25. EMPLOYEE BENEFIT PLANS—(continued)
The changes in the defined benefit obligations and in the fair value of plan assets and the funded status of the
defined benefit plans were as follows:
Pension and other benefits
Change in benefit obligations
Defined benefit obligation, January 1, 2011
Current service cost
Interest cost
Actuarial (gains) losses
Benefits paid
Contributions by plan participants
Plan amendments
Defined benefit obligation, December 31, 2011
Pension and other benefits
Change in fair value of plan assets
Fair value of plan assets, January 1, 2011
Expected return on plan assets
Actuarial gains (losses)
Benefits paid
Contributions by plan participants
Contributions by employer
Fair value of plan assets, December 31, 2011
Funded status
Plan surplus (deficit)
Accrued benefit asset (liability)
Pension and other benefits
Change in benefit obligations
Defined benefit obligation, January 1, 2010
Current service cost
Interest cost
Actuarial (gains) losses
Benefits paid
Contributions by plan participants
Plan amendments
Defined benefit obligation, December 31, 2010
December 31, 2011
Other
Total
Pension
175,444
3,844
9,687
30,541
(7,825)
1,383
—
213,074
21,592
299
1,183
2,222
(990)
33
—
24,339
197,036
4,143
10,870
32,763
(8,815)
1,416
—
237,413
December 31, 2011
Other
Total
Pension
166,235
10,708
(8,800)
(7,825)
1,383
8,107
169,808
(43,266)
(43,266)
—
—
—
(990)
33
957
—
(24,339)
(24,339)
166,235
10,708
(8,800)
(8,815)
1,416
9,064
169,808
(67,605)
(67,605)
December 31, 2010
Other
Total
Pension
151,977
2,630
9,665
19,165
(9,379)
1,386
—
175,444
22,433
232
1,237
(1,250)
(856)
32
(236)
21,592
174,410
2,862
10,902
17,915
(10,235)
1,418
(236)
197,036
F-101
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
25. EMPLOYEE BENEFIT PLANS—(continued)
Pension and other benefits
Change in fair value of plan assets
Fair value of plan assets, January 1, 2010
Expected return on plan assets
Actuarial gains (losses)
Benefits paid
Contributions by plan participants
Contributions by employer
Fair value of plan assets, December 31, 2010
Funded status
Plan surplus (deficit)
Accrued benefit asset (liability)
December 31, 2010
Other
Total
Pension
150,746
10,231
5,108
(9,379)
1,386
8,143
166,235
—
—
—
(856)
32
824
—
(9,209)
(9,209)
(21,592)
(21,592)
150,746
10,231
5,108
(10,235)
1,418
8,967
166,235
(30,801)
(30,801)
The major categories of plan assets as a percentage of total plans assets and the expected rate of return on
assets at the end of the reporting period for each category are as follows:
Equity securities
Fixed income instruments
Short-term investments
Weighted average of expected return
Expected return
Fair value of plan assets
December 31,
2011
December 31,
2010
December 31,
2011
December 31,
2010
8.4%
4.4%
3.4%
6.7%
7.9%
4.6%
2.7%
6.6%
59%
39%
2%
100%
61%
36%
3%
100%
Plan assets are valued as at the measurement date of December 31 each year. The overall expected rate of
return is a weighted average of the expected returns of the various investment categories held in the asset portfolio.
The Management Level Pension Fund Investment Committee and Investment Managers’ assessment of the expected
returns is based on historical average return trends and market predictions.
The actual return on plan assets for the year ended December 31, 2011 was $1.9 million (December 31,
2010 — $15.4 million).
The experience adjustments on plan liabilities for the year ended December 31, 2011 was a loss of $1.0
million (December 31, 2010 — gain of $1.7 million). The experience adjustments on plan assets for the year ended
December 31, 2011 was a loss of $8.8 million (December 31, 2010 — gain of $5.1 million).
The significant weighted-average assumptions adopted in measuring the Company’s pension and other benefit
obligations were as follows:
Accrued benefit obligation
Discount rate
Benefit costs for the periods ended
Discount rate
Expected long-term rate of return on plan assets
Future salary increase
Pre and post retirement pension increase
F-102
Pension
December 31, 2011
Other
4.5%
4.5%
5.5%
6.5%
3.0%
1.1%
5.5%
—
—
—
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
25. EMPLOYEE BENEFIT PLANS—(continued)
For measurement purposes, the medical trend rate for drugs was assumed to be 10.5% for 2011, decreasing by
1% per annum, to a rate of 4.5% per annum in 2016. The health care cost trend rate was assumed to be 9% grading
down to 5% in 2019. Other medical trend rates were assumed to be 4.5%.
