NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Organization and Principal Business
Loral
Space & Communications Inc., together with its subsidiaries (“Loral,” the “Company,” “we,”
“our” and “us”) is a leading satellite communications company engaged, through our ownership interests
in affiliates, in satellite-based communications services.
Description
of Business
Loral
has one operating segment consisting of satellite-based communications services. Loral participates in satellite services operations
primarily through its ownership interest in Telesat Canada (“Telesat”), a leading global satellite operator. Loral
holds a 62.7% economic interest and a 32.6% voting interest in Telesat. We use the equity method of accounting for our ownership
interest in Telesat (see Note 5).
Telesat
owns and leases a satellite fleet that operates in geostationary 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. On July 22, 2018, Telesat
successfully launched a geostationary satellite, Telstar 19 VANTAGE, which entered commercial service in August 2018. On September
10, 2018, Telesat successfully launched another geostationary satellite, Telstar 18 VANTAGE, which entered commercial service
in October 2018. Telesat is also developing a global constellation of low earth orbit (“LEO”) satellites. LEO satellites
operate in a circular orbit around the earth with an altitude typically between 500 and 870 miles. Unlike geostationary orbit
satellites that operate in a fixed orbital location above the equator, LEO satellites travel around the earth at high velocities
requiring antennas on the ground to track their movement. LEO satellite systems have the potential to offer a number of advantages
over geostationary orbit satellites to meet growing requirements for broadband services, both consumer and commercial, by providing
increased data speeds and capacity, global coverage, and latency on par with, or potentially better than, terrestrial services.
2.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities
and Exchange Commission (“SEC”) and, in our opinion, include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of results of operations, financial position and cash flows as of the balance sheet dates presented
and for the periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been
condensed or omitted pursuant to SEC rules. We believe that the disclosures made are adequate to keep the information presented
from being misleading. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative
of the results to be expected for the full year.
The
December 31, 2017 balance sheet has been derived from the audited consolidated financial statements at that date. These condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in
our latest Annual Report on Form 10-K filed with the SEC.
Discontinued
Operations
On
November 2, 2012, pursuant to the purchase agreement (the “Purchase Agreement”), dated as of June 26, 2012, as amended
on October 30, 2012 and March 28, 2013, by and among Loral, Space Systems/Loral, LLC (formerly known as Space Systems/Loral, Inc.)
(“SSL”), MacDonald, Dettwiler and Associates Ltd. (“MDA”) and MDA Communications Holdings, Inc. (“MDA
Holdings”), a subsidiary of MDA, Loral completed the sale of SSL (the “SSL Sale”), its wholly-owned subsidiary,
to MDA Holdings.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest
and other expenses that are directly related to the SSL Sale are classified as discontinued operations in the statements of operations
for the three and nine months ended September 30, 2018 and 2017.
Investments
in Affiliates
Our
ownership interest in Telesat is accounted for using the equity method of accounting. Income and losses of Telesat are recorded
based on our economic interest. Our equity in net income or loss of Telesat also reflects amortization of profits eliminated,
to the extent of our economic interest in Telesat, on satellites we constructed for them while we owned SSL and on Loral’s
sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets. Non-refundable cash
distributions received from Telesat in excess of our initial investment and our share of cumulative equity in comprehensive income
of Telesat, net of cash distributions received in prior periods, are recorded as equity in net income of Telesat (“Excess
Cash Distribution”) since we have no obligation to provide future financial support to Telesat. After receiving an Excess
Cash Distribution, we do not record additional equity in net income of Telesat until our share of Telesat’s future net income
exceeds the Excess Cash Distribution. Equity in losses of affiliates is not recognized after the carrying value of an investment,
including advances and loans, has been reduced to zero, unless guarantees or other funding obligations exist. We had no guarantees
or other funding obligations for our equity method investments as of September 30, 2018 and December 31, 2017. We use the nature
of distribution approach to classify distributions from equity method investments on the statements of cash flows. The Company
monitors its equity method investments for factors indicating other-than-temporary impairment. An impairment loss is recognized
when there has been a loss in value of the affiliate that is other-than-temporary.
Use
of Estimates in Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the amount of income (loss) reported for the period. Actual results could materially differ from estimates.
Significant
estimates also included the allowances for doubtful accounts, income taxes, including the valuation of deferred tax assets, the
fair value of liabilities indemnified, the dilutive effect of Telesat stock options (see Note 10) and our pension liabilities.
Cash,
Cash Equivalents and Restricted Cash
As
of September 30, 2018, the Company had $248.9 million of cash and cash equivalents. Cash and cash equivalents include liquid investments,
primarily money market funds, with maturities of less than 90 days at the time of purchase. Management determines the appropriate
classification of its investments at the time of purchase and at each balance sheet date.
As
of September 30, 2018 and December 31, 2017, the Company had restricted cash of $0.3 million. The restricted cash of $0.3 million
represents the amount pledged as collateral to the issuer of a standby letter of credit (the “LC”). The LC, which
expires in October 2018 and contains an automatic renewal period of one year, has been provided as a guaranty to the lessor of
our corporate offices.
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated
balance sheet to the condensed consolidated statement of cash flows (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
and cash equivalents
|
|
$
|
248,904
|
|
|
|
255,139
|
|
Restricted cash included
in current assets
|
|
|
304
|
|
|
|
—
|
|
Restricted
cash included in other assets
|
|
|
—
|
|
|
|
304
|
|
Cash,
cash equivalents and restricted cash shown in the statement of cash flows
|
|
$
|
249,208
|
|
|
|
255,443
|
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentration
of Credit Risk
Financial
instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and
receivables. Our cash and cash equivalents are maintained with high-credit-quality financial institutions. As of September 30,
2018 and December 31, 2017, our cash and cash equivalents were invested primarily in several liquid Prime and Government AAA money
market funds. Such funds are not insured by the Federal Deposit Insurance Corporation. The dispersion across funds reduces the
exposure of a default at any one fund. As a result, management believes that its potential credit risks are minimal.
Fair
Value Measurements
U.S.
GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability
in the principal or most advantageous market in an orderly transaction between market participants. U.S. GAAP also establishes
a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The
three levels of the fair value hierarchy are described below:
Level
1:
Inputs represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded
in active markets at the measurement date.
