UNITED STATES SECURITIES AND EXCHANGE
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14180
Successor registrant to
Jurisdiction of incorporation: Delaware
IRS identification number: 87-0748324
600 Third Avenue
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common stock, $.01 par value | NASDAQ |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act). Yes o No þ
On November 21, 2005, the predecessor registrant’s common stock, par value $0.10 per share, was cancelled and the registrant issued 20,000,000 shares of common stock, par value $0.01 per share. At March 1, 2006, 20,000,000 common shares of the registrant were outstanding.
As of March 1, 2006, the aggregate market value of the common stock, the only voting stock of the registrant currently issued and outstanding, held by non-affiliates of the registrant, was approximately $345,148,182.
Indicate by a check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o
PART I
Item 1. | Business |
THE COMPANY
Overview
Loral Space & Communications Inc. (“New Loral”) together with its subsidiaries is a leading satellite communications company with substantial activities in satellite-based communications services and satellite manufacturing. New Loral was formed to succeed the business conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal bankruptcy laws on November 21, 2005 (the “Effective Date”).
We adopted fresh start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7,Financial Reporting of Entities in Reorganization Under the Bankruptcy Code(“SOP 90-7”). Accordingly, our financial information disclosed under the heading “Successor Registrant” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not comparable to, our financial information disclosed under the heading “Predecessor Registrant” for the period ended and as of October 1, 2005 (the date we adopted fresh start accounting) or for prior periods.
The terms, “Loral”, the “Company,” “we,” “our,” and “us,” when used in this report with respect to the period prior to our emergence from Chapter 11, are references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New Loral. These references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context otherwise requires.
Loral is organized into two operating segments:
Satellite Services, conducted by our subsidiary Loral Skynet Corporation (“Loral Skynet”), generates its revenues and cash flows from leasing satellite capacity on its four-satellite fleet to commercial and government customers for video and direct to home (“DTH”) broadcasting, high-speed data distribution, Internet access and communications, as well as providing satellite-based networking services. It also provides professional services to other satellite operators including satellite construction oversight and fleet operating services.
Satellite Manufacturing, conducted by our subsidiary, Space Systems/ Loral, Inc. (“SS/L”), generates its revenues and cash flows from designing and manufacturing satellites, space systems and space system components for commercial and government customers whose applications include fixed satellite services, DTH broadcasting, broadband data distribution, wireless telephony, digital radio, military communications, weather monitoring and air traffic management.
Effective March��1, 2006, Bernard L. Schwartz retired from all officer and director positions he held with the Company and its subsidiaries and affiliates, including his positions as chairman of the board and chief executive officer. To succeed Mr. Schwartz, the Board of Directors has elected Michael B. Targoff, non-executive vice chairman of the Company, as chief executive officer, and Dr. Mark H. Rachesky as non-executive chairman of the Board, both elections effective as of March 1, 2006.
Reorganization
On July 15, 2003, Old Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Old Loral, the “Debtors”), including Loral Space & Communications Holdings Corporation (formerly known as Loral Space & Communications Corporation), Loral SpaceCom Corporation (“Loral SpaceCom”), SS/ L and Loral Orion, Inc. (now known as Loral Skynet Corporation), filed voluntary petitions for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (Lead Case No. 03-41710 (RDD), Case Nos. 03-41709 (RDD) through 03-41728 (RDD)) (the “Chapter 11 Cases”). Also on July 15, 2003, Old Loral and one of its Bermuda subsidiaries (the “Bermuda Group”) filed parallel insolvency proceedings in the Supreme Court of Bermuda (the “Bermuda Court”), and, on that
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The Debtors emerged from Chapter 11 on November 21, 2005 pursuant to the terms of their fourth amended joint plan of reorganization, as modified (the “Plan of Reorganization”). The Plan of Reorganization had previously been confirmed by order (the “Confirmation Order”) of the Bankruptcy Court entered on August 1, 2005.
Pursuant to the Plan of Reorganization:
• | The business and operations of Old Loral have been transferred to New Loral, and Loral Skynet and SS/ L have emerged intact as separate subsidiaries of reorganized Loral. | |
• | Our new common stock has been listed on NASDAQ under the symbol “LORL.” | |
• | SS/ L has emerged debt-free. | |
• | The initial distributions to creditors of Old Loral and its subsidiaries have been completed in accordance with the Plan of Reorganization as follows: |
• | All holders of allowed claims against SS/ L and Loral SpaceCom have been, or will be paid in cash in full, including interest from the petition date to the Effective Date. | |
• | 20 million shares of New Loral common stock were issued to our distribution agent on the Effective Date, 18.7 million of which have been distributed to creditors. | |
• | $200 million of Loral Skynet preferred stock was issued to our distribution agent on the Effective Date, $197.4 million of which has been distributed to creditors. | |
• | The remaining undistributed shares of New Loral common stock and Loral Skynet preferred stock have been reserved to cover disputed claims and will be distributed quarterly in accordance with the Plan of Reorganization upon resolutions of those claims. | |
• | Pursuant to a rights offering, Loral Skynet issued on the Effective Date $126 million, principal amount, of senior secured notes to certain creditors who subscribed for the notes and to certain creditors who committed to purchase any unsubscribed notes (i.e. “backstopped” the offering). | |
• | Old Loral will be liquidated by the JPLs in Bermuda; the common and preferred stock of Old Loral were cancelled on the Effective Date, and no distribution was made to the holders of such stock. |
Old Loral shareholders acting on behalf of the self-styled Loral Stockholders Protective Committee (“LSPC”) have filed appeals seeking to revoke the Confirmation Order, to overturn the Bankruptcy Court’s denial of the LSPC’s motion to compel Old Loral to hold a shareholders meeting and to rescind the approval of the Federal Communications Commission (“FCC”) of the transfer of our FCC licenses from Old Loral to New Loral. We believe that these appeals are completely without merit and will not have any effect on the completed reorganization. For further details about these appeals see Note 19 to the consolidated financial statements.
Segment Overview
Satellite Services Operations
Through Loral Skynet, which manages and operates our Satellite Services business, we are a global satellite operator, providing our customers with a wide range of video and data transmission services. Our four globally-positioned satellites operate in geosynchronous earth orbit approximately 22,000 miles above the equator. In this orbit, satellites remain in a fixed position relative to points on the earth’s surface. They provide reliable, high-bandwidth services anywhere in their coverage areas and serve as the backbone for many forms of telecommunications. Our satellites operate in the C-band and Ku-band frequencies, and through our affiliate XTAR, we operate in X-band.
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Transponder Leasing |
Customers lease our C- and Ku-band transponder capacity for the distribution of video and data for television programming, direct-to-home (DTH) services, business communications, Internet connectivity and telephony. Our customers include some of the world’s largest video and data service providers, including HBO, Disney, Cable & Wireless, Singapore Telecom (SingTel), Connexion by Boeing, Global Crossing, BT North America, Globecomm Systems, UPC and China Central Television (CCTV).
Network Services |
We also provide our customers with access services and transmission platforms that enable rapid and reliable networking solutions. Our hybrid satellite and ground-based network services capabilities allow our customers to address their communications requirements quickly and easily through a combination of applications that include broadband transport, bandwidth-on-demand, broadcast SCPC (single channel per carrier) platforms and teleport services. Loral Skynet’s newest network services offering is SkyReach(SM), a group of IP-based services that provide enterprise-level customers with access to regional and global private networking and public Internet services, including broadband WAN (wide area network) extension for terrestrial providers, Internet access for ISPs (Internet Service Providers), voice over IP (VoIP) and managed data services. Loral Skynet provides its SkyReach services through IP (Internet Protocol) hubs at facilities in North America, Europe and Asia, each with access to major satellite and terrestrial communications networks.
Loral Skynet’s network services are provided through an integrated satellite and fiber network that interconnects terrestrially with customer networks through points of presence (POPs) in San Jose, California; Ashburn, Virginia; New York, New York; and London, England and interconnects via satellite and VSAT (very small aperture terminals) services through teleports in Mount Jackson, Virginia; Aflenz, Austria; Hong Kong; Kapolei, Hawaii; and London, England.
Professional Services |
Our team of world-class network architects, engineers, program managers and satellite operations professionals, provides customized services tailored to unique customer requirements for deploying satellites and network services, including providing other satellite operators with spacecraft operational services (TT&C), satellite construction oversight services, network architecture design, regulatory management including orbital slot acquisition and the coordination and customization of distribution solutions.
Market and Competition |
Loral Skynet operates in a highly competitive market with larger, well-established satellite service companies including Intelsat/ PanAmSat, SES Global/ New Skies Satellites and Eutelsat, as well as regional operators such as Telesat and AsiaSat. We also compete with companies such as Hughes Network Systems, Gilat and ViaSat in our network services business. While we also compete with fiber optic cable and other terrestrial delivery systems, primarily for point-to-point applications, Loral Skynet has been able to combine the inherent advantages of each technology to provide its customers with complete end-to-end services. Since FSS satellites remain in a fixed point above the earth, they are considerably more efficient than terrestrial systems for certain applications, such as broadcast or point-to-multipoint transmission of video and broadband data. A satellite offers instant infrastructure. It can cover large geographic areas, sometimes entire hemispheres, and can not only deliver services to populated areas, but can also better serve areas with inadequate terrestrial infrastructures, low-density populations or difficult geographic terrain.