Actuarial gains and losses recognized in other comprehensive income:
Cumulative amount at January 1
Recognized during the year, net of taxes (2011 –
$10,486; 2010 –$3,357)
Cumulative amount at December 31
Sensitivity of assumptions
Pension
2011
Other
Total
(10,505)
1,055
(9,450)
(29,614)
(1,463)
(31,077)
(40,119)
(408)
(40,527)
Pension
—
(10,505)
(10,505)
2010
Other
—
Total
—
1,055
(9,450)
1,055
(9,450)
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
24,339
2,011
(1,706)
Aggregate of service and
interest cost
1,482
146
(121)
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.
The Company expects to make contributions of $8.9 million to the defined benefit plans during the next fiscal
year.
26. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents is comprised of:
Cash
Short term investments, original maturity three months or less
Restricted cash (a)
December 31,
2011
December 31,
2010
January 1,
2010
86,500
66,547
124,915
277,962
129,217
91,078
—
220,295
89,679
64,510
—
154,189
(a) The insurance proceeds received for the settlement of the Telstar 14R/Estrela do Sul 2 claim are restricted in
use, and will be used to repay a portion of the Company’s Credit Facility or reinvested in satellite
procurements in accordance with the terms and conditions of the Credit Agreement. The restricted amount is
expected to be used within the next twelve months.
F-103
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
26. SUPPLEMENTAL CASH FLOW INFORMATION—(continued)
The net change in operating assets and liabilities shown in the consolidated statements of cash flows is
comprised of the following:
At December 31
Trade and other receivables
Financial assets
Other assets
Trade and other payables
Financial liabilities
Other liabilities
At December 31
Non-cash investing and financing activities are comprised of:
Purchase of satellites, property and other equipment
27. COMMITMENTS AND CONTINGENT LIABILITIES
2011
(1,668)
(1,604)
(4,335)
(196)
(2,061)
(3,249)
(13,113)
2010
21,884
(541)
(1,295)
(22,484)
(20,249)
(7,130)
(29,815)
2011
2010
24,441
24,775
Off balance sheet commitments include operating leases, commitments for future capital expenditures and
other future purchases.
Off balance sheet commitments
Operating lease commitments
Other operating commitments
Capital commitments
Total off balance sheet commitments
2012
6,830
21,791
156,096
184,717
2013
6,478
18,285
—
24,763
2014
2015
5,824 5,392
14,271 7,530
—
—
20,095 12,922
2016
4,805
3,377
—
8,182
Thereafter
32,628
1,388
—
34,016
Total
61,957
66,642
156,096
284,695
Certain of the Company’s offices, warehouses, earth stations, and office equipment are leased under various
terms. The aggregate expense related to operating lease commitments for the year ended December 31, 2011 was $7
million (December 31, 2010—$8.0 million). The expiry terms range from January 2012 to January 2043.
Telesat has entered into contracts for the construction and launch of Nimiq 6 (targeted for launch in 2012) and
Anik G1 (targeted for launch in 2012). The total outstanding commitments at December 31, 2011 are in U.S. dollars.
Cash and cash equivalents includes $124.9 million of restricted cash as at December 31, 2011 (December 31,
2010 —zero, January 1, 2010 — zero). The restricted cash can be used for capital expenditures of satellite projects.
The restricted cash is as a result of insurance proceeds received for the claim filed in relation to Telstar 14R/Estrela
do Sul 2. The insurance proceeds were given as the satellite’s north solar array anomaly has diminished the amount
of power available for the satellite’s transponders and reduced the operational life expectancy of the satellite.
Telesat has agreements with various customers for prepaid revenue on several service agreements which take
effect when the spacecraft is placed in service. Telesat is responsible for operating and controlling these satellites.
Customer prepayments of $408.0 million (December 31, 2010 — $377.1 million, January 1, 2010 — $358.4 million),
refundable under certain circumstances, are reflected in other financial liabilities, both current and long-term.