Level
2:
Inputs represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not active, model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the
assets or liabilities, and pricing inputs, other than quoted prices in active markets included in Level 1, which are either directly
or indirectly observable as of the reporting date.
Level
3:
Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants
would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include
option pricing models, discounted cash flow models, and similar techniques.
Assets
and Liabilities Measured at Fair Value
The
following table presents our assets and liabilities measured at fair value on a recurring and non-recurring basis (in thousands):
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
247,237
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
251,742
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification -
Sale of SSL
|
|
|
—
|
|
|
|
—
|
|
|
|
2,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,410
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification -
Globalstar do Brasil S.A.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293
|
|
The
carrying amount of money market funds approximates fair value as of each reporting date because of the short maturity of those
instruments.
The
Company did not have any non-financial assets or non-financial liabilities that were recognized or disclosed at fair value as
of September 30, 2018 and December 31, 2017.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED 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.
The
asset resulting from the indemnification of SSL is for certain pre-closing taxes and reflects the excess of payments since inception
over the estimated liability, which was originally determined using the fair value objective approach. The estimated liability
for indemnifications relating to Globalstar do Brasil S.A. (“GdB”), originally determined using expected value analysis,
is net of payments since inception.
Contingencies
Contingencies
by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability
has been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs relating to litigation, claims
and other contingent matters when such liabilities become probable and reasonably estimable. Such estimates may be based on advice
from third parties or on management’s judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and
such differences will be charged to operations in the period in which the final determination of the liability is made.
Income
Taxes
Loral
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 benefit of an uncertain tax position (“UTP”) taken or expected to be taken in income tax returns is 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 benefit recognized in the financial statements from such a position is measured based
on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company
recognizes interest and penalties related to income taxes in income tax expense on a quarterly basis.
The
unrecognized tax benefit of a UTP is recognized in the period when the UTP is effectively settled. A previously recognized tax
position is derecognized in the first period in which it is no longer more likely than not that such tax position would be sustained
upon examination.
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 unvested or unconverted restricted stock units. For diluted earnings per share, earnings are adjusted for the dilutive effect
of Telesat stock options.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent
Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework –
Changes to the Disclosure Requirements for Defined Benefit Plans.
The amendments in ASU No. 2018-14 remove certain disclosures
that are no longer considered cost beneficial, clarify the specific requirements of certain disclosures, and add disclosure requirements
identified as relevant to improve effectiveness of disclosures related to employer sponsored defined benefit or other postretirement
plans. The new guidance is effective for the Company on January 1, 2021, with earlier application permitted in any interim or
annual period. The amendments in this ASU are to be applied on a retrospective basis to all periods presented. The Company is
currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.
ASU No. 2018-13 eliminates, amends, and adds disclosure requirements to
improve the effectiveness of fair value measurement disclosures. The new guidance is effective for the Company on January 1, 2020,
with earlier application permitted in any interim or annual period. Companies may also choose to early adopt the eliminated and
amended disclosures and wait to adopt the new disclosures until the effective date of the new guidance. While certain amendments
are to be applied prospectively, all other amendments are to be applied retrospectively to all periods presented. The Company
is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
In
February 2018, the FASB issued ASU No. 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income
. On December 22, 2017, Public Law 115-97, known as the “Tax Cuts and Jobs Act” was signed into law. Among
other things, the Tax Cuts and Jobs Act permanently reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent
effective for tax years commencing January 1, 2018. According to ASU 2018-02, an entity may elect either to (a) reclassify from
accumulated other comprehensive income (loss) to retained earnings the stranded income tax effects of the federal tax rate change
(the “Reclassification”) or (b) provide certain disclosures. The new guidance is effective for the Company on January
1, 2019, with earlier adoption permitted in any interim or annual period. The amendments in this update are to be applied either
in the period of adoption or retrospectively to each period in which the effect of the tax rate change is recognized. The Company
early adopted the new guidance in the fourth quarter of 2017 and elected the Reclassification approach. As a result of adopting
the new guidance, we reclassified $4.5 million of stranded deferred federal income tax benefits from accumulated other comprehensive
loss to accumulated deficit in the fourth quarter of 2017 related to the change in the federal corporate income tax rate.
In
March 2017, the FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost
. ASU No. 2017-07, as it applies to the Company, amended the presentation of net periodic pension and postretirement
cost (i.e. net benefit cost). The new guidance requires the service cost component to be presented separate from the non-service
cost components of net benefit cost. While the service cost will be presented with other employee compensation costs within operations,
the non-service cost components of net benefit cost, such as interest cost, amortization of prior service cost, and gains or losses,
are required to be separately presented outside of operations, if income or loss from operations is presented. The guidance, to
be applied retrospectively, is effective for the Company on January 1, 2018. Adoption of the new guidance on January 1, 2018,
with retrospective effect, required us to restate the condensed consolidated statements of operations and comprehensive income
for the prior-period presented. Accordingly, for the three and nine months ended September 30, 2017, of the net benefit cost of
$0.4 million and $1.2 million, respectively, we reclassified the non-service cost components of $0.2 million and $0.7 million,
respectively, from general and administrative expenses to other expense. Adoption of the new guidance did not affect previously
reported financial position, earnings per share, or cash flows.
In
February 2016, the FASB amended the ASC by creating ASC Topic 842,
Leases
. ASC Topic 842 requires a lessee to record a
right-of-use asset and a lease liability for all leases with a lease term greater than 12 months. The main difference between
previous U.S. GAAP and ASC Topic 842 is the recognition under ASC 842 of lease assets and lease liabilities by lessees for those
leases classified as operating leases under previous U.S. GAAP. The new guidance, effective for the Company on January 1, 2019,
with earlier application permitted, is not expected to have a material effect on our condensed consolidated financial statements.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Additional
Cash Flow Information
The
following represents non-cash activities and supplemental information to the condensed consolidated statements of cash flows (in
thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Non-cash operating items:
|
|
|
|
|
|
|
|
|
Equity
in net income of affiliates
|
|
$
|
(56,734
|
)
|
|
$
|
(183,086
|
)
|
Deferred taxes
|
|
|
(1,237
|
)
|
|
|
26,655
|
|
Depreciation and
amortization
|
|
|
16
|
|
|
|
33
|
|
Amortization
of prior service credit and actuarial loss
|
|
|
797
|
|
|
|
770
|
|
Net non-cash
operating items – continuing operations
|
|
$
|
(57,158
|
)
|
|
$
|
(155,628
|
)
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest
paid – continuing operations
|
|
$
|
17
|
|
|
$
|
22
|
|
Interest
paid – discontinued operations
|
|
$
|
—
|
|
|
$
|
55
|
|
Tax (refunds)
payments, net - continuing operations
|
|
$
|
(55
|
)
|
|
$
|
10,038
|
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.