Competition in the satellite services market has been intense in recent years due to a number of factors, including transponder over-capacity in certain geographic regions and increased competition from fiber. This competition has put further pressure on prices already depressed by the telecommunications industry downturn earlier this decade. A stronger economy and an increase in capital available for expanded consumer and enterprise-level services have led to an improvement in demand. Much of Loral Skynet’s remaining available capacity, however, is over geographic regions where the market is characterized by excess capacity,
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Satellite Fleet |
Licensing | ||||||||||||
Satellite | Jurisdiction | Location | Frequency | Coverage | In Service Date | Expected End of Life | ||||||
Telstar 10/ ApstarIIR | China | 76.5°E.L. | C/Ku-band | Asia and portions of Europe, portions of Africa and Australia | December 1997 | February 2014 | ||||||
Telstar 12 | U.S. | 15°W.L. | Ku-band | Eastern U.S., SE Canada, Europe, Russia, Middle East, North Africa, portions of South and Central America | December 1999 | September 2016 | ||||||
Telstar 14/ Estrela do Sul-1 | Brazil | 63°W.L. | Ku-band | Brazil and portions of Latin America, North America, Atlantic Ocean | April 2004 | July 2010(2) | ||||||
Telstar 18(3) | China/Tonga | 138°E.L. | C/Ku-band | India, South East Asia, China, Australia and Hawaii | August 2004 | November 2018 | ||||||
(1) | We also own and operate Telstar 11 at 37.5°W.L. and Brazil 1T at 63° W.L., both of which are in inclined orbit and generate minimal revenues. |
(2) | Estrela do Sul-1 was launched in January 2004 and did not fully deploy one of its solar arrays. At the end of March 2004, the satellite began commercial service operating 15 of its 41 transponders. The satellite’s life expectancy is now approximately six years, as compared to its design life of 15 years. See Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
(3) | Telstar 18 went into commercial service in September 2004. We have entered into a sales-type lease arrangement with an Asian satellite services company, initially for the lease of 37 transponders on the satellite (see Note 8 to the consolidated financial statements). |
Satellite Services Performance |
Successor | |||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | For the Years | |||||||||||||||
October 2, | January 1, | Ending | |||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
(in millions) | |||||||||||||||||
Satellite services revenues | $ | 37 | $ | 115 | $ | 141 | $ | 154 | |||||||||
Satellite services sales-type lease arrangement(1) | — | — | 87 | — | |||||||||||||
Total segment revenues | 37 | 115 | 228 | 154 | |||||||||||||
Eliminations | (1 | ) | (4 | ) | (5 | ) | (7 | ) | |||||||||
Revenues from satellite services as reported | $ | 36 | $ | 111 | $ | 223 | $ | 147 | |||||||||
Segment Adjusted EBITDA before eliminations(2) | $ | 12 | $ | 40 | $ | 23 | $ | 8 | |||||||||
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(1) | See Note 8 to the consolidated financial statements. |
(2) | See Management’s Discussion and Analysis of Financial Condition and Results of Operations for significant items that affect comparability between the periods presented (see Note 20 to the consolidated financial statements for the definition of Adjusted EBITDA). |
Market and Competition |
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Satellite Manufacturing Performance |
Successor | |||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | For the Years | |||||||||||||||
October 2, | January 1, | Ending | |||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
(in millions) | |||||||||||||||||
Total segment revenues | $ | 162 | $ | 329 | $ | 437 | $ | 474 | |||||||||
Eliminations | (1 | ) | (11 | ) | (137 | ) | (229 | ) | |||||||||
Revenues from satellite manufacturing as reported | $ | 161 | $ | 318 | $ | 300 | $ | 245 | |||||||||
Segment Adjusted EBITDA before eliminations(1) | $ | 12 | $ | 15 | $ | (14 | ) | $ | (159 | ) | |||||||
(1) | See Consolidated Operating Results in Management’s Discussion and Analysis of Financial Condition and Results of Operations for significant items that affect comparability between the periods presented (see Note 20 to the consolidated financial statements for the definition of Adjusted EBITDA). |
XTAR |
Globalstar |
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Satmex |
We own 49% of Satelites Mexicanos, S.A. de C.V. (“Satmex”), a satellite communications company providing services in Mexico and Latin America. Satmex has two satellites in operation and a third, Satmex 6, scheduled for launch this year. In January 2006, Satmex reached an agreement in principle with its creditors to restructure its debt, which is currently in default. As a result, we expect our ownership in Satmex to be reduced to less than 5%. Separately, Loral reached a settlement agreement with Satmex in 2005 relating to the construction of the Satmex 6 satellite by SS/ L whereby Loral will acquire rights, upon launch, to four transponders on Satmex 6 for the life of the satellite. During 2003, Loral wrote off its remaining investment in Satmex. For more information on Satmex see Note 9 to the consolidated financial statements.
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REGULATION
Telecommunications Regulation
As an operator of a privately owned global satellite system, we are subject to: the regulatory authority of the U.S. government; the regulatory authority of other countries in which we operate; and the frequency coordination process of the International Telecommunication Union (“ITU”). Our ability to provide satellite services in a particular country or region is subject also to the technical constraints of our satellites, international coordination, local regulatory approval and any limitation to those approvals.
U.S. Regulation |
The FCC regulates our U.S.-licensed satellites as well as our non-U.S. licensed satellites authorized to operate in the U.S. We are subject to the FCC’s jurisdiction primarily for the licensing of satellites and earth stations, avoidance of interference with radio stations and compliance with FCC rules. Violations of the FCC’s rules can result in various sanctions including fines, loss of authorizations, forfeiture of bonds, or the denial of new or renewal authorizations. We are not regulated as a common carrier and, therefore, are not subject to rate regulation or the obligation not to discriminate among customers. We must pay FCC filing fees in connection with our space station and earth station applications and annual fees to defray the FCC’s regulatory expenses. We must file annual status reports with the FCC and, to the extent Loral is deemed to be providing interstate/international telecommunications, we must contribute funds supporting universal service. Loral has petitioned the FCC for exemptions from having to pay certain of such fees and contributions. These petitions are under review by the FCC.
Authorization to Launch and Operate Satellites |
Pursuant to satellite licensing rules issued in 2003, the FCC grants satellite authorizations on a first-come, first-served basis to satellite operators that meet its legal and technical qualification requirements. The FCC often receives multiple applications to operate a satellite at a given orbital slot. There can be no assurance that applications will be granted. Most satellite authorizations include specific construction and launch milestones; failure to meet them may result in license revocation. Under licensing rules, we must post a bond for up to $3,000,000 when we are granted a satellite authorization. Some or the entire amount of the bond may be forfeited if we fail to meet any of the milestones for satellite construction, launch and commencement of operation. In accordance with the current licensing rules, the FCC will issue new satellite licenses for an initial fifteen-year term and will provide a licensee with an “expectancy” that a subsequent license will be granted for the replacement of an authorized satellite using the same frequencies. At the end of a fifteen-year term, a satellite that has not been replaced, or that has been relocated to another orbital location following its replacement, may be allowed to continue operations for a limited period of time subject to certain restrictions.
We have final FCC authorization for two existing satellites which operate in the Ku-band: Telstar 11 at 37.5°W.L. and Telstar 12 at 15° W.L. In addition, we have final FCC authorization for a planned satellite which will operate in the Ku-band at 37.5°W.L and replace Telstar 11. Certain of our authorizations may be subject to pending petitions for reconsideration or review submitted to the FCC by third parties. The final FCC authorizations for certain of the satellites that are not yet in orbit also do not cover certain possible design changes and require adherence with FCC milestones stated within the authorizations. There can be no assurance that any design changes or milestone extensions which may be sought will be granted by the FCC. The failure to obtain a requested milestone extension could result in the loss of the related FCC authorization. If we are unable to obtain FCC approval to implement requested technical modifications for any particular authorization, we will be obligated to operate the related satellite in accordance with the original authorization.
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Coordination Requirements |
The FCC requires applicants to demonstrate that their proposed satellites would be compatible with the operations of adjacent satellites. Adjacent satellite operators must coordinate with one another to minimize frequency conflicts. The FCC reserves the right to require that an FCC-licensed satellite be relocated if it deems such a change to be in the public interest.
Regulation by Non-U.S. National Telecommunications Authorities |
Foreign laws and regulatory practices governing the provision of satellite services to licensed entities and directly to end-users vary substantially from country to country. Some countries may require us to confirm that we have successfully completed technical consultation with other satellite service providers before offering services on a given satellite. In addition, we may be subject to varying communications and/or broadcasting laws with respect to our provision of international satellite services.
Foreign laws and regulatory practices may be applied or changed in ways that may adversely affect our ability to operate or provide service. There are no guarantees that other countries will grant our applications to construct, launch, operate or provide service via satellites, or extend construction or launch milestones, or that we will be permitted to retain or renew our authorizations. As in the U.S., violations of other countries’ laws and rules may result in sanctions, fines, loss of authorizations or denial of applications for new or renewal authorizations. Application and other administrative fees may be required in other countries. License terms for non-U.S. authorizations held by Loral vary but generally authorize operation for at least the life of the satellite and include rights to operate a replacement satellite. Loral’s failure to operate or maintain operation of a satellite pursuant to a non-U.S. authorization may result in revocation.
Many countries have liberalized their regulations for the provision of voice, data or video services. This trend should accelerate with the commitments by many World Trade Organization (“WTO”) members, in the context of the WTO Agreement on Basic Telecommunications Services, to open their satellite markets to competition. Other countries, however, have maintained strict monopoly regimes. In such markets, the provision of service from Loral and other U.S.-licensed satellites may be more complicated.
In addition to the orbital slots licensed by the FCC, Loral has been assigned orbital slots by certain other countries. For example, we have been authorized to use numerous C-, Ku- and Ka-band orbital slots by the Isle of Man government. These Isle of Man authorizations are (1) at 15° W.L. and 47° W.L. for use of the Ka-band frequencies, and (2) at 9.9° E.L., 16.1° E.L., 22.3° E.L., 115.5° E.L., 37.5° W.L., 89° W.L., 97° W.L. and 115° W.L. for the use of C-, Ku- and Ka-band frequencies. We also have Isle of Man authorizations at 96.5° W.L. and 123.5° W.L. for Broadcast Satellite Service.
In March 1999, Loral won Brazil’s auction for its 63° W.L. Ku-band orbital slot. Telstar 14/Estrela do Sul-1 is licensed by Brazil and is authorized to operate in the U.S. by the FCC from this orbital slot. Pursuant to a lease, Loral operates all of the capacity (with the exception of one transponder) on the Telstar 10/Apstar IIR C/Ku-band satellite licensed by China and located at 76.5° E.L. We also operate the C/extended C-band and Ku-band payloads on Telstar 18 at 138° E.L. using licenses provided by Tonga and China, respectively.
Access to certain of these international orbital slots and authorizations are subject to our payment of various ongoing fees to the applicable licensee or licensing authority, which in the case of the Isle of Man authorizations, include a revenue-based fee that would commence at the time we place a satellite into an Isle of Man slot.
The ITU Frequency Coordination Process |
All satellite systems are subject to ITU frequency coordination requirements and must obtain appropriate authority to provide service in a given territory. The required international coordination process may limit the extent to which all or some portion of a particular authorized orbital slot may be used for commercial operations, with a corresponding impact on the useable capacity of a satellite at that location.
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All of our satellite registrations are or will be subject to the ITU coordination process. There may be more than one ITU filing submitted for a particular orbital slot, or one adjacent to it, thus requiring coordination between or among the affected operators. Loral cannot guarantee successful frequency coordination for its satellites.
Export Regulation
Commercial communication satellites and certain related items, technical data and services, are subject to United States export controls. These laws and regulations affect the export of products and services to foreign launch providers, subcontractors, insurers, customers, potential customers, and business partners, as well as to foreign Loral employees, foreign regulatory bodies, foreign national telecommunications authorities and to foreign persons generally. Commercial communications satellites and certain related items, technical data and services are on the United States Munitions List and are subject to the Arms Export Control Act and the International Traffic in Arms Regulations. Export jurisdiction over these products and services resides in the U.S. Department of State. Other Loral exports are subject to the jurisdiction of the U.S. Department of Commerce, pursuant to the Export Administration Act and the Export Administration Regulations.
U.S. Government licenses or other approvals generally must be obtained before satellites and related items, technical data and services are exported and may be required before they are re-exported or transferred from one foreign person to another foreign person. There can be no assurance that such licenses or approvals will be granted. Also, licenses or approvals may be granted with limitations, provisos or other requirements imposed by the U.S. Government as a condition of approval, which may affect the scope of permissible activity under the license or approval. See Item 1A — Risk Factors below.
PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position. It holds 213 patents in the United States and has applications for 12 patents pending in the United States. SS/ L patents include those relating to communications, station keeping, power control systems, antennae, filters and oscillators, phased arrays and thermal control as well as assembly and inspections technology. The SS/L patents that are currently in force expire between 2006 and 2022.
Loral Skynet has 13 patents in the United States and has four patents abroad. Our satellite services segment has six patents pending in the United States and has one patent pending abroad. Satellite services patents that are currently in force expire between 2016 and 2020.
There can be no assurance that any of our pending patent applications will be issued. Moreover, because the U.S. patent application process is confidential, there can be no assurance that third parties, including competitors, do not have patents pending that could result in issued patents which we would infringe. In such an event, we could be required to pay royalties to obtain a license, which could increase costs.