In the normal course of business, the Company has executed agreements that provide for indemnification and
guarantees to counterparties in various transactions. These indemnification undertakings and guarantees may require
the Company 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. The nature of substantially all of the indemnification undertakings prevents the Company from
making a reasonable estimate of the maximum potential amount the Company 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, the Company has not made any significant payments under such indemnifications.
F-104
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
27. COMMITMENTS AND CONTINGENT LIABILITIES—(continued)
Telesat and Loral have entered into an indemnification agreement whereby Loral will indemnify Telesat for
any tax liabilities for taxation years prior to 2007 related to Loral Skynet operations. Likewise, Telesat will
indemnify Loral for the settlement of any tax receivables for taxation years prior to 2007.
Legal Proceedings
The Company frequently participates in proceedings before national telecommunications regulatory
authorities. In addition, the Company may also become involved from time to time in other legal proceedings arising
in the normal course of its business.
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. In November 2006, Telesat Canada commenced arbitration proceedings against Boeing,
alleging 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. Telesat’s claim seeks approximately $331 million plus costs
and post-award interest, a portion of which was in respect of the subrogated rights of its insurers. 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, which is
approximately $176 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 U.S. $5.5 million plus
interest. The arbitration hearing is scheduled to commence in November 2012. 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.
Other than the above, the Company is not aware of any proceedings outstanding or threatened as of the date
hereof by or against us or relating to its business which may have, or have had in the recent past, significant effects
on Telesat Canada’s financial position or profitability.
28. SUBSIDIARIES
The list of significant companies included in the scope of consolidation is as follows:
Company
Telesat Canada
Infosat Communications LP
Skynet Satellite Corporation
Telesat Network Services, Inc.
The SpaceConnection Inc.
Telesat Satellite LP
Infosat Able Holdings Inc.
Able Infosat Communications, Inc.
Telesat Brasil Capacidade de Satélites Ltda.
Telesat (IOM) Limited
Country
Canada
Canada
United States
United States
United States
United States
United States
United States
Brazil
Isle of Man
Method of
Consolidation
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
Fully consolidated
% voting rights
December 31,
2011
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
The percentage of voting rights and interest were the same as at December 31, 2010 and January 1, 2010,
respectively.
F-105
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
29. RELATED PARTY TRANSACTIONS
The Company’s immediate shareholders are Red Isle Private Investment Inc. (“Red Isle”), a company
incorporated in Canada, Loral Holdings Corporation (“Loral Holdings”), a company incorporated in the United
States, Mr. John P. Cashman and Mr. Colin D. Watson, two Canadian citizens. Red Isle is wholly owned by the
Public Sector Pension Investment Board (“PSP Investments”), a Canadian Crown corporation. Loral Holdings is a
wholly owned subsidiary of Loral Space & Communications Inc. (“Loral”), a United States publically listed
company.
Transactions with subsidiaries
The Company and its subsidiaries regularly engage in inter-group transactions. These transactions include the
purchase and sale of satellite services and communication equipment, providing and receiving network and call
centre services, access to orbital slots and management services. The transactions have been entered into over the
normal course of operations. Balances and transactions between the Company and its subsidiaries have been
eliminated on consolidation and therefore have not been disclosed.
Transactions with related parties
The Company and certain of its subsidiaries regularly engage in transactions with related parties. The
Company’s related parties include Loral, Red Isle, Space Systems/Loral (“SSL”), a satellite manufacturer and a
wholly owned subsidiary of Loral, XTAR LLC (“XTAR”), a satellite operator and affiliate of Loral, and Loral
Canadian Gateway Corporation (“LCGC”), a wholly owned subsidiary of Loral.
On April 11, 2011, Telesat acquired from Loral and LCGC all of its rights and obligations with respect to the
Canadian payload on the ViaSat-1 satellite, which was manufactured by SSL, and all related agreements. On closing
of the transaction, Telesat paid Loral U.S. $13 million ($12.6 million Canadian dollars) for the assumption of
Loral’s 15-year revenue contract with Xplornet Communications Inc. for ViaSat-1. In addition Telesat reimbursed
Loral and LCGC approximately U.S. $48.2 million of net costs incurred through completion of the sale.