Accumulated Other Comprehensive Loss
The
components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
|
|
|
|
|
Equity
in
|
|
|
Accumulated
|
|
|
|
|
|
|
Telesat
Other
|
|
|
Other
|
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Benefits
|
|
|
Income
(Loss)
|
|
|
Loss
|
|
Balance, January 1, 2017
|
|
$
|
(14,074
|
)
|
|
$
|
238
|
|
|
$
|
(13,836
|
)
|
Other comprehensive
loss before reclassification
|
|
|
(1,365
|
)
|
|
|
(18,280
|
)
|
|
|
(19,645
|
)
|
Amounts
reclassified from accumulated other comprehensive loss
|
|
|
671
|
|
|
|
—
|
|
|
|
671
|
|
Net current-period other comprehensive
loss
|
|
|
(694
|
)
|
|
|
(18,280
|
)
|
|
|
(18,974
|
)
|
Tax
Cuts and Jobs Act, reclassification of tax effect from accumulated other comprehensive loss to accumulated deficit
|
|
|
(1,686
|
)
|
|
|
(2,782
|
)
|
|
|
(4,468
|
)
|
Balance, December 31, 2017
|
|
|
(16,454
|
)
|
|
|
(20,824
|
)
|
|
|
(37,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income before reclassification
|
|
|
—
|
|
|
|
1,733
|
|
|
|
1,733
|
|
Amounts
reclassified from accumulated other comprehensive loss
|
|
|
629
|
|
|
|
—
|
|
|
|
629
|
|
Net current-period
other comprehensive income
|
|
|
629
|
|
|
|
1,733
|
|
|
|
2,362
|
|
Balance, September 30, 2018
|
|
$
|
(15,825
|
)
|
|
$
|
(19,091
|
)
|
|
$
|
(34,916
|
)
|
The
components of other comprehensive income (loss) and related tax effects are as follows (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
Amortization
of prior service credits and net actuarial loss
|
|
$
|
265
|
(a)
|
|
$
|
(56
|
)
|
|
$
|
209
|
|
|
$
|
257
|
(a)
|
|
$
|
(90
|
)
|
|
$
|
167
|
|
Equity
in Telesat other comprehensive loss
|
|
|
(7,115
|
)
|
|
|
1,496
|
|
|
|
(5,619
|
)
|
|
|
(19,255
|
)
|
|
|
6,732
|
|
|
|
(12,523
|
)
|
Other comprehensive
loss
|
|
$
|
(6,850
|
)
|
|
$
|
1,440
|
|
|
$
|
(5,410
|
)
|
|
$
|
(18,998
|
)
|
|
$
|
6,642
|
|
|
$
|
(12,356
|
)
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
|
Amount
|
|
|
Provision
|
|
|
Amount
|
|
Amortization
of prior service credits and net actuarial loss
|
|
$
|
797
|
(a)
|
|
$
|
(168
|
)
|
|
$
|
629
|
|
|
$
|
770
|
(a)
|
|
$
|
(270
|
)
|
|
$
|
500
|
|
Equity
in Telesat other comprehensive income (loss)
|
|
|
2,194
|
|
|
|
(461
|
)
|
|
|
1,733
|
|
|
|
(24,184
|
)
|
|
|
8,469
|
|
|
|
(15,715
|
)
|
Other comprehensive
income (loss)
|
|
$
|
2,991
|
|
|
$
|
(629
|
)
|
|
$
|
2,362
|
|
|
$
|
(23,414
|
)
|
|
$
|
8,199
|
|
|
$
|
(15,215
|
)
|
|
(a)
|
Reclassifications
are included in other expense.
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4.
Other Current Assets
Other
current assets consists of (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Indemnification receivable
from SSL for pre-closing taxes (see Note 13)
|
|
$
|
2,410
|
|
|
$
|
2,410
|
|
Restricted cash
|
|
|
304
|
|
|
|
—
|
|
Due from affiliates
|
|
|
205
|
|
|
|
217
|
|
Prepaid
expenses
|
|
|
443
|
|
|
|
198
|
|
Other
|
|
|
418
|
|
|
|
274
|
|
|
|
$
|
3,780
|
|
|
$
|
3,099
|
|
5.
Investments in Affiliates
Investments
in affiliates consist of (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Telesat
|
|
$
|
84,363
|
|
|
$
|
53,430
|
|
Equity
in net income of affiliates consists of (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Telesat
|
|
$
|
55,095
|
|
|
$
|
43,372
|
|
|
$
|
56,734
|
|
|
$
|
183,086
|
|
Telesat
As
of September 30, 2018 and December 31, 2017, we held a 62.7% economic interest and a 32.6% voting interest in Telesat. We use
the equity method of accounting for our majority economic interest in Telesat because we own 32.6% of the voting stock and do
not exercise control by other means to satisfy the U.S. GAAP requirement for treatment as a consolidated subsidiary. We have also
concluded that Telesat is not a variable interest entity for which we are the primary beneficiary. Loral’s equity in net
income or loss of Telesat is based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S.
dollars. Our proportionate share of Telesat’s net income or loss is based on our economic interest as our holdings consist
of common stock and non-voting participating preferred shares that have all the rights of common stock with respect to dividends,
return of capital and surplus distributions, but have no voting rights.
In
addition to recording our share of equity in net income of Telesat, we also recorded our share of equity in other comprehensive
income of Telesat of $2.2 million for the nine months ended September 30, 2018.