FOREIGN OPERATIONS
Sales to foreign customers, primarily in Asia, Europe and Mexico, represented 14%, 18% 42% and 39% of our consolidated revenues for the periods October 2, 2005 to December 31, 2005, and January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003, respectively. As of December 31, 2005 and 2004, substantially all of our long-lived assets were located in the United States with the exception of our in-orbit satellites. See Item 1A — Risk Factors below for a discussion of the risks related to operating internationally. See Note 20 to the consolidated financial statements for detail on our domestic and foreign sales.
EMPLOYEES
As of December 31, 2005, we had approximately 1,700 full-time employees, approximately 2% of whom are subject to collective bargaining agreements. We consider our employee relations to be good.
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Item 1A. | Risk Factors |
I. | Financial Risk Factors |
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The Loral Skynet Notes are collateralized by substantially all of Loral Skynet’s assets.
A breach of any of the restrictive covenants contained in the Loral Skynet indenture could result in an event of default, which would give the noteholders the ability to accelerate repayment of the Loral Skynet notes. If Loral Skynet is unable to repay the notes when due, the noteholders will have the right to proceed against the collateral granted to them to secure the Loral Skynet Notes, which consists of substantially all of the assets of Loral Skynet and its subsidiaries.
We may in the future incur significant additional indebtedness, thereby making us more vulnerable to adverse developments.
Although the indenture governing the Loral Skynet Notes contains restrictions on the incurrence of indebtedness by Loral Skynet and its subsidiaries, these restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial, and in certain cases, may be secured by the same assets that secure the Loral Skynet Notes. Moreover, there are currently no restrictions on the ability of Loral or SS/ L to incur additional indebtedness. As a result, we may be able to incur significant additional debt in the future. If new debt is added, such indebtedness would likely impose more restrictive covenants, which may include financial ratios. If we incur significant additional indebtedness, we would be more vulnerable to, among other things, adverse changes in general economic, industry and competitive conditions.
XTAR will have significant lease obligations, which may require us to make additional capital contributions to the venture.
XTAR has agreed to lease certain transponders on Hisdesat’s recently launched Spainsat satellite. These lease obligations initially amount to $6.2 million per year, growing to $23 million per year in 2008. XTAR’s ability to fund these lease obligations is dependent on it generating a significant increase in customer orders. If XTAR is unable to do so, then XTAR would seek to restructure the terms of the Spainsat lease. If XTAR is unable to do so on terms that are acceptable to it, then we will be faced with the decision of either making additional cash contributions to XTAR to enable it to meet its obligations or allowing XTAR to default under the lease agreement, which may result in a loss of our investment in XTAR.
Replacing a satellite upon the end of its useful life will require us to make significant expenditures.
To ensure no disruption in Loral Skynet’s business and to prevent loss of customers, we will be required to commence construction of a replacement satellite approximately two to three years prior to the end of life of the satellite then in orbit. For example, we will be required to commence construction of a replacement to our Estrela do Sul satellite in 2008 to ensure a continuation of our business on this satellite. We have also recently commenced construction of our Telstar 11N satellite and will incur substantial expenditures in connection with such effort. Typically, it costs in excess of $200 million to construct, launch and insure a satellite. We have in the past funded this cost from a combination of operating cash flow and financing proceeds. There is no assurance that we will be able to obtain financing to fund such expenditures on favorable terms, if at all.
Significant changes in discount rates, actual investment return on pension assets, and other factors could affect our statement of operations, equity, and pension contributions in future periods.
Our statement of operations may be positively or negatively impacted by the amount of expense we record for our pension and other postretirement benefit plans. Generally accepted accounting principles (GAAP) in the United States of America require that we calculate expense for the plans using actuarial valuations. These valuations reflect assumptions that we make relating to financial market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The most significant year-end assumptions used to estimate pension or other postretirement expense for the following
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II. | Operational Risk Factors |
• Risk Factors Associated With Satellite Services |
Launch delays or failures have delayed some of our operations in the past and may do so again in the future.
We depend on third parties in the United States and abroad to launch our satellites. Delays in launching satellites are not uncommon and result from construction delays, the unavailability of appropriate launch vehicles and other factors. For example, the launch of the XTAR-EUR satellite was significantly delayed while we waited for Arianespace to complete work on its ECA launch vehicle.
Satellite launches are risky, and some launch attempts have ended in complete or partial failure. On January 10, 2004, for example, our Telstar 14/ Estrela do Sul-1 communications satellite was launched by Boeing Sea Launch, but only partially deployed its North solar array. Although the satellite was insured and we collected insurance proceeds of $205 million, the failed solar array deployment has resulted in the availability of only 15 of the satellite’s 41 Ku-band transponders and a life expectancy of only six years as compared to a design life of 15 years. This reduced capacity and life will affect the roll out of our Brazilian business and will reduce operating revenues pending construction of a replacement satellite.
We ordinarily insure against launch failures but at considerable cost. The cost and the availability of insurance vary depending on market conditions and the launch vehicle used. Replacing a lost satellite typically requires at least two years from execution of a manufacturing contract to launch.
After launch, our satellites remain vulnerable to in-orbit failures which may result in reduced revenues and profits and other financial consequences.
In-orbit damage to or loss of a satellite before the end of its expected life results from various causes, some random, including component failure, degradation of solar panels, loss of power or fuel, inability to maintain the satellite’s position, solar and other astronomical events, and space debris.
Satellites are built with redundant components or additional components to provide excess performance margins to permit their continued operation in case of a component failure, an event that is not uncommon in complex satellites. Certain of our satellites are currently operating using back-up components because of the failure of primary components. If the back-up components fail, however, and we are unable to restore redundancy, these satellites could lose capacity or be total losses, which would result in a loss of revenues and profits.
For example, in July 2005, in the course of conducting our normal operations, we determined that the primary command receiver on two of our satellites had failed. These satellites, which are equipped with redundant command receivers designed to provide full functional capability through the full design life of the satellite, continue to function normally and service to customers has not been affected. Moreover, SS/L, the manufacturer of the satellites, has successfully completed implementation of a software workaround that fully restored the redundant command receiver function on both of these satellites.
In addition, three satellites operated by Loral Skynet or its affiliates that were manufactured by SS/ L have experienced minor losses of power from their solar arrays. Although we believe the satellites will fulfill
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Loral Skynet has in the past entered into prepaid leases, sales contracts and other arrangements relating to transponders on its satellites. Under the terms of these agreements, Loral Skynet may be required to replace transponders that do not meet operating specifications. Failure to replace such transponders may result in a payment obligation on the part of Loral Skynet.
It may be difficult to obtain full insurance coverage for satellites that have, or are part of a family of satellites that has, experienced problems in the past; moreover, not all satellite-related losses will be covered by our insurance.
While we have in the past typically insured against launch and in-orbit failure of the satellites in our satellite services segment, insurance will not protect us against all losses. For example, insurance will not protect us against business interruption, lost revenues or delay of revenues. Our existing launch and in-orbit insurance policies also include, and future policies are expected to include, specified exclusions, deductibles and material change limitations. Typically, these insurance policies exclude coverage for damage arising from acts of war and other exclusions then customary in the industry. In addition, they typically exclude coverage for health-related problems affecting our satellites that are known at the time the policy is written.
We cannot assure that, upon the expiration of an in-orbit insurance policy, which typically has a term of one year, that we will be able to renew the policy on terms acceptable to us. As noted above, insurers may require either exclusions of certain components or may place similar limitations on coverage in connection with insurance renewals for satellites that have experienced problems in the past. For example, the insurance coverage for two of our satellites provides for coverage of losses due to solar array failures only in the event of a capacity loss of 75% or more for one satellite and 80% or more for the other. The loss of a satellite would likely have a material adverse effect on our financial performance and may not be adequately mitigated by insurance coverage. Moreover, if we were to determine in the future that the terms of any particular insurance renewal are uneconomic after taking into account factors such as cost of the insurance and scope of insurance exclusions and limitations, we may elect to self-insure against losses of a satellite. For further details see Note 19 to the consolidated financial statements.
Like other satellite operators, we are faced with increased launch and in-orbit insurance premiums.
The cost of obtaining insurance has increased significantly, primarily due to post-September 2001 insurance industry developments. This has increased our cost of doing business. For further details see Note 19 to the consolidated financial statements.
Our satellite services businesses compete for market share, customers and orbital slots, against competitors that are significantly larger than us.
We face significant competition in the transponder leasing business from companies such as Intelsat/ PanAmSat, SES Global/ New Skies Satellites and Eutelsat, all of which are larger and better capitalized than we are. We also face competition from smaller, regional operators, which may enjoy competitive advantages in their local markets. The supply of satellite capacity has increased in recent years, making it more difficult for us to sell our services in certain markets and to maintain our prices for the capacity that we do sell. Competition may cause further downward pressure on prices and further reduce the utilization of our fleet capacity, both of which may have an adverse effect on our financial performance. Our transponder leasing business also competes with fiber optic cable and other terrestrial delivery systems, which have a cost advantage in point-to-point applications.
Similarly, our network services business faces competition not only from other satellite-based providers, but also from providers of land-based data communications services, such as cable, DSL (digital subscriber
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As land-based telecommunications services expand and become more sophisticated, demand for some satellite-based services may be reduced. New technology could render satellite-based services less competitive by satisfying consumer demand in other ways. We also compete for local regulatory approval in places where more than one provider may want to operate, and for scarce frequency assignments and fixed orbital positions.
The content of third-party transmissions over our satellites may affect us.
Loral Skynet provides satellite capacity for transmissions by third parties. We do not decide what content is transmitted over our satellites, although our contracts generally provide us with rights to prohibit certain types of content or to cease transmission under certain circumstances. Issues arising from the content of transmissions by these third parties over our satellites could affect our future revenues, operations, or our relationship with certain governments or customers.
Our business is regulated, causing uncertainty and additional costs.
Multiple authorities regulate our business, including the FCC, the International Telecommunication Union (ITU) and the European Union. Regulatory authorities can modify, withdraw or impose charges or conditions upon, or deny or delay action on applications for the licenses we need, and so increase our costs.
To prevent frequency interference, the regulatory process requires potentially lengthy and costly negotiations with third parties who operate or intend to operate satellites at or near the locations of our satellites. For example, as part of our coordination effort on Telstar 12, we agreed to provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the satellite and have retained risk of loss with respect to those transponders. We also granted Eutelsat the right to acquire, at cost, four transponders on the replacement satellite for Telstar 12. We continue to discuss coordination issues with other operators and may need to make additional financial concessions in connection with future coordination efforts. The failure to reach an appropriate arrangement with a third party having priority rights at or near one of our orbital slots may result in substantial restrictions on the use and operation of our satellite at that location. In addition, while the ITU rules require later-in-time systems to coordinate with us, there can be no assurance that other operators will conduct their operations so as to avoid transmitting any signals that would cause harmful interference to the operation of our satellites.
Failure to successfully coordinate our satellites’ frequencies or to resolve other required regulatory approvals could have an adverse effect on our consolidated financial position and our results of operations, as well as the value of our business. For further details see Note 19 to the consolidated financial statements.
The recent trend toward industry consolidation in the fixed satellite services industry may adversely affect us.