During the year, the Company and its subsidiaries entered into the following transactions with related parties.
year ended ended
Loral
–Revenue
–Operating expenses
–Interest expense
-Intangible asset
Red Isle
–Interest expense
SSL
–Revenue
–Satellite, property and other equipment
–Operating expenses
XTAR
–Revenue
LCGC
–Revenue
–Satellite, property and other equipment
Sale of goods and services,
interest income
Purchase of goods and services,
interest expense
December 31,
2011
December 31,
2010
December 31,
2011
December 31,
2010
166
—
—
—
—
2,373
—
—
1,017
442
—
—
4,990
1,291
12,618
9,869
—
180,853
1,423
—
—
4,586
—
5,245
1,004
—
12,339
—
168,040
373
—
—
—
1
—
—
—
—
1,942
—
—
927
324
—
F-106
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
Telesat Holdings Inc.
29. RELATED PARTY TRANSACTIONS—(continued)
The following balances were outstanding at the end of the year:
At
Loral
–Trade receivables/payables
–Other long-term financial
assets/liabilities
Red Isle
–Other current financial liabilities
–Other long-term financial
liabilities
–Senior preferred shares
SSL
–Trade receivable/payable
–Other current financial liabilities
–Other long-term financial
liabilities
XTAR
–Trade receivable/payable
Amounts owed by related parties
Amounts owed to related parties
December 31,
2011
December 31,
2010
January 1,
2010
December 31,
2011
December 31,
2010
January 1,
2010
—
—
—
—
14
—
2,387
2,332
2,461
28,252
24,474
19,543
—
—
—
380
—
—
—
—
—
—
428
—
—
—
—
—
—
1,430
—
—
79
1,650
2,075
—
—
141,435
—
141,435
25,090
141,435
4,758
1,047
37
1,003
1,230
—
15,018
15,469
8,068
—
—
—
The amounts outstanding are unsecured and will be settled in cash. The related party transactions were made
on terms equivalent to those that prevail in arm’s length transactions.
The Company has entered into contracts for the construction of Nimiq 6 and Anik G1 with SSL. The total
outstanding commitments at December 31, 2011 were $50.9 million (December 31, 2010 — $187.4 million,
January 1, 2010 — $225.1 million).
Other related party transactions
The Company funds certain defined benefit pension plans as described in note 25. Contributions made to the
plans for the year ended December 31, 2011 were $8.1 million (December 31, 2010 — $8.1 million).
Compensation of key management personnel
Key management personnel consists of Board level directors and senior management.
Short-term benefits (including salary)
Post-employment benefits
Other-long term benefits
Termination benefits
Share-based payments
Year ended
2011
Year ended
2010
7,309
720
—
—
2,572
7,262
557
—
—
4,514
10,601
12,333
There were no transactions with key management personnel in 2011 and 2010 other than compensation.
F-107
Telesat Holdings Inc.
Notes to the 2011 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except for per share amounts and where otherwise noted)
30. 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, and were guaranteed fully and
unconditionally, on a joint and several basis, by Telesat and certain of its subsidiaries.
The condensed consolidating financial information below for the year ended December 31, 2011 and the year
ended December 31, 2010 are presented pursuant to Article 3-10(d) of Regulation S-X. The information presented
consists of the operations of Telesat Holdings Inc. Telesat Holdings Inc. primarily holds investments in subsidiaries
and equity. Telesat LLC, a U.S. Delaware corporation, is a financing subsidiary that has no assets, liabilities or
operations.