On
January 1, 2018, Telesat adopted ASC 606,
Revenue from Contracts with Customers,
for its U.S. GAAP reporting which we use
to record our equity income in Telesat. Telesat adopted the new standard using the modified retrospective approach with a cumulative
effect adjustment to reduce Telesat’s retained earnings by $44.6 million. As a result, we recorded our share of the cumulative
effect adjustment by reducing our investment in Telesat by $28.0 million, increasing our deferred tax assets by $5.9 million and
increasing our accumulated deficit by $22.1 million. Comparative summary financial data of Telesat presented below has not been
restated and continues to be reported under the accounting standards in effect for those periods presented.
For
the three months ended September 30, 2017, our share of equity in net income of Telesat, including elimination of affiliate transactions
and related amortization, was $82.4 million. In the first quarter of 2017, we received a $242.7 million cash distribution from
Telesat. As of June 30, 2017, the cash distribution we received from Telesat exceeded our initial investment and our share of
cumulative equity in comprehensive income of Telesat, net of cash distributions received from Telesat in prior periods, by $39.0
million which we recognized as additional equity income during the six months ended June 30, 2017. For the three months ended
September 30, 2017, we reduced our share of Telesat’s net income, including elimination of affiliate transactions and related
amortization, of $82.4 million by the $39.0 million excess cash distribution resulting in the recognition of equity in net income
of Telesat of $43.4 million.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On
January 1, 2018, Telesat adopted ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Costs,
for its U.S. GAAP reporting. Comparative summary financial data of Telesat presented below has
been restated as the new guidance is to be applied retrospectively. Adoption of the new guidance did not affect Telesat’s
previously reported financial position or net income.
In
February 2017, Telesat amended its senior secured credit facilities. The amendment to the senior secured credit facilities reduced
the applicable margin on the term loan B – U.S. facility (“U.S. TLB Facility”) from 3.75% to 3.0%.
In
March 2018, Telesat made a $50 million voluntary payment on the U.S. TLB Facility.
In
April 2018, Telesat amended the senior secured credit facilities, resulting in a reduction of the margin on the U.S. TLB
Facility to 2.5% from 3.0%.
The
ability of Telesat to pay dividends or certain other restricted payments in cash to Loral is governed by applicable covenants
in Telesat’s debt and shareholder agreements. Telesat’s credit agreement governing its senior secured credit facilities
limits, among other items, Telesat’s ability to incur debt and make dividend payments if the total leverage ratio (“Total
Leverage Ratio”) is above 4.50:1.00, with certain exceptions. As of September 30, 2018, Telesat’s Total Leverage Ratio
was 4.53:1.00. Telesat is, however, permitted to pay annual consulting fees of $5.0 million to Loral in cash (see Note 14).
The
contribution of Loral Skynet, a wholly owned subsidiary of Loral prior to its contribution to Telesat in 2007, was recorded by
Loral at the historical book value of our retained interest combined with the gain recognized on the contribution. However, the
contribution was recorded by Telesat at fair value. Accordingly, the amortization of Telesat fair value adjustments applicable
to the Loral Skynet assets and liabilities is proportionately eliminated in determining our share of the net income or losses
of Telesat. Our equity in net income or loss of Telesat also reflects amortization of profits eliminated, to the extent of our
economic interest in Telesat, on satellites we constructed for Telesat while we owned SSL and on Loral’s sale to Telesat
in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets.
The
following table presents summary financial data for Telesat in accordance with U.S. GAAP, for the three and nine months ended
September 30, 2018 and 2017 and as of September 30, 2018 and December 31, 2017 (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
174,010
|
|
|
$
|
170,151
|
|
|
$
|
522,990
|
|
|
$
|
514,800
|
|
Operating expenses
|
|
|
(34,268
|
)
|
|
|
(34,101
|
)
|
|
|
(91,804
|
)
|
|
|
(112,876
|
)
|
Depreciation, amortization and stock-based
compensation
|
|
|
(47,946
|
)
|
|
|
(49,741
|
)
|
|
|
(144,732
|
)
|
|
|
(145,875
|
)
|
Other operating
income (expense)
|
|
|
848
|
|
|
|
(204
|
)
|
|
|
835
|
|
|
|
(220
|
)
|
Operating income
|
|
|
92,644
|
|
|
|
86,105
|
|
|
|
287,289
|
|
|
|
255,829
|
|
Interest expense
|
|
|
(43,063
|
)
|
|
|
(37,901
|
)
|
|
|
(130,671
|
)
|
|
|
(111,765
|
)
|
Foreign exchange gain (loss)
|
|
|
42,784
|
|
|
|
103,099
|
|
|
|
(66,294
|
)
|
|
|
193,259
|
|
(Loss) gain on financial instruments
|
|
|
(202
|
)
|
|
|
(6,542
|
)
|
|
|
30,414
|
|
|
|
(17,471
|
)
|
Other income
|
|
|
3,204
|
|
|
|
1,531
|
|
|
|
7,795
|
|
|
|
1,305
|
|
Income tax provision
|
|
|
(7,605
|
)
|
|
|
(16,114
|
)
|
|
|
(39,190
|
)
|
|
|
(35,571
|
)
|
Net income
|
|
$
|
87,762
|
|
|
$
|
130,178
|
|
|
$
|
89,343
|
|
|
$
|
285,586
|
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
576,052
|
|
|
$
|
445,104
|
|
Total assets
|
|
|
4,054,930
|
|
|
|
4,082,472
|
|
Current liabilities
|
|
|
157,103
|
|
|
|
126,100
|
|
Long-term debt, including current portion
|
|
|
2,764,075
|
|
|
|
2,829,911
|
|
Total liabilities
|
|
|
3,474,619
|
|
|
|
3,538,656
|
|
Shareholders’ equity
|
|
|
580,311
|
|
|
|
543,816
|
|
Other
We
own 56% of XTAR, a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of Spain. We account
for our ownership interest in XTAR under the equity method of accounting because we do not control certain of its significant
operating decisions. We have also concluded that XTAR is not a variable interest entity for which we are the primary beneficiary.