The recent industry consolidation trend will result in the formation of competitors with greater financial resources and increased coverage and scale. While we may pursue strategic transactions on an opportunistic basis, we may not find or be able to take advantage of any suitable opportunities. We may therefore find it difficult to compete with our competitors, many of whom are substantially larger than we are and enjoy the benefits of the economies of scale from their fleets of satellites.
• Risk Factors Associated With Satellite Manufacturing |
The satellite manufacturing market is highly competitive and fixed costs are high.
SS/L competes with several large, well-capitalized companies such as Boeing, Lockheed Martin and Orbital Sciences in the United States, and Alcatel Alenia Space and EADS Astrium in Europe, nearly all of which are larger and better capitalized than we are. We may also face competition in the future from emerging low-cost competitors in India, Russia and China. The number of annual satellite manufacturing awards varies and is difficult to predict. In addition, U.S. satellite manufacturers must contend with export control
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SS/L is a large-scale systems integrator, requiring a large staff of highly-skilled and specialized workforce, as well as specialized manufacturing and test facilities in order to perform under its satellite construction contracts. Although overhead costs at SS/ L were cut substantially during our bankruptcy proceedings, SS/ L must continuously retain the services of a core group of specialists in a wide variety of disciplines for each phase of the design, development, manufacture and testing of its products in order to maintain its ability to compete as one of the leading prime contractors for technologically advanced space satellites.
SS/L’s contracts are subject to adjustments, cost overruns, risk of non-payment and termination.
SS/L’s major contracts are firm fixed-price contracts under which work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred. While cost savings under these fixed-price contracts result in gains to SS/L, cost increases result in reduction of margins or losses, borne solely by SS/L. Under such contracts, SS/L may receive progress payments, or it may receive partial payments upon the occurrence of certain program milestones. If performance on these milestones is delayed, SS/L’s receipt of the corresponding payments will also be delayed.
Non-performance, including schedule delays, can increase costs and subject us to damages claims from customers, including liquidated damages and termination of the contract for our default. If a contract is terminated, we could be liable for a refund of payments made to date, excess re-procurement costs and other damages incurred by our customer, although SS/L would own the satellite under construction and attempt to recoup any losses through resale to another customer. A contract termination for default could have a material adverse effect on SS/L and us.
In addition, many of SS/L’s contracts and subcontracts may be terminated at will by the customer or the prime contractor. In the event of such a termination, SS/L is normally entitled to recover the purchase price for delivered items, reimbursement for allowable costs for work in process, and an allowance for profit or an adjustment for loss, depending on whether completion of the project would have resulted in a profit or loss.
Moreover, many of SS/L’s contracts require SS/L to provide vendor financing to its customers or, more customarily, for customers to pay a portion of the purchase price for the satellite over time subject to performance of the satellite, i.e., orbital payments, or a combination of these terms. In some cases these arrangements are provided to customers that are start-up companies or companies in the early stages of building their businesses. As of December 31, 2005, SS/L had recorded vendor financing and orbital receivables of $99 million (of which $57 million was from start-up or early stage companies). Of this $57 million, SS/L had received payments of $49 million as of March 2006. Although we expect to be paid, there can be no assurance that these companies or their businesses will be successful and, accordingly, that they will be able to fulfill their payment obligations under their contracts with SS/L.
SS/L’s accounting for long-term contracts requires adjustments to profit and loss based on estimates revised during the execution of the contract. These adjustments may have a material effect on our consolidated financial position and our results of operations in the period in which they are made. The estimates giving rise to these risks, which are inherent in long-term, fixed-price contracts, include the forecasting of costs and schedules, contract revenues related to contract performance, and the potential for component obsolescence due to procurement long before assembly.
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SS/L may forfeit payments from customers as a result of satellite failures or losses after launch, or may be liable for penalty payments under certain circumstances, and these losses may be uninsured.
Most of SS/L’s satellite manufacturing contracts provide that some of the total price is contingently payable as “incentive” payments earned over the life of the satellite, subject to satellite performance. Known as orbitals, SS/L generally does not insure for these payments and in some cases agrees with its customers not to insure them.
SS/L records the present value of orbital payments as revenue during the construction of the satellite. SS/L generally receives the present value of these incentive payments if there is a launch failure or a failure caused by customer error. SS/L forfeits some or all of these payments, however, if the loss is caused by satellite failure or as a result of its own error. As of December 31, 2005, SS/L had orbital receivables of $42 million, payable over 16 years. Since these orbital receivables could be affected by future satellite performance, there can be no assurance that SS/L will be able to collect all or a portion of these receivables.
Some of SS/L’s contracts call for in-orbit delivery, transferring the launch risk to SS/L. SS/L generally insures against that exposure. In addition, some of SS/L’s contracts provide that SS/L may be liable to a customer for penalty payments under certain circumstances, including late delivery or that a portion of the price paid by the customer is subject to “warranty payback” in the event satellite anomalies were to develop (see Note 19 to the consolidated financial statements). These contingent liabilities are not insured by SS/L. We have recorded reserves in our financial statements based on our current estimates of SS/L’s warranty liabilities. There is no assurance that SS/L’s actual liabilities to its customers in respect of these warranty liabilities will not be greater than the amount reserved for.
Some satellites built by SS/L, including three satellites operated by Loral Skynet or other affiliates, have experienced minor losses of power from their solar arrays.
Twenty satellites built by SS/L have experienced minor losses of power from their solar arrays. There can be no assurance that one or more will not experience an additional power loss that could lead to a loss of transponder capacity and performance degradation. A partial or complete loss of a satellite could result in an incurrence of warranty payments by, or a loss of orbital incentive payments to SS/L. SS/L has instituted remedial measures that it believes will prevent similar anomalies from occurring on satellites under construction or in development. For further details see Note 19 to the consolidated financial statements.
Some satellites built by SS/L have the same design as another SS/L-built satellite that has experienced a partial failure.
In November 2004, Intelsat Americas 7 (formerly Telstar 7) experienced an anomaly which caused it to completely cease operations for several days before it was partially recovered. Four other satellites manufactured by SS/L for other customers have designs similar to Intelsat Americas 7 and, therefore, could be susceptible to similar anomalies in the future. A partial or complete loss of these satellites could result in an incurrence of warranty payments by SS/L of up to $18 million.
We are subject to export controls, which may result in delays and additional costs.
SS/L is required by the U.S. State Department to obtain licenses and enter into technical assistance agreements to export satellites and related equipment, and to disclose technical data to foreign persons. The delayed receipt of or the failure to obtain the necessary licenses and agreements may interrupt the completion of a satellite contract by SS/L and could lead to a customer’s cancellation of a contract, monetary penalties and/or the loss of incentive payments.
Some of our customers and potential customers, along with insurance underwriters and brokers have raised concerns that U.S. export control laws and regulations excessively restrict their access to information about the satellite during construction and on-orbit. To the extent that our non-U.S. competitors are not subject to these export control laws and regulations, they may enjoy a competitive advantage with foreign customers, and, to the extent that our foreign competitors continue to gain market share, it could become
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The recent trend toward industry consolidation in the fixed satellite services industry may adversely affect us.
The recent industry consolidation trend will result in the formation of satellite operators with greater satellite resources and increased coverage. This consolidation may reduce demand for new satellite construction as operators may need fewer satellites in orbit to provide back-up coverage or to rationalize the amount of capacity available in certain geographic regions. It may also result in concentrating additional bargaining power in the hands of large customers, which could increase pressure on pricing and other contractual terms.
The availability of qualified personnel and facility space may be limited; SS/L will incur costs to upgrade or expand its facility and these costs may be substantial.
SS/L has recently won a number of satellite construction awards and its backlog has expanded significantly. In order to complete construction of all the satellites in backlog, SS/L will need to and is in the process of hiring additional staff and will likely require an expansion of its existing facilities. There can be no assurance that SS/L will be able to hire the employees with the requisite skills and training or to acquire suitable facility space and, accordingly, may not be able to perform its contracts as efficiently as planned.
SS/L is in the process of performing a comprehensive evaluation of its facility requirements that takes into account various factors, including its backlog requirements, as well as expansions or upgrades that may be required to enable the company to meet its future growth prospects. The costs of such expansions or upgrades may be substantial.
• Risk Associated With Conducting Business Internationally |
We face risks in conducting business internationally.
For the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003, approximately 14%, 18%, 42% and 39%, respectively, of our revenue was generated from customers outside of the United States. We could be harmed financially and operationally by changes in foreign regulations and telecommunications standards, tariffs or taxes and other trade barriers that may be imposed on our services, or by political and economic instability in the countries in which we conduct business. Almost all of our contracts with foreign customers require payment in U.S. dollars, and customers in developing countries could have difficulty obtaining U.S. dollars to pay us due to currency exchange controls and other factors. Exchange rate fluctuations may adversely affect the ability of our customers to pay us in U.S. dollars. If we need to pursue legal remedies against our foreign business partners or customers, we may have to sue them abroad where it could be difficult for us to enforce our rights.
III Other Risks
We share control of our affiliates with third parties.
We share control of our affiliates with third parties and as a result we do not have control over management of these entities. For example, Hisdesat enjoys substantial approval rights in regard to XTAR, our X-band joint venture. The rights of these third parties and fiduciary duties under applicable law could result in others acting or omitting to act in ways that are not in our best interest. To the extent that these entities are or become customers of SS/L, further conflicts of interest between us and these affiliates are likely to arise.
We rely on key personnel.
We need highly qualified personnel. Michael Targoff, our chief executive officer, has an employment contract expiring in December 2010, and several of our key officers have two-year employment contracts expiring in November 2007. See Item 11 — Executive Compensation — Employment Contracts, Change in
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MHR is our controlling shareholder and may have conflicts of interest with us in the future.
MHR Fund Management LLC (“MHR”), through its affiliated funds, beneficially owns approximately 35.9% of our common stock and is the largest single holder of our common stock. MHR also owns 38.3% of Loral Skynet’s preferred stock and 44.6% of Loral Skynet’s senior secured notes. Moreover, representatives of MHR occupy three of the nine seats on our board of directors, and two additional directors were selected by the creditors’ committee in our Chapter 11 Cases, in which MHR served as the chairman. Conflicts of interests may arise in the future between us and MHR. For example, MHR and its affiliated funds are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us.
Compliance with the Sarbanes-Oxley Act increases our operating expenses.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission (“SEC”), have required changes to some of our corporate governance practices. These changes include developing financial and disclosure processes that satisfy Section 404 of the Sarbanes-Oxley Act. We expect that these rules and regulations will continue to make some activities more difficult, time-consuming and costly. We also expect that these rules and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and to attract and retain qualified executive officers. If we are unable to comply with the Sarbanes-Oxley Act and related rules and regulations, our business could be materially adversely affected.
The future use of tax attributes is limited upon emergence from bankruptcy.
As of December 31, 2005, Loral had net operating loss carryforwards, or NOLs, of approximately $1.1 billion that are available to offset future taxable income. Since our reorganization on the Effective Date constituted an “ownership change” under Section 382 of the Internal Revenue Code, our ability to use these NOLs, as well as certain other tax attributes existing at the Effective Date, is subject to an annual limitation of approximately $32 million, subject to modification based on certain factors. If New Loral experiences an additional “ownership change” during any three-year period after the Effective Date, future use of these tax attributes may become further limited. An ownership change would be triggered if shareholders owning five percent or more of our total equity value dispose of their holdings during a three-year period by more than 50 percent in the aggregate. Since Loral’s charter contains no restriction on the transfer of equity interests, if our existing significant shareholders were to dispose of all of their equity interests in New Loral during this three-year period, an additional “ownership change” will have occurred.