The condensed consolidating financial information reflects the investments of Telesat Holdings Inc. 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
Revenue
Operating expenses
Depreciation
Amortization
Other operating
gains (losses), net
Operating income
(loss)
Income (loss) from
equity
investments
Interest (expense)
income
Interest and other
income
Gain on changes in
fair value of
financial
instruments
(Loss) gain on
foreign exchange
Income (loss) before
tax
Tax (expense)
benefit
Net income (loss)
Condensed Consolidating Statement of Income (Loss)
For the year ended December 31, 2011
Telesat
Holdings
—
—
—
—
—
Telesat
LLC
—
—
—
—
—
Telesat Canada
742,728
(134,137)
608,591
(146,581)
(42,480)
Guarantor
Subsidiaries
110,203
(95,827)
14,376
(51,711)
1,541
Non-guarantor
Subsidiaries Adjustments
20,286
(22,657)
(2,371)
(334)
(82)
Consolidated
(64,856) 808,361
64,856
(187,765)
—
—
—
620,596
(198,626)
(41,021)
—
—
116,063
(1,989)
(6)
—
114,068
—
—
535,593
(37,783)
(2,793)
—
495,017
247,144
—
(40,204)
(3,049)
— (203,891)
(9,869)
—
(219,590)
2,421
(13)
—
(227,051)
—
—
86
1,465
3
—
1,554
—
—
98,585
—
—
—
(75,155)
(6,084)
—
2,395
—
—
98,585
(78,844)
237,275
—
299,315
(43,030)
(408) (203,891) 289,261
—
237,275
—
—
(52,171)
106
247,144
(42,924)
79
—
(51,986)
(329) (203,891) 237,275
F-109
Revenue
Operating expenses
Depreciation
Amortization
Other operating losses,
net
Operating income (loss)
Income (loss) from
equity investments
Interest (expense)
income
Interest and other
income (expense)
Loss on changes in fair
value of financial
instruments
Gain (loss) on foreign
exchange
Income (loss) before tax
Tax expense
Net income (loss)
Condensed Consolidating Statement of Income (Loss)
For the year ended December 31, 2010
Telesat
Holdings
—
—
—
—
—
—
—
Telesat
LLC
—
—
—
—
—
—
—
Telesat Canada
745,689
(144,180)
601,509
(147,892)
(47,395)
Guarantor
Subsidiaries
98,049
(83,375)
14,674
(53,948)
2,126
Non-guarantor
Subsidiaries
Adjustments
(46,216)
46,216
—
—
—
23,839
(25,125)
(1,286)
(343)
(199)
Consolidated
821,361
(206,464)
614,897
(202,183)
(45,468)
75,023
7,995
481,245
(29,153)
—
(1,828)
—
—
83,018
450,264
298,439
—
(30,096)
(32,013)
— (236,330)
—
(12,338)
—
(244,372)
125
3
—
(256,582)
—
—
4,316
1,517
(81)
—
5,752
—
—
(11,168)
—
—
—
(11,168)
—
286,101
—
286,101
—
—
—
—
162,921
362,846
(64,407)
7,333
(52,191)
(1,169)
298,439
(53,360)
(6,288)
—
(8,194) (236,330)
—
(8,749) (236,330)
(555)
163,966
352,232
(66,131)
286,101
F-110
Condensed Consolidating Balance Sheet
As at December 31, 2011
Telesat
Holdings
Telesat
LLC
Telesat Canada
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries Adjustments
Consolidated
—
—
256,837
18,654
2,471
— 277,962
—
—
27,010
18,670
1,109
—
46,789
—
—
—
—
26
349,662
255
137,658
6,729
—
148,153 (635,473)
7,010
—
Total current assets
—
—
647,587
183,256
—
—
14,052
8,019
55
22,126
158,517 (635,473) 353,887
—
Assets
Cash and cash equivalents
Trade and other
receivables
Other current financial
assets
Intercompany receivable
Prepaid expenses and
other current assets
Satellites, property and
other equipment
Other long-term financial
assets
Other long-term assets
Intangible assets
Investment in affiliates
Goodwill
Total assets
Liabilities
Trade and other payables
Other current financial
liabilities
Intercompany payable
Other current liabilities
Current indebtedness
Total current liabilities
Long-term indebtedness
Deferred tax liabilities
Other long-term financial
1,650
45,689
—
—
47,339
—
—
liabilities
Other long-term liabilities
Senior preferred shares
Total liabilities
Shareholders’ Equity
Share capital
Accumulated earnings
—
—
141,435
188,774
1,298,178
(deficit)
Reserves
Total shareholders’
equity
—
—
1,808,997
340,992
1,926
— 2,151,915
—
—
—
1,878,938
—
—
—
—
—
—