As of September 30, 2018 and December 31, 2017, the carrying value of our investment in XTAR was zero. Beginning January 1, 2016,
we discontinued providing for our allocated share of XTAR’s net losses as our investment was reduced to zero and we have
no commitment to provide further financial support to XTAR.
XTAR
owns and operates an X-band satellite, XTAR-EUR, located at 29° E.L., which is designed to provide X-band communications services
exclusively to United States, Spanish and allied government users throughout the satellite’s coverage area, including Europe,
the Middle East and Asia. XTAR also leases 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L., owned
by Hisdesat. These transponders, designated as XTAR-LANT, provide capacity to XTAR for additional X-band services and greater
coverage and flexibility.
As
of September 30, 2018 and December 31, 2017, the Company also held an indirect ownership interest in a foreign company that currently
serves as the exclusive service provider for Globalstar service in Mexico. The Company accounts for this ownership interest using
the equity method of accounting. Loral has written-off its investment in this company, and, because we have no future funding
requirements relating to this investment, there is no requirement for us to provide for our allocated share of this company’s
net losses.
6.
Other Current Liabilities
Other
current liabilities consists of (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Due to affiliate
|
|
|
443
|
|
|
|
9
|
|
Accrued professional fees
|
|
|
1,691
|
|
|
|
1,117
|
|
Pension and other postretirement liabilities
|
|
|
69
|
|
|
|
69
|
|
Accrued liabilities
|
|
|
59
|
|
|
|
84
|
|
|
|
$
|
2,262
|
|
|
$
|
1,279
|
|
7.
Income Taxes
The
following summarizes our income tax provision (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current income tax provision
|
|
$
|
(863
|
)
|
|
$
|
(1,592
|
)
|
|
$
|
(2,251
|
)
|
|
$
|
(55,581
|
)
|
Deferred income
tax (provision) benefit
|
|
|
(5,806
|
)
|
|
|
(14,960
|
)
|
|
|
1,237
|
|
|
|
(26,655
|
)
|
Income tax provision
|
|
$
|
(6,669
|
)
|
|
$
|
(16,552
|
)
|
|
$
|
(1,014
|
)
|
|
$
|
(82,236
|
)
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For
the nine month periods ended September 30, 2018 and 2017, our income tax provision is computed by applying an expected effective
annual tax rate against the pre-tax results for each period (after adjusting for certain tax items that are discrete to each period).
For the three month periods ended September 30, 2018 and 2017, this amount is then reduced by the tax benefit (provision) recorded
for the six month periods ended June 30, 2018 and 2017, respectively. The current income tax provision for each period includes
our anticipated income tax liability related to distributions received or deemed to be received from Telesat. The deferred income
tax (provision) benefit for each period includes the impact of equity in net income of affiliates from our condensed consolidated
statement of operations.
In
accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118,
Income Tax- Accounting Implication
of the Tax Cuts and Job Act
(SAB 118), we recognized the preliminary income tax effects of the Tax Cuts and Jobs Act in our
consolidated financial statements for the year ended December 31, 2017. The preliminary effect previously recorded may change
in the future due to revisions in the interpretation of the Tax Cuts and Jobs Act or legislative action to clarify interpretation
of the Tax Cuts and Jobs Act. The Company expects to finalize the effect of the Tax Cuts and Jobs Act and complete its accounting
by December 31, 2018.
In addition to reducing
the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018, the Tax Cuts and Jobs Act included
new Global Intangible Low-Taxed Income (“GILTI”) provisions effective for the first time during 2018 which require
the Company to currently include in U.S. federal taxable income certain earnings of controlled foreign corporations, including
Telesat. The GILTI provisions provided an incremental tax benefit of approximately $5.7 million and $12.5 million for the three
and nine months ended September 30, 2018, respectively.
Subsequent
to the SSL Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining
net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment in order
to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
The
following summarizes amounts for UTPs included in our income tax provision (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current provision for UTPs
|
|
$
|
(791
|
)
|
|
$
|
(704
|
)
|
|
$
|
(2,018
|
)
|
|
$
|
(2,069
|
)
|
Deferred benefit
for UTPs
|
|
|
167
|
|
|
|
226
|
|
|
|
425
|
|
|
|
701
|
|
Tax provision
for UTPs
|
|
$
|
(624
|
)
|
|
$
|
(478
|
)
|
|
$
|
(1,593
|
)
|
|
$
|
(1,368
|
)
|
As
of September 30, 2018, we had unrecognized tax benefits relating to UTPs of $70 million. The Company recognizes interest and penalties
related to income taxes in income tax expense on a quarterly basis. As of September 30, 2018, we have accrued no penalties and
approximately $9.2 million for the potential payment of tax-related interest.
With
few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for
years prior to 2012. Earlier years related to certain foreign jurisdictions remain subject to examination. To the extent allowed
by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried
forward, and make adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax
assessments for uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve
months, the statute of limitations for assessment of additional tax will expire with regard to certain UTPs related to our federal
income tax return filed for 2012, potentially resulting in the recognition of $27.3 million of previously unrecognized tax
benefits. Pursuant to the Purchase Agreement for the SSL Sale, we are obligated to indemnify SSL for taxes related to periods
prior to the closing of the transaction.
The
following summarizes the changes to our liabilities for UTPs included in other liabilities in the condensed consolidated balance
sheets (in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Liabilities for UTPs:
|
|
|
|
|
|
|
|
|
Opening balance — January 1
|
|
$
|
61,182
|
|
|
$
|
68,658
|
|
Current provision
for potential additional interest
|
|
|
2,018
|
|
|
|
2,069
|
|
Ending balance
|
|
$
|
63,200
|
|
|
$
|
70,727
|
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As
of September 30, 2018, if our positions are sustained by the taxing authorities, the Company’s income tax provision from
continuing operations would be reduced by approximately $46.9 million. Other than as described above, there were no significant
changes to our UTPs during the nine months ended September 30, 2018 and 2017, and we do not anticipate any other significant changes
to our unrecognized tax benefits during the next twelve months.
8.
Other Liabilities
Other
liabilities consists of (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Indemnification liabilities
- other (see Note 13)
|
|
|
190
|
|
|
|
293
|
|
Liabilities for
uncertain tax positions
|
|
|
63,200
|
|
|
|
61,182
|
|
|
|
$
|
63,390
|
|
|
$
|
61,475
|
|
9.