There is a thin trading market for our common stock.
Our common stock was first issued and listed on the NASDAQ National Market in December 2005. Since that time, trading activity in our stock has generally been light. Moreover, over 50% of our common stock is effectively held by MHR and two other shareholders. If any of our significant shareholders should sell some or all of their holdings, it will likely have an adverse effect on our share price. Funds affiliated with MHR have registration rights in respect of the securities they hold in Loral and Loral Skynet, including our common stock.
The market for our stock could be adversely affected by future issuance of significant amounts of our common stock.
As of December 31, 2005, 20,000,000 shares of our common stock were outstanding. On that date, there were 1,390,452 stock options outstanding which will become vested and exercisable over the next four years. In addition, in March 2006, subject to stockholder approval at an annual or special meeting of our
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IV | Litigation and Disputes |
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Item 1B. | Unresolved Staff Comments |
Item 2. | Properties |
Corporate |
Satellite Services |
Satellite Manufacturing |
Item 3. | Legal Proceedings |
Item 4. | Submission of Matters to a Vote of Security Holders |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a) | Market Price and Dividend Information |
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High | Low | |||||||
Year ended December 31, 2005 | ||||||||
October 1, 2005 through December 31, 2005 | $ | 29.40 | $ | 21.75 | ||||
July 27, 2005 through September 30, 2005 | $ | 28.70 | $ | 26.50 |
High | Low | |||||||
Year ended December 31, 2005 | ||||||||
October 1, 2005 through November 21, 2005 | $ | 0.43 | $ | 0.04 | ||||
Quarter ended September 30, 2005 | 0.30 | 0.04 | ||||||
Quarter ended June 30, 2005 | 0.53 | 0.16 | ||||||
Quarter ended March 31, 2005 | 0.23 | 0.11 | ||||||
Year ended December 31, 2004 | ||||||||
Quarter ended December 31, 2004 | $ | 0.19 | $ | 0.03 | ||||
Quarter ended September 30, 2004 | 0.18 | 0.03 | ||||||
Quarter ended June 30, 2004 | 0.61 | 0.12 | ||||||
Quarter ended March 31, 2004 | 1.20 | 0.31 |
(b) | Approximate Number of Holders of Common Stock |
(c) | Dividends |
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(d) | Sales of Unregistered Securities by Registrant |
(e) | Securities Authorized for Issuance under Equity Compensation Plans |
Item 6. | Selected Financial Data |
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Successor | |||||||||||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||||||||||
For the Period | For the Period | ||||||||||||||||||||||||
October 2, | January 1, | ||||||||||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | |||||||||||||||||||||||
December 31, | October 1, | ||||||||||||||||||||||||
2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||
Statement of operations data: | |||||||||||||||||||||||||
Revenues | $ | 197,165 | $ | 429,183 | $ | 522,127 | $ | 392,043 | $ | 900,527 | $ | 845,725 | |||||||||||||
Operating loss from continuing operations | (4,945 | ) | (67,095 | ) | (214,345 | ) | (388,873 | ) | (208,368 | ) | (158,593 | ) | |||||||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments | — | 1,101,453 | (1) | — | — | — | — | ||||||||||||||||||
(Loss) income from continuing operations before income taxes, equity income (losses) in affiliates and minority interest | (5,395 | ) | 1,022,651 | (207,852 | ) | (368,355 | ) | (237,540 | ) | (229,851 | ) | ||||||||||||||
Income tax (provision) benefit | (1,752 | ) | 10,901 | (13,284 | )(2) | 6,330 | (322,422 | )(2) | 40,096 | ||||||||||||||||
(Loss) income from continuing operations before equity income (losses) in affiliates and minority interest | (7,147 | ) | 1,033,552 | (221,136 | ) | (362,025 | ) | (559,962 | ) | (189,755 | ) | ||||||||||||||
Equity (losses) income in affiliates(3) | (5,447 | ) | (2,796 | ) | 46,654 | (51,153 | ) | (76,280 | ) | (66,677 | ) | ||||||||||||||
Minority interest | (2,667 | ) | 126 | 135 | 20 | (226 | ) | 461 | |||||||||||||||||
(Loss) income from continuing operations | (15,261 | ) | 1,030,882 | (174,347 | ) | (413,158 | ) | (636,468 | ) | (255,971 | ) | ||||||||||||||
(Loss) income from discontinued operations, net of taxes | — | — | (2,348 | ) | 18,803 | 57,566 | 61,252 | ||||||||||||||||||
Gain on sale of discontinued operations, net of taxes | — | 13,967 | — | — | — | — | |||||||||||||||||||
(Loss) income before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (15,261 | ) | 1,044,849 | (176,695 | ) | (394,355 | ) | (578,902 | ) | (194,719 | ) | ||||||||||||||
Cumulative effect of change in accounting principle, net of taxes | — | — | — | (1,970 | ) | (890,309 | )(4) | (1,741 | ) | ||||||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | 13,615 | — | — | |||||||||||||||||||
Net (loss) income | (15,261 | ) | 1,044,849 | (176,695 | ) | (382,710 | ) | (1,469,211 | ) | (196,460 | ) | ||||||||||||||
Preferred dividends | — | — | — | (6,719 | ) | (89,186 | ) | (80,743 | ) | ||||||||||||||||
Net (loss) income applicable to common stockholders | (15,261 | ) | 1,044,849 | (176,695 | ) | (389,429 | ) | (1,558,397 | ) | (277,203 | ) | ||||||||||||||
Basic and diluted (loss) earnings per share: | |||||||||||||||||||||||||
Continuing operations | $ | (0.76 | ) | $ | 23.37 | $ | (3.96 | ) | $ | (9.58 | ) | $ | (19.47 | ) | $ | (10.40 | ) | ||||||||
Discontinued operations | — | 0.32 | (0.05 | ) | 0.43 | 1.55 | 1.89 | ||||||||||||||||||
Before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (0.76 | ) | 23.69 | (4.01 | ) | (9.15 | ) | (17.92 | ) | (8.51 | ) | ||||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.05 | ) | (23.89 | ) | (0.05 | ) | ||||||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | 0.31 | — | — | |||||||||||||||||||
(Loss) earnings per share | $ | (0.76 | ) | $ | 23.69 | $ | (4.01 | ) | $ | (8.89 | ) | $ | (41.81 | ) | $ | (8.56 | ) | ||||||||
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Successor | ||||||||||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||||||||||
For the Period | For the Period | |||||||||||||||||||||||
October 2, | January 1, | |||||||||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | ||||||||||||||||||||||
December 31, | October 1, | |||||||||||||||||||||||
2005 | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||||
Deficiency of earnings to cover fixed charges | $ | 8,062 | $ | 65,570 | $ | 208,809 | $ | 389,218 | $ | 337,019 | $ | 315,708 | ||||||||||||
Cash flow data: | ||||||||||||||||||||||||
(Used in) provided by operating activities(5) | (38,531 | ) | (143,827 | ) | 66,129 | 232,653 | 192,670 | 169,818 | ||||||||||||||||
(Used in) provided by investing activities(6) | (5,089 | ) | 194,707 | 906,887 | (157,484 | ) | (138,824 | ) | (248,672 | ) | ||||||||||||||
Provided by (used in) equity transactions | — | — | — | 3,852 | (32,737 | ) | (35,687 | ) | ||||||||||||||||
(Used in) provided by financing transactions | 120,763 | — | (966,887 | ) | (3,313 | ) | (115,122 | ) | (119,555 | ) | ||||||||||||||
Dividends paid per common share | — | — | — | — | — | — |
Successor | ||||||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||||||
December 31, | ||||||||||||||||||||
December 31, | ||||||||||||||||||||
2005 | 2004(7) | 2003(7) | 2002(2)(4) | 2001(8) | ||||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 275,796 | $ | 147,773 | $ | 141,644 | $ | 65,936 | $ | 159,949 | ||||||||||
Total assets | 1,678,977 | 1,218,733 | 2,463,813 | 2,692,802 | 4,426,187 | |||||||||||||||
Debt, including current portion | 128,191 | — | — | 2,236,497 | 2,352,956 | |||||||||||||||
Non-current liabilities and minority interest | 603,374 | 84,677 | 72,932 | 354,475 | 272,302 | |||||||||||||||
Convertible redeemable preferred stock | — | — | — | 125,081 | — | |||||||||||||||
Liabilities subject to compromise (see Notes 5 and 11 to the consolidated financial statements) | — | 1,916,000 | 2,921,680 | — | — | |||||||||||||||
Shareholders’ equity (deficit) | 627,164 | (1,044,101 | ) | (855,670 | ) | (354,227 | ) | 1,350,868 |
(1) | In connection with our emergence from Chapter 11 and our adoption of fresh-start accounting on October 1, 2005 we recognized a gain on discharge of pre-petition obligations and fresh-start adjustments of $1.101 billion, related interest expense of $13.2 million related to the holders of claims to be paid in cash and a tax benefit of $15.4 million, each of which is reflected separately in our statement of operations (see Note 4 to the consolidated financial statements). |
(2) | 2004 includes an $11 million increase to the deferred tax valuation allowance relating to the reversal of deferred tax liabilities arising from the write-off of our investment in Globalstar, L.P.’s $500 million credit facility, upon Globalstar, L.P.’s dissolution in June 2004. 2002 includes an increase in the deferred tax valuation allowance of $390 million, based upon management’s assessment that insufficient positive evidence existed substantiating recoverability of our loss carryforwards and other deferred tax assets (see Note 14 to the consolidated financial statements). |
(3) | Our principal affiliate is XTAR. Loral also has investments in joint ventures providing Globalstar service, which are accounted for under the equity method. During 2004, we recorded $47 million of equity income on the reversal of vendor financing liabilities that were non-recourse to SS/L in the event of non-payment by Globalstar, L.P. (see Note 9 to the consolidated financial statements). During 2003, we wrote off our remaining investment of $29 million in Satmex. |
(4) | On January 1, 2002, in compliance with the adoption of SFAS 142, we recorded a charge of $890 million to write off all of our goodwill as the cumulative effect of change in accounting principle. |
(5) | Cash flow(used in) provided by operating activities includes cash flow from operating activities provided by discontinued operations. |
(6) | Cash flow (used in) provided by investing activities includes cash flow provided by (used in) investing activities of discontinued operations. |
(7) | As a result of our Chapter 11 filing, our debt obligations, preferred stock obligations and certain other liabilities existing at July 15, 2003, were classified as liabilities subject to compromise on our balance sheets at December 31, 2004 and 2003. These obligations have been extinguished as of the Effective Date (see Note 11 to the consolidated financial statements). |
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(8) | On December 21, 2001, Loral Orion, Inc. (now known as Loral Skynet Corporation) completed exchange offers and consent solicitations by issuing $613 million principal amount of new senior notes guaranteed by Old Loral and 0.6 million five year warrants to purchase Old Loral common stock in exchange for a total of $841 million principal amount of Loral Orion senior notes due 2007 and senior discount notes due 2007. These obligations have been extinguished as of the Effective Date. |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with our consolidated financial statements (the “financial statements”) included in Item 15 of this Annual Report on Form 10-K.