141,084
3,010
848,898
896
2,526
47,077
1,184,893 1,495,142
343,876
2,078,056
1,878,938
—
6,712,525 2,413,765
428
—
103
260 (4,559,233)
— 142,408
—
5,536
— 896,078
—
24,671
— 2,446,603
185,905 (5,194,706) 5,996,427
—
—
33,405
9,118
2,633
—
45,156
—
—
—
—
—
—
—
—
—
—
79,995
179,352
64,393
86,494
1,308
375,012
3,111
1
443,639
2,748,131
452,208
388,550
—
(312)
255,630
411,533
—
3,862
10,726
—
—
4,311,141
402,826
35
373
—
—
35,420 (635,473)
—
—
82,988
—
67,877
86,495
38,461 (635,473) 282,516
— 2,748,131
— 451,896
—
—
291
243
—
— 259,783
— 422,502
— 141,435
38,995 (635,473) 4,306,263
—
2,320,730 1,898,682
104,434 (4,323,846) 1,298,178
369,992
21,994
—
—
35,415
45,239
176,382
(64,125)
42,071 (253,868) 369,992
18,481
21,994
405
1,690,164
—
2,401,384 2,010,939
146,910 (4,559,233) 1,690,164
Total liabilities and
shareholders’ equity 1,878,938
—
6,712,525 2,413,765
185,905 (5,194,706) 5,996,427
F-111
Condensed Consolidating Balance Sheet
As at December 31, 2010
Telesat Holdings
Telesat
LLC Telesat Canada
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries Adjustments
Consolidated
— —
196,682
21,135
2,478
—
220,295
— —
28,718
13,593
— —
— —
— —
— —
25
219,035
346
202,459
13,671
7,136
458,131
244,669
1,772
6,573
—
—
112,436 (533,930)
44,083
6,944
—
130
20,937
123,389 (533,930) 292,259
—
— —
1,643,419
333,173
2,197
—
1,978,789
— —
— —
— —
1,663,758 —
— —
1,663,758 —
— —
35,385 —
2,075 —
— —
— —
37,460 —
— —
— —
77,503
7,907
909,744
502
4,120
35,617
1,309,540 1,487,893
343,876
2,078,056
6,484,300 2,449,850
—
626
—
—
—
186
259 (4,461,450)
24,671
—
151,328 (4,995,380)
78,631
12,027
945,547
—
2,446,603
5,753,856
31,667
124,484
15,164
374,061
3,143
—
— (533,930)
49,974
—
100,610
61,643
96,847
1,233
301
1
415,251
2,771,802
416,069
390,760
—
(2,002)
164
701
—
—
104,082
—
62,645
—
96,848
4,008 (533,930) 313,549
—
2,771,802
—
414,717
—
650
— —
265,346
—
283
—
265,629
— —
141,435 —
178,895 —
348,873
—
12,750
—
4,217,341
401,508
238
—
—
361,861
—
141,435
5,179 (533,930) 4,268,993
1,298,178 —
2,320,730 1,896,596
104,434 (4,321,760)
1,298,178
163,804 —
22,881 —
(128,079)
74,308
216,134
(64,388)
38,204 (126,259) 163,804
(13,431)
3,511
22,881
1,484,863 —
2,266,959 2,048,342
146,149 (4,461,450)
1,484,863
Assets
Cash and cash
equivalents
Trade and other
receivables
Other current financial
assets
Intercompany receivable
Prepaid expenses and
other current assets
Total current assets
Satellites, property and
other equipment
Other long-term
financial assets
Other long-term assets
Intangible assets
Investment in affiliates
Goodwill
Total assets
Liabilities
Trade and other payables
Intercompany payable
Other current financial
liabilities
Other current liabilities
Current indebtedness
Total current liabilities
Long-term indebtedness
Deferred tax liabilities
Other long-term
financial liabilities
Other long-term
liabilities
Senior preferred shares
Total liabilities
Shareholders’ Equity
Share capital
Accumulated earnings
(deficit)
Reserves
Total shareholders’
equity
Total liabilities and
shareholders’ equity 1,663,758 —
6,484,300 2,449,850
151,328 (4,995,380)
5,753,856
F-112
Condensed Consolidating Balance Sheet
As at January 1, 2010
Telesat Holdings
Telesat
LLC Telesat Canada
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries Adjustments
Consolidated
Assets
Cash and cash equivalents
Trade and other
receivables
Other current financial
assets
Intercompany receivable
Prepaid expenses and
other current assets
Total current assets
Satellites, property and
other equipment
Other long-term financial
assets
Other long-term assets
Intangible assets
Investment in affiliates
Goodwill
Total assets
Liabilities
Trade and other payables
Intercompany payable
Other current financial
liabilities
Other current liabilities