Stock-Based Compensation
Stock
Plans
The
Loral amended and restated 2005 stock incentive plan (the “Stock Incentive Plan”) which allowed for the grant of several
forms of stock-based compensation awards including stock options, stock appreciation rights, restricted stock, restricted stock
units, stock bonuses and other stock-based awards, had a ten-year term and has expired. The Company granted 75,262 restricted
stock units under the Stock Incentive Plan that do not expire and remained unconverted as of September 30, 2018 and December 31,
2017.
10.
Earnings Per Share
Telesat
has awarded employee stock options, which, if exercised, would result in dilution of Loral’s economic ownership interest
in Telesat from 62.7% to approximately 62.3%.
The
following table presents the dilutive impact of Telesat stock options on Loral’s reported income from continuing operations
for the purpose of computing diluted earnings per share (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income from continuing operations
— basic
|
|
$
|
46,219
|
|
|
$
|
24,537
|
|
|
$
|
50,997
|
|
|
$
|
93,724
|
|
Less: Adjustment
for dilutive effect of Telesat stock options
|
|
|
(340
|
)
|
|
|
(713
|
)
|
|
|
(350
|
)
|
|
|
(1,346
|
)
|
Income from continuing
operations — diluted
|
|
$
|
45,879
|
|
|
$
|
23,824
|
|
|
$
|
50,647
|
|
|
$
|
92,378
|
|
Basic
income per share is computed based upon the weighted average number of share of voting and non-voting common stock outstanding.
The following is the computation of common shares outstanding for diluted earnings per share (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average common shares outstanding
|
|
|
30,933
|
|
|
|
30,933
|
|
|
|
30,933
|
|
|
|
30,933
|
|
Unconverted restricted
stock units
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
Common shares
outstanding for diluted earnings per share
|
|
|
31,008
|
|
|
|
31,008
|
|
|
|
31,008
|
|
|
|
31,008
|
|
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11.
Pensions and Other Employee Benefit Plans
The
following tables provide the components of net periodic cost for our qualified retirement plan (the “Pension Benefits”)
and health care and life insurance benefits for retired employees and dependents (the “Other Benefits”) for the three
and nine months ended September 30, 2018
and 2017
(in
thousands):
|
|
Pension
Benefits
|
|
|
Other Benefits
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service
cost
(1)
|
|
$
|
179
|
|
|
$
|
175
|
|
|
$
|
1
|
|
|
$
|
-
|
|
Interest cost
(2)
|
|
|
464
|
|
|
|
490
|
|
|
|
4
|
|
|
|
5
|
|
Expected return on
plan assets
(2)
|
|
|
(657
|
)
|
|
|
(531
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of net
actuarial loss
(2)
|
|
|
260
|
|
|
|
250
|
|
|
|
—
|
|
|
|
1
|
|
Amortization
of prior service credits
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
6
|
|
Net periodic
cost
|
|
$
|
246
|
|
|
$
|
384
|
|
|
$
|
10
|
|
|
$
|
12
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service
cost
(1)
|
|
$
|
536
|
|
|
$
|
526
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
(2)
|
|
|
1,391
|
|
|
|
1,470
|
|
|
|
12
|
|
|
|
14
|
|
Expected return on
plan assets
(2)
|
|
|
(1,971
|
)
|
|
|
(1,593
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of net
actuarial loss
(2)
|
|
|
780
|
|
|
|
749
|
|
|
|
—
|
|
|
|
3
|
|
Amortization
of prior service credits
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
18
|
|
Net periodic
cost
|
|
$
|
736
|
|
|
$
|
1,152
|
|
|
$
|
30
|
|
|
$
|
36
|
|
|
(1)
|
Included
in general and administrative expenses.
|
|
(2)
|
Included
in other expense.
|
12. Financial
Instruments, Derivative Instruments and Hedging
Financial
Instruments
The
carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments.
Foreign
Currency
We
are subject to the risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate
exposure, we attempt to denominate all contracts in U.S. dollars. Where appropriate, derivatives are used to minimize the risk
of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative instruments for trading or
speculative purposes.
Derivatives
and Hedging Transactions
There
were no derivative instruments as of September 30, 2018 and December 31, 2017.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13.
Commitments and Contingencies
Financial
Matters
In
the fourth quarter of 2012, we sold our former subsidiary, SSL, to MDA pursuant to the Purchase Agreement. Under the terms of
the Purchase Agreement, we are obligated to indemnify MDA and its affiliates from liabilities with respect to certain pre-closing
taxes. Our consolidated balance sheets include an indemnification refund receivable of $2.4 million as of September 30, 2018 and
December 31, 2017. This receivable represents payments to date net of the estimated fair value of the liability for our indemnification
for our obligation with respect to certain pre-closing taxes. The final amounts for indemnification claims related to pre-closing
taxes have not yet been determined. Where appropriate, we intend vigorously to contest the underlying tax assessments, but there
can be no assurance that we will be successful. Although no assurance can be provided, we do not believe that these tax-related
matters will have a material adverse effect on our financial position or results of operations.
In
connection with the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their
respective interests in GdB, the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for
certain GdB pre-closing liabilities, primarily related to Brazilian taxes. Our condensed consolidated balance sheets include liabilities
of $0.2 million and $0.3 million as of September 30, 2018 and December 31, 2017, respectively, for indemnification liabilities
relating to the sale of GdB.
See
Note 14 — Related Party Transactions —
Transactions with Affiliates — Telesat
for commitments and contingencies
relating to our agreement to indemnify Telesat for certain liabilities and our other arrangements with Telesat.
Legal
Proceedings
We
are not currently subject to any legal proceedings that, if decided adversely, could have a material adverse effect on our financial
position or results of operations. In the future, however, we may become subject to legal proceedings and claims, either asserted
or unasserted, that may arise in the ordinary course of business or otherwise.
14.
Related Party Transactions
MHR
Fund Management LLC
Mark
H. Rachesky, President of MHR Fund Management LLC (“MHR”), and Janet T. Yeung, a principal and the General Counsel
of MHR, are members of Loral’s board of directors.