Loral Space & Communications Inc. (“New Loral”) was formed to succeed the business conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from Chapter 11 of the federal bankruptcy laws on November 21, 2005 (the “Effective Date”) pursuant to the terms of the fourth amended joint plan of reorganization of Old Loral and its debtor subsidiaries, as modified (the “Plan of Reorganization”).
We adopted fresh start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7,Financial Reporting of Entities in Reorganization Under the Bankruptcy Code(“SOP 90-7”). Accordingly, our financial information disclosed under the heading “Successor Registrant” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not comparable to, our financial information disclosed under the heading “Predecessor Registrant” for the period ended and as of October 1, 2005 (the date we adopted fresh-start accounting) or for prior periods.
The terms, “Loral,” the “Company,” “we,” “our” and “us,” when used in this report with respect to the period prior to our emergence from Chapter 11, are references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New Loral. These references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context otherwise requires.
References to full-year 2005 financial information throughout this discussion combine the periods of January 1, 2005 to October 1, 2005 with October 2, 2005 to December 31, 2005. A reconciliation is provided to that effect. Management believes that providing this financial information is the most relevant and useful method for making comparisons to the year ended December 31, 2004.
Disclosure Regarding Forward-Looking Statements
Except for the historical information contained in the following discussion and analysis, the matters discussed below are not historical facts, but are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we or our representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts. These forward-looking statements can be identified by the use of words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should,” “anticipates,” “estimates,” “project,” “intend,” or “outlook” or other variations of these words. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or quantify. Actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond our control. For a detailed discussion of these and other factors and conditions, please refer to the Commitments and Contingencies section below and to our other periodic reports filed with the Securities and Exchange Commission (“SEC”). We operate in an industry sector in which the value of securities may be volatile and may be influenced by economic and other factors beyond our control. We undertake no obligation to update any forward-looking statements.
Overview
Businesses
Loral is a leading satellite communications company organized into two operating segments: Satellite Services and Satellite Manufacturing.
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Satellite Services |
Through Loral Skynet Corporation (“Loral Skynet”) we provide satellite capacity and networking infrastructure to our commercial and government customers for a wide range of video and data transmission services, including video and direct-to-home (“DTH”) broadcasting, high-speed data distribution, Internet access, communications and networking services. While we compete with fiber optic cable and other terrestrial delivery systems, primarily for point-to-point applications, Loral Skynet has been able to combine the inherent advantages of each technology to provide its customers with complete end-to-end services. Since FSS satellites remain in a fixed point above the earth’s equator, they are considerably more efficient than terrestrial systems for certain applications, such as broadcast or point-to-multipoint transmission of video and broadband data. A satellite offers instant infrastructure. It can cover large geographic areas, sometimes entire hemispheres, and can not only provide services to populated areas, but can also better serve areas with inadequate terrestrial infrastructures, low-density populations or difficult geographic terrain.
The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once these investments are made, however, the costs to maintain and operate the fleet are relatively low. The upfront investments are earned back through the leasing of transponders to customers over the life of the satellite. Given the harsh and unpredictable environment in which the satellites operate, another major cost factor is in-orbit insurance. Annual receipts from this business are fairly predictable because they are derived from an established base of long-term customer contracts and high contract renewal rates.
On March 17, 2004, we consummated the sale of our North American satellites and related assets to certain affiliates of Intelsat, Ltd. and Intelsat (Bermuda), Ltd. (collectively, “Intelsat”). The North American satellites and related assets sold to Intelsat have been accounted for as a discontinued operation. Commencing on March 18, 2006, Loral Skynet resumed marketing of satellite services to the North American market, a region in which it was precluded from doing business for two years pursuant to the terms of its sale of satellites to Intelsat in March 2004 (see Note 5 to the consolidated financial statements).
Competition in the satellite services market has been intense in recent years due to a number of factors, including transponder over-capacity in certain geographic regions and increased competition from fiber. This competition has put further pressure on prices already depressed by the telecommunications industry downturn earlier this decade. A stronger economy and an increase in capital available for expanded consumer and enterprise-level services have led to an improvement in demand. Much of Loral Skynet’s remaining available capacity, however, is over geographic regions where the market is characterized by excess capacity, coupled with weak demand, or where regulatory obstacles are such that we find ourselves at a competitive disadvantage versus local operators. Loral Skynet’s growth depends on its ability to successfully market the capacity available on its international fleet of satellites, to differentiate itself from its competition through customized product offerings and its superior customer service and to fund additional satellite acquisitions.
Satellite Manufacturing |
Space Systems/ Loral, Inc. (“SS/ L”) designs and manufactures satellites, space systems and space systems components for commercial and government customers who use the satellites for applications such as fixed satellite services, DTH broadcasting, broadband data distribution, wireless telephony, digital radio, military communications, weather monitoring and air traffic management.
While its requirement for ongoing capital investment is relatively low, the satellite manufacturing industry is a knowledge-intensive business, the success of which relies heavily on its technological heritage and the skills of its workforce. The breadth and depth of talent and experience resident in SS/ L’s workforce of approximately 1,400 employees is one of our key competitive resources.
Satellite manufacturers have high fixed costs relating primarily to labor and overhead. Based on its current cost structure, we estimate that SS/ L covers its fixed costs with an average of three to four satellite awards a year depending on the size, power and complexity of the satellite. Cash flow in the satellite manufacturing business, however, tends to be uneven. It takes two to three years to complete a satellite project
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Satellites are extraordinarily complex devices designed to operate in the very hostile environment of space. This complexity may lead to unanticipated costs during the design, manufacture and testing of a satellite. SS/ L establishes provisions for costs based on historical experience and program complexity to cover anticipated costs. Since most of SS/ L’s contracts are fixed price, cost increases in excess of the provisions reduce profitability and may result in losses borne solely by SS/ L, which may be material. The highly competitive satellite manufacturing industry is just now recovering from a several-year period when order levels reached an unprecedented low level, resulting in manufacturing over-capacity. Buyers, as a result, have had the advantage over suppliers in negotiating prices, terms and conditions resulting in reduced margins and increased assumptions of risk by SS/ L. SS/ L was further handicapped while it was in Chapter 11, because of buyers’ reluctance to purchase satellites from a company in bankruptcy.
Bankruptcy Reorganization
The sustained and unprecedented decline in demand for our satellites and the transponder over-capacity in our satellite services business exacerbated Loral’s already strained financial condition brought on primarily by the investments we had previously made in Globalstar, L.P. and subsequently wrote-off. On July 15, 2003, Old Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Old Loral, the “Debtors”) filed voluntary petitions for reorganization (the “Chapter 11 Cases”) under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”). During the ensuing two-and-a-half year period we further increased our emphasis on cash conservation by reducing operating expenses and closely monitoring capital expenditures.
On August 1, 2005, the Bankruptcy Court entered its Confirmation Order confirming the Plan of Reorganization. On September 30, 2005, the FCC approved the transfer of FCC licenses from Old Loral to New Loral, which represented satisfaction of the last material condition precedent to emergence. The Debtors emerged from their reorganization proceeding under Chapter 11 on November 21, 2005 pursuant to the Plan of Reorganization. Pursuant to SOP 90-7 we adopted fresh-start accounting as of October 1, 2005 (see Notes 2 and 4 to the financial statements).
Future Outlook
Following our recent emergence from Chapter 11, we have focused primarily on taking advantage of the years of experience and superior expertise of our professional senior management team to capture opportunities in our markets and maintain an efficient stream-lined operation.
We have reorganized around SS/ L’s satellite manufacturing operations and Loral Skynet’s international fleet of satellites. We consider these operations to be a viable foundation for the further expansion of our company.
Construction of Telstar 11N, a powerful new multi-region Ku-band communications satellite, has begun at SS/ L and upon completion will be launched into the 37.5 degree W.L. orbital location. Scheduled to enter service in 2008, Telstar 11N will provide commercial and governmental customers with broadband connectivity within and among the American, European and African regions. Our customers will use Telstar 11N for video distribution and high-speed, IP-based data and voice services.
Critical success factors for both of our segments include maintaining our reputation for reliability, quality and superior customer service. These factors are vital to securing new customers and retaining current ones. At the same time, we must continue to contain costs, and maximize efficiencies. Loral Skynet is focused on increasing the capacity utilization of its satellite fleet and successfully rolling out new value-added services to
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See Part 1, Item 1 of this Annual Report on Form 10-K, for a complete description of Loral’s businesses, the Chapter 11 Cases and our Plan of Reorganization.
Consolidated Operating Results
Please refer to Critical Accounting Matters set forth below in this section.
The following discussion of revenues and Adjusted EBITDA (see Note 20 to the financial statements) reflects the results of our operating business segments for 2005, 2004 and 2003. The balance of the discussion relates to our consolidated results, unless otherwise noted. As previously discussed, we emerged from Chapter 11 on November 21, 2005 and adopted fresh-start accounting as of October 1, 2005. As a result of the adoption of fresh-start accounting, the Successor Registrant’s financial statements are not comparable with the Predecessor Registrant’s financial statements. References to full-year 2005 financial information throughout this discussion combine the periods of January 1, 2005 to October 1, 2005 with October 2, 2005 to December 31, 2005. A reconciliation is provided to that effect. Management believes that presenting the financial information in this way is the most relevant and useful method for making comparisons to the year ended December 31, 2004.
The sale of our North American satellites and related assets to Intelsat in March 2004, has been accounted for as a discontinued operation, resulting in our historical statements of operations and statements of cash flows reflecting such discontinued operations separately from continuing operations (see Note 5 to the financial statements).