Current indebtedness
Total current liabilities
Long-term indebtedness
Deferred tax liabilities
Other long-term financial
liabilities
Other long-term liabilities
Senior preferred shares
Total liabilities
Shareholders’ Equity
Share capital
Accumulated earnings
(deficit)
Reserves
Total shareholders’
equity
Total liabilities and
shareholders’ equity
—
—
137,623
14,232
—
—
51,444
15,591
—
—
—
—
—
—
—
—
101
249,103
267
150,490
14,957
7,967
453,228
188,547
—
154,189
—
70,200
2,334
3,165
6,949
120,038 (519,631 )
—
7,317
—
77
23,001
132,563 (519,631 ) 254,707
—
—
—
1,446,613
449,801
2,484
—
1,898,898
—
—
—
1,371,792
—
1,371,792
—
—
—
—
—
20,545
13,311
886,965
1,346,054
2,078,057
529
5,720
38,570
1,477,459
343,876
—
6,244,773
2,504,502
—
—
—
659
—
386
261 (4,195,566 )
21,733
19,031
925,921
—
24,670
2,446,603
161,023 (4,715,197 ) 5,566,893
—
—
—
—
—
32,059
108,346
6,798
411,285
4,556
—
— (519,631 )
43,413
—
—
—
—
—
—
—
25,090
—
141,435
166,525
—
—
—
—
—
—
—
—
—
100,685
70,523
23,601
1,304
1,093
1
335,214
3,021,820
355,904
420,481
—
(2,266)
214,633
346,705
—
102
16,268
—
—
4,274,276
434,585
135
505
—
102,124
—
72,121
—
23,602
—
5,196 (519,631 ) 241,260
3,021,820
—
353,637
—
—
(1)
—
676
—
—
239,825
—
363,649
141,435
—
5,871 (519,631 ) 4,361,626
1,298,178
—
2,320,730
1,896,596
104,434 (4,321,760 ) 1,298,178
(112,817) —
—
19,906
(430,301 )
80,068
237,247
(63,926)
46,953 146,101
3,765
(19,907 )
(112,817)
19,906
1,205,267
—
1,970,497
2,069,917
155,152 (4,195,566 ) 1,205,267
1,371,792
—
6,244,773
2,504,502
161,023 (4,715,197 ) 5,566,893
F-113
Condensed Consolidating Statement of Cash Flow
For the year ended December 31, 2011
Telesat
Holdings
Telesat
LLC Telesat Canada
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries Adjustments
Consolidated
Cash flows from (used in) operating
activities
Net income (loss)
Adjustments to reconcile net income
(loss) to cash flows from operating
activities:
Amortization and depreciation
Deferred tax expense (benefit)
Unrealized foreign exchange
loss (gain)
Unrealized gain on derivatives
Dividends on senior preferred
shares
Share-based compensation
Income (loss) from equity
investments
Loss on disposal of assets
Impairment loss on intangible
assets
Insurance proceeds
Other
Customer prepayments on
future satellite services
Insurance proceeds
Operating assets and liabilities
Net cash from (used in) operating
activities
Cash flows from (used in) investing
activities
Satellite programs
Purchases of other property and
equipment
Purchase of intangible assets
Insurance proceeds
Proceeds from sale of assets
Business acquisitions
Dividends received
237,275
—
247,144
(42,924)
(329 )
(203,891 )
237,275
—
—
—
—
—
—
—
—
1,650
—
—
—
(247,144 )
—
—
—
—
—
—
—
—
—
—
—
(2,075 )
—
—
—
189,061
52,099
66,375
(87,914)
—
2,073
40,204
588
18,368
(135,019)
(28,167)
50,170
(145)
4,045
—
—
383
3,049
879
1,100
—
(2,876)
55,268
11,228
1,944
2,500
—
(15,262)
416
(100 )
—
—
239,647
51,854
(2,714 )
—
—
—
67,706
(87,914 )
—
198
—
—
—
16
203,891
—
1,650
2,654
—
1,483
—
—
242
—
—
2,280
—
—
—
19,468
(135,019 )
(30,801 )
—
—
—
57,768
11,228
(13,113 )
(10,294 )
—
433,252
919
9
—
423,886
—
—
(302,193)
(54,006)
—
—
(356,199 )
—
—
—
—
—
—
—
—
—
—
—
—
(16,137)
—
135,019
148
(9,264)
8,633
(1,374)
(12,618)
—
—
9,264
—
(55 )
—
—
—
—
—
—
—
—
—
—
(8,633 )
(17,566 )
(12,618 )
135,019
148
—
—
Net cash used in investing activities
—
—
(183,794)
(58,734)
(55 )
(8,633 )
(251,216 )
Cash flows from (used in) financing
activities
Repayment of indebtedness
Dividends paid on preferred shares
Satellite performance incentive
payments
Intercompany loan
Dividends paid
Net cash from (used in) financing
activities
Effect of changes in exchange rates on
cash and cash equivalents
Increase (decrease) in cash and cash