Various
funds affiliated with MHR and Dr. Rachesky held, as of September 30, 2018 and December 31, 2017, approximately 39.9% of the outstanding
voting common stock and 58.4% of the combined outstanding voting and non-voting common stock of Loral.
Transactions
with Affiliates
Telesat
As
described in Note 5, we own 62.7% of Telesat and account for our ownership interest under the equity method of accounting.
In
connection with the acquisition of our ownership interest in Telesat (which we refer to as the Telesat transaction), Loral and
certain of its subsidiaries, our Canadian co-owner, Public Sector Pension Investment Board (“PSP”) and one of its
subsidiaries, Telesat and MHR entered into a Shareholders Agreement (the “Shareholders Agreement”). The Shareholders
Agreement provides for, among other things, the manner in which the affairs of Telesat and its subsidiaries will be conducted
and the relationships among the parties thereto and future shareholders of Telesat. The Shareholders Agreement also contains an
agreement by Loral not to engage in a competing satellite communications business and agreements by the parties to the Shareholders
Agreement not to solicit employees of Telesat or any of its subsidiaries. Additionally, the Shareholders Agreement details the
matters requiring the approval of the shareholders of Telesat (including veto rights for Loral over certain extraordinary actions)
and provides for preemptive rights for certain shareholders upon the issuance of certain capital shares of Telesat. The Shareholders
Agreement also (i) restricts the ability of holders of certain shares of Telesat to transfer such shares unless certain conditions
are met or approval of the transfer is granted by the directors of Telesat, (ii) provides for a right of first offer to certain
Telesat shareholders if a holder of equity shares of Telesat wishes to sell any such shares to a third party and (iii) provides
for, in certain circumstances, tag-along rights in favor of shareholders that are not affiliated with Loral if Loral sells equity
shares and drag-along rights in favor of Loral in case Loral or its affiliate enters into an agreement to sell all of its Telesat
equity securities.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In
addition, the Shareholders Agreement provides for either PSP or Loral to initiate the process of conducting an initial public
offering of the equity shares of Telesat (a “Telesat IPO”). In connection with our exploration of strategic initiatives
to alter the status quo in our ownership of Telesat, in July 2015, we exercised our right under the Shareholders Agreement to
require Telesat to conduct a Telesat IPO. Specifically, we requested that Telesat issue not more than 25 million newly issued
shares of Telesat voting common stock. We also requested the termination of the Shareholders Agreement and the elimination of
certain provisions in Telesat’s Articles of Incorporation, both of which we believe are important for a successful public
offering. If those provisions are eliminated, an impediment to the conversion of our non-voting Telesat shares to voting shares
would be eliminated. Termination or modification of the Shareholders Agreement and conversion of our non-voting shares to voting
shares would enable us, after a Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority
voting control of Telesat. To date, we and PSP have not reached agreement on governance matters following a Telesat IPO. In the
event a strategic transaction to combine Loral and Telesat into one public company that we are pursuing is not likely to be achievable
in a timely manner or on satisfactory terms, we may further pursue our right to a Telesat IPO. There can be no assurance as to
whether, when or on what terms a Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes
to Telesat’s Articles of Incorporation may occur or that any particular economic, tax, structural or other objectives or
benefits with respect to a Telesat IPO will be achieved. If a Telesat IPO is expected to proceed under unfavorable terms or at
an unfavorable price, we may withdraw our demand for a Telesat IPO.
Depending
upon the outcome of discussions with PSP relating to Telesat strategic matters, we may assert certain claims against PSP for actions
we believe violated our rights relating to the affairs of Telesat under the Telesat Shareholders Agreement and otherwise. In response
to our claims, PSP has informed us that it believes that it may have claims against us, although we are not aware of the legal
or factual basis for any such claims. We and PSP have agreed that, pending the outcome of our discussions, it would be beneficial
to delay the commencement of any action relating to either party’s claims and have entered into an agreement (the “Tolling
Agreement”) which preserves the parties’ rights to assert against one another legal claims relating to Telesat. We
also included Telesat as a party to the Tolling Agreement because, as a technical matter of Canadian law and for purposes of potentially
seeking equitable relief, Telesat may be a necessary party. There can be no assurance that if the Tolling Agreement lapses that
we and PSP will not pursue legal claims against one another relating to Telesat. If we pursue claims against PSP, there can be
no assurance that our claims will be successful or that the relief we seek will be granted. If PSP pursues claims against us,
there can be no assurance that PSP will not prevail on its claims.
Under
the Shareholders Agreement, in the event that, except in certain limited circumstances, either (i) ownership or control, directly
or indirectly, by Dr. Rachesky of Loral’s voting stock falls below certain levels other than in connection with certain
specified circumstances, including an acquisition by a Strategic Competitor (as defined in the Shareholders Agreement) or (ii)
there is a change in the composition of a majority of the members of the Loral Board of Directors over a consecutive two-year
period without the approval of the incumbent directors, Loral will lose its veto rights relating to certain extraordinary actions
by Telesat and its subsidiaries. In addition, after either of these events, PSP will have certain rights to enable it to exit
from its investment in Telesat, including a right to cause Telesat to conduct an initial public offering in which PSP’s
shares would be the first shares offered or, if no such offering has occurred within one year due to a lack of cooperation from
Loral or Telesat, to cause the sale of Telesat and to drag along the other shareholders in such sale, subject to Loral’s
right to call PSP’s shares at fair market value.
The
Shareholders Agreement provides for a board of directors of Telesat consisting of 10 directors, three nominated by Loral, three
nominated by PSP and four independent directors to be selected by a nominating committee comprised of one PSP nominee, one nominee
of Loral and one of the independent directors then in office. Each party to the Shareholders Agreement is obligated to vote all
of its Telesat shares for the election of the directors nominated by the nominating committee. Pursuant to action by the board
of directors taken on October 31, 2007, Dr. Rachesky, who is non-executive Chairman of the Board of Directors of Loral, was appointed
non-executive Chairman of the Board of Directors of Telesat. In addition, Michael B. Targoff, Loral’s Vice Chairman, serves
on the board of directors of Telesat.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On
October 31, 2007, Loral and Telesat entered into a consulting services agreement (the “Consulting Agreement”). Pursuant
to the terms of the Consulting Agreement, Loral provides to Telesat certain non-exclusive consulting services in relation to the
business of Loral Skynet which was transferred to Telesat as part of the Telesat transaction as well as with respect to certain
aspects of the satellite communications business of Telesat. The Consulting Agreement has a term of seven-years with an automatic
renewal for an additional seven-year term if Loral is not then in material default under the Shareholders Agreement. Upon expiration
of the initial term on October 31, 2014, the Consulting Agreement was automatically renewed for the additional seven-year term.