Revenues:
For the Period | For the Period | |||||||||||||||||||
October 2, | January 1, | |||||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | ||||||||||||||||||
December 31, | October 1, | |||||||||||||||||||
2005 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Satellite Services | $ | 37.0 | $ | 114.5 | $ | 151.5 | $ | 141.2 | $ | 154.3 | ||||||||||
Revenues from sales-type lease arrangement (see Note 8 to the financial statements) | — | — | — | 87.2 | — | |||||||||||||||
Satellite Manufacturing | 161.8 | 329.5 | 491.3 | 436.6 | 474.0 | |||||||||||||||
Segment revenues | 198.8 | 444.0 | 642.8 | 665.0 | 628.3 | |||||||||||||||
Eliminations(2) | (1.6 | ) | (14.8 | ) | (16.4 | ) | (142.9 | ) | (236.3 | ) | ||||||||||
Revenues as reported(3) | $ | 197.2 | $ | 429.2 | $ | 626.4 | $ | 522.1 | $ | 392.0 | ||||||||||
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Adjusted EBITDA:
For the Period | For the Period | |||||||||||||||||||
October 2, | January 1, | |||||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | ||||||||||||||||||
December 31, | October 1, | |||||||||||||||||||
2005 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Satellite Services(4) | $ | 11.5 | $ | 39.8 | $ | 51.3 | $ | 15.6 | $ | 7.5 | ||||||||||
Satellite Services sales-type lease arrangement (see Note 8 to the financial statements) | — | — | — | 7.7 | — | |||||||||||||||
Satellite Manufacturing(5) | 11.8 | 15.2 | 27.0 | (13.5 | ) | (158.6 | ) | |||||||||||||
Corporate expenses(6) | (11.0 | ) | (17.3 | ) | (28.3 | ) | (34.9 | ) | (36.0 | ) | ||||||||||
Segment Adjusted EBITDA before eliminations | 12.3 | 37.7 | 50.0 | (25.1 | ) | (187.1 | ) | |||||||||||||
Eliminations(2) | (1.2 | ) | (12.3 | ) | (13.5 | ) | (24.0 | ) | (41.9 | ) | ||||||||||
Adjusted EBITDA | $ | 11.1 | $ | 25.4 | $ | 36.5 | $ | (49.1 | ) | $ | (229.0 | ) | ||||||||
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For the Period | For the Period | |||||||||||||||||||
October 2, | January 1, | |||||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | ||||||||||||||||||
December 31, | October 1, | |||||||||||||||||||
2005 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Adjusted EBITDA | $ | 11.1 | $ | 25.4 | $ | 36.5 | $ | (49.1 | ) | $ | (229.0 | ) | ||||||||
Depreciation and amortization(7) | (16.0 | ) | (61.3 | ) | (77.3 | ) | (134.8 | ) | (134.6 | ) | ||||||||||
Reorganization expenses due to bankruptcy | — | (31.2 | ) | (31.2 | ) | (30.4 | ) | (25.3 | ) | |||||||||||
Operating loss from continuing operations | (4.9 | ) | (67.1 | ) | (72.0 | ) | (214.3 | ) | (388.9 | ) | ||||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments(1) | — | 1,101.5 | 1,101.5 | — | — | |||||||||||||||
Interest and investment income | 4.1 | 6.4 | 10.5 | 9.9 | 15.2 | |||||||||||||||
Interest expense | (4.4 | ) | (17.2 | ) | (21.6 | ) | (2.9 | ) | (14.1 | ) | ||||||||||
Other income (expense) | (0.2 | ) | (0.9 | ) | (1.1 | ) | (0.5 | ) | 1.5 | |||||||||||
Gain on investments | — | — | — | — | 17.9 | |||||||||||||||
Income tax (provision) benefit | (1.8 | ) | 10.9 | 9.1 | (13.2 | ) | 6.4 | |||||||||||||
Equity (losses) income in affiliates | (5.4 | ) | (2.8 | ) | (8.2 | ) | 46.6 | (51.2 | ) | |||||||||||
Minority interest | (2.7 | ) | 0.1 | (2.6 | ) | 0.1 | — | |||||||||||||
(Loss) income from continuing operations | (15.3 | ) | 1,030.9 | 1,015.6 | (174.3 | ) | (413.2 | ) | ||||||||||||
Income (loss) from discontinued operations, net of taxes | — | 14.0 | 14.0 | (2.4 | ) | 18.8 | ||||||||||||||
(Loss) income before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (15.3 | ) | 1,044.9 | 1,029.6 | (176.7 | ) | (394.4 | ) | ||||||||||||
Cumulative effect of change in accounting principle | — | — | — | — | (1.9 | ) | ||||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | — | 13.6 | |||||||||||||||
Preferred dividends | — | — | — | — | (6.7 | ) | ||||||||||||||
Net (loss) income applicable to common shareholders | $ | (15.3 | ) | $ | 1,044.9 | $ | 1,029.6 | $ | (176.7 | ) | $ | (389.4 | ) | |||||||
(1) | In connection with our emergence from Chapter 11 and our adoption of fresh-start accounting on October 1, 2005 we recognized a gain on discharge of pre-petition obligations and fresh-start adjustments of $1.101 billion, related interest expense of $13.2 million and a tax benefit of $15.4 million, each of which is reflected separately in our statement of operations (see Note 4 to the financial statements). |
(2) | Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under construction by SS/ L for wholly owned subsidiaries and in 2003, the reversal of cumulative satellite manufacturing sales of $83 million and cost of satellite manufacturing of $73 million on a satellite program that was changed to a lease arrangement in the third quarter of 2003 (see Note 8 to the financial statements). |
(3) | Includes revenues from affiliates of $4.1 million, $10.0 million, $7.8 million and $27.7 million for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005 and the years ended December 31, 2004 and 2003, respectively. |
(4) | In 2004, includes an impairment charge of $12 million for our Telstar 14/ Estrela do Sul-1 Satellite (see Note 8 to the financial statements). |
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(5) | Excludes charges of $24 million for 2004, as a result of the settlement of all orbital receivables on satellites sold to Intelsat. This settlement had the effect of reducing future orbital receipts by $25 million, including $15 million relating to a satellite under construction in 2004. Consistent with our internal reporting for satellite manufacturing, this decrease in contract value for the satellite under construction is not being reflected as a decrease in 2004 satellite manufacturing revenues. These charges had no effect on our consolidated results. |
Years Ended December 31, | |||||||||||||
2005 | 2004 | 2003 | |||||||||||
(in millions) | |||||||||||||
Satellite Manufacturing includes: | |||||||||||||
Adjusted EBITDA before specific identified charges | $ | 45.1 | $ | 10.8 | $ | (21.3 | ) | ||||||
Accrued warranty obligations | (14.5 | ) | (9.7 | ) | (2.2 | ) | |||||||
Write-off of long-term receivables due to contract modifications | — | (11.3 | ) | (20.2 | ) | ||||||||
Provisions for inventory obsolescence | (3.6 | ) | (3.3 | ) | (49.5 | ) | |||||||
Loss on cancellation of deposits | — | — | (23.5 | ) | |||||||||
Accrual for Alcatel settlement | — | — | (13.0 | ) | |||||||||
Loss on acceleration of receipt of long-term receivables | — | — | (10.9 | ) | |||||||||
Valuation allowance on vendor financing receivables | — | — | (10.0 | ) | |||||||||
Settlement of satellite contract dispute | — | — | (8.0 | ) | |||||||||
Satellite Manufacturing segment Adjusted EBITDA before eliminations | $ | 27.0 | $ | (13.5 | ) | $ | (158.6 | ) | |||||
(6) | Represents corporate expenses incurred in support of our operations and for the period October 2, 2005 to December 31, 2005 includes $3.9 million of continuing expenses related to the run out of bankruptcy related matters, which after the adoption of fresh-start accounting are classified as corporate expenses. |
(7) | Includes additional depreciation expense of $9 million and $14 million for 2004 and 2003, respectively, due to accelerating the estimated end of depreciable life of our Telstar 11 satellite to June 2004 from March 2005. |
Revenues from Satellite Services |
% Increase | ||||||||||||||||||||
(Decrease) | ||||||||||||||||||||
Years Ended | ||||||||||||||||||||
December 31, | 2005 | 2004 | ||||||||||||||||||
vs. | vs. | |||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Revenues from Satellite Services | $ | 152 | $ | 141 | $ | 154 | 7 | % | (8 | )% | ||||||||||
Revenues from sales-type lease arrangement | — | 87 | — | |||||||||||||||||
Eliminations | (5 | ) | (5 | ) | (7 | ) | — | 29 | % | |||||||||||
Revenues from Satellite Services as reported | $ | 147 | $ | 223 | $ | 147 | (34 | )% | 51 | % | ||||||||||
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Revenues from Satellite Services as reported increased $76 million in 2004 as compared to 2003, primarily because of the $87 million of revenues recognized in connection with the sales-type lease arrangement for satellite capacity (see Note 8 to the financial statements) and from higher customer lease termination and settlement fees of $7 million. This was offset by a $17 million decrease in transponder and network utilization and a $2 million decrease due to lower rates for services.
Revenues from Satellite Manufacturing
% Increase | ||||||||||||||||||||
(Decrease) | ||||||||||||||||||||
Years Ended | ||||||||||||||||||||
December 31, | 2005 | 2004 | ||||||||||||||||||
vs. | vs. | |||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Revenues from Satellite Manufacturing | $ | 491 | $ | 437 | $ | 474 | 13 | % | (8 | )% | ||||||||||
Eliminations | (11 | ) | (137 | ) | (229 | ) | 91 | % | 40 | % | ||||||||||
Revenues from Satellite Manufacturing as reported | $ | 480 | $ | 300 | $ | 245 | 61 | % | 22 | % | ||||||||||
Revenues from Satellite Manufacturing before eliminations increased by $54 million in 2005 as compared to 2004. Revenues in 2005 include $165 million of revenues from new satellite awards of $824 million in 2005 and $326 million of revenues from existing backlog. Revenues in 2004 include $57 million of revenues from new satellite awards of $385 million in 2004 and $380 million of revenues from existing backlog. Eliminations consist primarily of revenues from satellites under construction by SS/L for Satellite Services, and in 2004 include satellites under construction which have been completed. As a result, revenues from Satellite Manufacturing as reported increased $180 million in 2005 as compared to 2004.
Revenues from Satellite Manufacturing before eliminations decreased by $37 million in 2004 as compared to 2003, primarily resulting from a $213 million decrease in revenues from satellite programs nearing completion under the percentage of completion method, offset by a $167 million increase in revenues from new satellite orders received in 2003 and a $9 million decrease in write-offs of long-term receivables due to contract modifications. Eliminations consist primarily of revenues from satellites under construction by SS/L for Satellite Services, and, in 2003, include the reversal of $83 million of cumulative sales on a satellite program that was changed to a lease arrangement in 2003 (see Note 8 to the financial statements). As a result, revenues from Satellite Manufacturing as reported increased $55 million in 2004 as compared to 2003.
Cost of Satellite Services
% Increase | |||||||||||||||||||||
(Decrease) | |||||||||||||||||||||
Years Ended | |||||||||||||||||||||
December 31, | 2005 | 2004 | |||||||||||||||||||
vs. | vs. | ||||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||
(in millions) | |||||||||||||||||||||
Cost of Satellite Services includes: | |||||||||||||||||||||
Cost of Satellite Services before specific identified charges | $ | 59 | $ | 65 | $ | 85 | (10 | )% | (23 | )% | |||||||||||
Depreciation and amortization | 61 | 112 | 107 | (44 | )% | 4 | % | ||||||||||||||
Impairment charge for Telstar 14/ Estrela do Sul-1 satellite | — | 12 | — | ||||||||||||||||||
Cost of sales-type lease arrangement | — | 80 | — | ||||||||||||||||||
Cost of Satellite Services | $ | 120 | $ | 269 | $ | 192 | (55 | )% | 40 | % | |||||||||||
Cost of Satellite Services as a % of Satellite Services revenues as reported | 82 | % | 121 | % | 130 | % |
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Cost of Satellite Services was $26 million and $94 million for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, respectively, totaling $120 million for 2005. Cost of Satellite Services before specific identified charges decreased $6 million in 2005 as compared to 2004, primarily because external satellite capacity costs declined $7 million and headcount and other costs declined $4 million. These decreases were partially offset by an increase in satellite insurance expense of $3 million due to higher premiums and higher ground operations costs of $2 million. Depreciation and amortization expense decreased by $51 million in 2005 as compared to 2004, primarily resulting from a reduction of $42 million related to our Telstar 11 satellite which was fully depreciated in 2004 and the net effect of the fair value adjustments in connection with the adoption of fresh-start accounting on October 1, 2005. Depreciation and amortization for 2005 includes reduced charges of depreciation and amortization of $7 million for fixed assets and a $1 million credit for amortization of intangibles primarily resulting from the adoption of fresh-start accounting. In 2004, we incurred $80 million of costs for a sales-type lease arrangement and recognized an impairment charge of $12 million for the Telstar 14/ Estrela do Sul-1 satellite and related assets to reduce the carrying values to the expected proceeds from insurance of $250 million (see Note 8 to the financial statements). As a result, cost of Satellite Services decreased $149 million in 2005 as compared to 2004.