equivalents
Cash and cash equivalents, beginning
of year
Cash and cash equivalents, end of
year
—
(10 )
—
—
—
10,304
—
—
—
—
(108,741)
—
(5,928)
(74,634)
—
—
—
—
64,330
(8,633)
—
—
—
—
—
—
—
(108,741 )
(10 )
—
—
8,633
(5,928 )
—
—
10,294
—
(189,303)
55,697
—
8,633
(114,679 )
—
—
—
(363)
39
—
(324 )
—
—
60,155
(2,481)
(7 )
—
57,667
—
—
196,682
21,135
2,478
—
220,295
—
—
256,837
18,654
2,471
—
277,962
F-114
Condensed Consolidating Statement of Cash Flow
For the year ended December 31, 2010
Telesat
Holdings
Telesat
LLC Telesat Canada
Guarantor
Subsidiaries
Non-guarantor
Subsidiaries Adjustments
Consolidated
Cash flows from operating
activities
Net income (loss)
Adjustments to reconcile net income
(loss) to cash flows from
operating activities:
Amortization and
depreciation
Deferred tax expense
Unrealized foreign exchange
(gain) loss
Unrealized loss on
derivatives
Dividends on senior
preferred shares
Share-based compensation
(Income) loss from equity
investments
Gain on disposal of assets
Reversal of impairment loss
on intangible assets
Reversal of impairment loss
on satellites, property and
other equipment
Other
Customer prepayments on future
satellite services
Operating assets and liabilities
Net cash from operating activities
Cash flows used in investing
activities
Satellite programs
Purchase of other property and
equipment
Proceeds from sale of assets
Other
Net cash used in investing
activities
Cash flows from (used in)
financing activities
Repayment of indebtedness
Dividends paid on preferred shares
Satellite performance incentive
payments
Dividends paid
Net cash from (used in) financing
activities
Effect of changes in exchange rates
on cash and cash equivalents
Increase in cash and cash
equivalents
Cash and cash equivalents,
beginning of year
Cash and cash equivalents, end of
year
286,101
—
298,439
(53,360 )
(8,749 )
(236,330 )
286,101
—
—
—
—
195,287
63,277
51,822
146
542
429
—
—
247,651
63,852
—
—
(168,787 )
(7,502 )
6,273
—
(170,016 )
—
—
13,955
2,075
—
—
—
—
3,691
—
—
635
—
—
13,955
—
341
—
—
2,075
4,667
(298,439)
—
—
—
30,096
(3,754 )
32,013
(72 )
—
—
236,330
—
—
(3,826 )
—
—
(71,269 )
—
—
—
(71,269 )
—
—
(24,600 )
—
10,293
30
—
—
—
30,982
(44,971 )
322,346
(7,923 )
(315 )
—
2,867
18,311
(15 )
—
(7,923 )
(24,930 )
—
1,996
817
—
—
—
30,982
(29,815 )
341,504
—
—
(257,725 )
—
—
—
(257,725 )
—
—
—
—
—
—
(2,299 )
26,782
10,000
(1,556 )
144
—
(111 )
—
—
—
—
(10,000 )
(3,966 )
26,926
—
—
—
(223,242 )
(1,412 )
(111 )
(10,000 )
(234,765 )
—
(30)
—
—
—
—
—
—
(34,946 )
—
—
—
(5,099 )
—
—
(10,000 )
—
—
—
—
—
—
(34,946 )
(30 )
—
10,000
(5,099 )
—
(30)
—
(40,045 )
(10,000 )
—
10,000
(40,075 )
—
—
—
4
(562 )
—
(558 )
—
—
59,059
6,903
144
—
66,106
—
—
137,623
14,232
2,334
—
154,189
—
—
196,682
21,135
2,478
—
220,295
F-115
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.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Loral Space & Communications Inc.;
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.
February 28, 2012
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
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.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Loral Space & Communications Inc.;
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.
February 28, 2012
/s/ HARVEY B. REIN
Harvey B. Rein
Senior Vice President and Chief Financial Officer
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, 2011 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.
February 28, 2012
/s/ MICHAEL B. TARGOFF
Michael B. Targoff
Chief Executive Officer
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, 2011 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.
February 28, 2012
/s/ HARVEY B. REIN
Harvey B. Rein
Senior Vice President and Chief Financial Officer