In exchange for Loral’s services under the Consulting Agreement, Telesat pays Loral an annual fee of $5.0 million, payable
quarterly in arrears on the last day of March, June, September and December of each year during the term of the Consulting Agreement.
Our general and administrative expenses are net of income related to the Consulting Agreement of $1.25 million for each of the
three-month periods ended September 30, 2018 and 2017 and $3.8 million for each of the nine-month periods ended September 30,
2018 and 2017, respectively. For each of the nine-month periods ended September 30, 2018 and 2017, Loral received payments in
cash from Telesat, net of withholding taxes, of $3.6 million for consulting fees.
In
connection with the acquisition of our ownership interest in Telesat in 2007, Loral retained the benefit of tax recoveries related
to the transferred assets and indemnified Telesat (“Telesat Indemnification”) for certain liabilities, including Loral
Skynet’s tax liabilities arising prior to January 1, 2007. The Telesat Indemnification includes certain tax disputes currently
under review in various jurisdictions including Brazil. The Brazilian tax authorities challenged Loral Skynet’s historical
characterization of its revenue generated in Brazil for the years 2003 to 2006. Telesat received and challenged, on Loral Skynet’s
behalf, tax assessments from Brazil totaling approximately $0.8 million. The Company believes that Loral Skynet’s filing
position will ultimately be sustained requiring no payment under the Telesat Indemnification. There can be no assurance that there
will be no future claims under the Telesat Indemnification related to tax disputes.
Loral’s
employees and retirees participate in certain welfare plans sponsored or managed by Telesat. Loral pays Telesat an annual administrative
fee of $0.1 million and reimburses Telesat for the plan costs attributable to Loral participants.
Loral, along with Telesat,
PSP and 4440480 Canada Inc., an indirect wholly-owned subsidiary of Loral (the “Special Purchaser”), entered into grant
agreements (the “Grant Agreements”) with certain executives of Telesat (each, a “Participant” and collectively,
the “Participants”). Each of the Participants is or was, at the time, an executive of Telesat.
The Grant Agreements
confirm grants of Telesat stock options (including tandem SAR rights) to the Participants and provide for certain rights, obligations
and restrictions related to such stock options, which include, among other things: (w) the possible obligation of the Special
Purchaser to purchase the shares in the place of Telesat should Telesat be prohibited by applicable law or under the terms of
any credit agreement applicable to Telesat from purchasing such shares, or otherwise default on such purchase obligation, pursuant
to the terms of the Grant Agreements; and (x) the obligation of the Special Purchaser to purchase shares upon exercise by Telesat
of its call right under Telesat's Management Stock Incentive Plan in the event of a Participant’s termination of employment;
and, in the case of certain executives, (y) the right of each such Participant to require the Special Purchaser or Loral to purchase
a portion of the shares in Telesat owned by him in the event of exercise after termination of employment to cover taxes that are
greater than the minimum withholding amount; and (z) the right of each such Participant to require Telesat to cause the Special
Purchaser or Loral to purchase a portion of the shares in Telesat owned by him, or that are issuable to him under Telesat's Management
Stock Incentive Plan at the relevant time, in the event that more than 90% of Loral's common stock is acquired by an unaffiliated
third party that does not also purchase all of PSP's and its affiliates' interest in Telesat.
LORAL
SPACE & COMMUNICATIONS INC.
NOTES
TO CONDENSED 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, with Telesat agreeing to the acquisition of such subsidiary by Telesat from the Special Purchaser for
nominal consideration and with the purchase price for the shares being paid by Telesat within ten (10) business days after completion
of the winding-up of such subsidiary into Telesat.
In
the first quarter of 2017, Loral received a $242.7 million cash distribution from Telesat (see Note 5).
Other
As
described in Note 5, we own 56% of XTAR, a joint venture between Loral and Hisdesat and account for our investment in XTAR under
the equity method of accounting. SSL constructed XTAR’s satellite, which was successfully launched in February 2005. XTAR
and Loral have entered into a management agreement whereby Loral provides general and specific services of a technical, financial
and administrative nature to XTAR. For the services provided by Loral, XTAR, until December 31, 2013, was charged a quarterly
management fee equal to 3.7% of XTAR’s quarterly gross revenues. Amounts due to Loral primarily due to the management agreement
were $6.8 million as of September 30, 2018 and December 31, 2017. 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 its payables owed to Loral, as well as to Hisdesat and Telesat. No cash was received under this agreement
for the nine months ended September 30, 2018 and 2017, and we had an allowance of $6.6 million against receivables from XTAR as
of September 30, 2018 and December 31, 2017. Loral and Hisdesat have agreed to waive future management fees for an indefinite
period starting January 1, 2014.
Consulting
Agreement
On
December 14, 2012, Loral entered into a consulting agreement with Michael B. Targoff, Vice Chairman of the Company and former
Chief Executive Officer and President. Pursuant to this agreement, Mr. Targoff is engaged as a part-time consultant to the Board
to assist the Board with respect to the oversight of strategic matters relating to Telesat and XTAR. Under the agreement, Mr.
Targoff receives consulting fees of $120,000 per month and reimburses the Company for certain expenses. For each of the three
and nine month periods ended September 30, 2018 and 2017, Mr. Targoff earned $360,000 and $1,080,000 respectively, in consulting
fees. For each of the three months ended September 30, 2018 and 2017, Mr. Targoff reimbursed Loral net expenses of $11,250 and
for the nine months ended September 30, 2018 and 2017, Mr. Targoff reimbursed Loral net expenses of $33,750 and $42,750, respectively.