Cost of Satellite Services before specific identified charges decreased $20 million in 2004 as compared to 2003, primarily due to reduced external satellite capacity costs of $10 million, lower costs of $5 million due to headcount and other cost reductions and decreased insurance costs of $5 million primarily resulting from non-renewal of insurance for Telstar 11 in the fourth quarter of 2003 and from the lower premium on renewal for Telstar 10/ Apstar IIR due to changes to coverage, offset by the insurance cost for Telstar 18 which commenced service at the beginning of September 2004. Depreciation and amortization expense increased $5 million in 2004 as compared to 2003, primarily resulting from higher depreciation expense of $12 million for our Telstar 14/Estrela do Sul-1 satellite which commenced service at the end of March 2004 and our Telstar 18 satellite, offset in part by a reduction of $6 million due to our Telstar 11 satellite being fully depreciated in 2004 and a reduction of $1 million due to the timing of assets placed in service and assets that became fully depreciated. In 2004, we incurred $80 million of costs for a sales-type lease arrangement and recognized an impairment charge of $12 million for the Telstar 14/Estrela do Sul-1 satellite and related assets to reduce the carrying values to the expected proceeds from insurance of $250 million (see Note 8 to the financial statements). As a result, cost of Satellite Services increased $77 million in 2004 as compared to 2003.
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Cost of Satellite Manufacturing
% Increase | |||||||||||||||||||||
(Decrease) | |||||||||||||||||||||
Years Ended | |||||||||||||||||||||
December 31, | 2005 | 2004 | |||||||||||||||||||
vs. | vs. | ||||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||
(in millions) | |||||||||||||||||||||
Cost of Satellite Manufacturing includes: | |||||||||||||||||||||
Cost of Satellite Manufacturing before specific identified charges | $ | 396 | $ | 271 | $ | 330 | 46 | % | (18 | )% | |||||||||||
Depreciation and amortization | 15 | 23 | 27 | (34 | )% | (16 | )% | ||||||||||||||
Accrued warranty obligations | 15 | 10 | 2 | 50 | % | ||||||||||||||||
Write-off of long-term receivables due to contract modifications | — | 11 | 20 | (44 | )% | ||||||||||||||||
Provisions for inventory obsolescence | 4 | 3 | 50 | ||||||||||||||||||
Loss on cancellation of deposits | — | — | 24 | ||||||||||||||||||
Accrual for Alcatel settlement | — | — | 13 | ||||||||||||||||||
Loss on acceleration of receipt of long-term receivables | — | — | 11 | ||||||||||||||||||
Valuation allowance on vendor financing receivables | — | — | 10 | ||||||||||||||||||
Settlement of satellite contract dispute | — | — | 8 | ||||||||||||||||||
Reversal of costs on a satellite program changed to a lease | — | — | (73 | ) | |||||||||||||||||
Cost of Satellite Manufacturing | $ | 430 | $ | 318 | $ | 422 | 36 | % | (25 | )% | |||||||||||
Cost of Satellite Manufacturing as a % of Satellite Manufacturing revenues as reported | 90 | % | 106 | % | 172 | % |
Cost of Satellite Manufacturing was $139 million and $291 million for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, respectively, totaling $430 million for 2005. Cost of Satellite Manufacturing increased $112 million in 2005 as compared to 2004. The Cost of Satellite Manufacturing before specific identified charges increased $125 million in 2005 as compared to 2004, primarily due to the increase in sales for the period, partially offset by the effect of improved factory performance. The Cost of Satellite Manufacturing increase was also offset by lower depreciation and amortization expense of $8 million primarily resulting from the effects of reduced capital spending and the adoption of fresh-start accounting on October 1, 2005. Depreciation and amortization for the Successor Registrant includes a $5 million credit due to amortization of contract valuation adjustments, partially offset by a $3 million amortization charge for intangibles established in connection with the adoption of fresh-start accounting.
Cost of Satellite Manufacturing decreased $104 million in 2004 as compared to 2003. Cost of Satellite Manufacturing before specific identified charges decreased $59 million in 2004 as compared to 2003, primarily due to lower overall volume as satellite programs neared completion under the percentage of completion method and lower costs due to headcount reductions, offset in part by $141 million of increased costs for the satellite orders received in the fourth quarter of 2003. Cost of Satellite Manufacturing also decreased in 2004 as compared to 2003, due to lower depreciation expense of $4 million primarily resulting from reduced capital spending and the charges incurred in 2003 as compared to those in 2004, as detailed in the above table. These decreases were partially offset by the reversal of $73 million of costs on a satellite program that was changed to a lease arrangement in 2003 (see Note 8 to the financial statements).
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% Increase | ||||||||||||||||||||
(Decrease) | ||||||||||||||||||||
Years Ended | ||||||||||||||||||||
December 31, | 2005 | 2004 | ||||||||||||||||||
vs. | Vs. | |||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Selling, general and administrative expenses | $ | 116 | $ | 119 | $ | 142 | (2 | )% | (16 | )% | ||||||||||
% of revenues as reported | 19 | % | 23 | % | 36 | % |
% Increase | ||||||||||||||||||||
(Decrease) | ||||||||||||||||||||
Year Ended | ||||||||||||||||||||
December 31, | July 15, 2003 to | 2005 | 2004 | |||||||||||||||||
December 31, | vs. | vs. | ||||||||||||||||||
2005 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Reorganization Expenses Due to Bankruptcy | $ | 31 | $ | 30 | $ | 25 | 3 | % | 20 | % |
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Interest and Investment Income
Years Ended | ||||||||||||
December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in millions) | ||||||||||||
Interest and investment income | $ | 11 | $ | 10 | $ | 15 |
Interest income is primarily derived from our orbital incentives on satellites in orbit manufactured by SS/L.
Interest Expense
Years Ended | ||||||||||||
December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in millions) | ||||||||||||
Interest cost before capitalized interest | $ | 22 | $ | 4 | $ | 28 | ||||||
Capitalized interest | — | (1 | ) | (14 | ) | |||||||
Interest expense | $ | 22 | $ | 3 | $ | 14 | ||||||
Interest cost before capitalized interest increased $18 million in 2005 as compared to 2004, primarily due to $13 million of interest expense relating to payments to pre-petition creditors in accordance with our Plan of Reorganization and $3 million of interest expense recognized on the Loral Skynet 14% senior secured notes issued in connection with our Plan of Reorganization.
Interest expense decreased $11 million in 2004 as compared to 2003, primarily attributable to the fact that subsequent to our voluntary petitions for reorganization on July 15, 2003, we stopped recognizing and paying interest on all outstanding prepetition debt obligations (except our secured bank debt, for which a portion of interest expense is included in discontinued operations) and preferred stock. Capitalized interest decreased to $1 million in 2004, which was due to us no longer incurring interest expense on our secured bank debt that we repaid in March 2004. Interest cost was minimal while we were in Chapter 11.
Other Income (Expense)
Other income (expense) represents gains and (losses) on foreign currency transactions.
Gain on Investments |
During 2003, we realized an $18 million gain from the sale of all 59 million shares of common stock of Sirius Satellite Radio Inc. received by us in settlement of the vendor financing owed to SS/ L by Sirius.
Income Tax (Provision) Benefit |
During 2005, 2004 and 2003, we continued to maintain the 100% valuation allowance that had been established at December 31, 2002 against our net deferred tax assets. However, upon emergence from bankruptcy in 2005, we reversed our valuation allowance relating to $2.0 million of deferred tax assets for AMT credit carryforwards. The valuation allowance was $337.3 million at December 31, 2005 and $336.9 million at October 1, 2005. If, in the future we were to determine that we will be able to realize all or a portion of the benefit from our deferred tax assets, a reduction to the valuation allowance as of October 1, 2005 will first reduce goodwill, then other intangible assets with any excess treated as an increase to paid-in-capital.
For 2005, we recorded a current tax provision of $7.0 million and a deferred tax benefit of $16.1 million, resulting in a net benefit of $9.1 million on pre-tax income of $1.017 billion, which included a gain on discharge of pre-petition obligations and fresh-start adjustments of $1.101 billion. For 2004, we recorded a current tax provision of $1.1 million and a deferred tax provision of $12.2 million, resulting in a total provision
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The increase to our current provision for 2005 as compared to 2004 and 2003 was primarily attributable to additional foreign income taxes, primarily Brazil on our lease income from Estrela do Sul-1, and accruals of tax contingency reserves for potential audit issues.
In connection with our emergence from bankruptcy, Old Loral realized cancellation of debt income (“COD”) on its federal income tax return of approximately $439 million. COD realized while in bankruptcy is excluded from federal taxable income. We are required to reduce certain of our tax attributes, and to the extent sufficient attributes are not available on a separate company basis, reduce the tax basis in our assets, by an amount equal to the COD excluded by Old Loral from its taxable income. This adjustment resulted in a reduction to our deferred tax assets and the related valuation allowance. Also, as part of our fresh-start accounting and plan of reorganization adjustments, we recognized a net income tax benefit of $15.4 million, which includes a net deferred tax benefit of $16.5 million. See Notes 4 and 14 to the financial statements.
For 2004, the deferred income tax provision of $12.1 million related to an additional valuation allowance which was required when we reversed the following deferred tax liabilities from accumulated other comprehensive loss: (i) With the dissolution of Globalstar on June 29, 2004, we wrote-off the remaining book value of our investment in Globalstar’s $500 million credit facility and reduced to zero the unrealized gains and related deferred tax liabilities previously reflected in accumulated other comprehensive loss. The reversal of this deferred tax liability resulted in a net deferred tax asset of $11.4 million against which we recorded a full valuation allowance. (ii) We also reduced the balance for certain deferred gains on derivative transactions and the related deferred tax liability included in accumulated other comprehensive loss. The reversal of this deferred tax liability also resulted in a net deferred tax asset of $0.7 million against which we recorded a full valuation allowance. See Notes 6 and 9 to the financial statements.
For 2003, the deferred income tax benefit of $7.3 million related to an $11.0 million reclassification of a tax provision to income from discontinued operations partially offset by a provision of $3.7 million for certain foreign entities.
Equity Income (Losses) in Affiliates |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in millions) | ||||||||||||
XTAR | $ | (8.1 | ) | $ | 0.1 | $ | (0.2 | ) | ||||
Satmex | — | — | (51.7 | ) | ||||||||
Globalstar and Globalstar service provider partnerships | (0.1 | ) | 46.5 | 0.7 | ||||||||
$ | (8.2 | ) | $ | 46.6 | $ | (51.2 | ) | |||||
XTAR commenced commercial operations in 2005 with the launch of its satellite in February 2005. The increase in equity losses in XTAR in 2005 represents our share of higher XTAR losses incurred in connection with its start-up, as well as, the elimination of profit related to the construction of the Spainsat satellite by SS/L for Hisdesat, which was successfully launched on March 11, 2006.
In connection with Globalstar, L.P.’s dissolution in June 2004, we recorded equity income of $47 million relating to Globalstar, L.P. on the reversal of vendor financing that was non-recourse to SS/ L in the event of non-payment by Globalstar, L.P. During 2004, we did not provide for our allocated share of net losses of Satélites Mexicanos, S.A. de C.V. (“Satmex”), due to our write-off of our remaining investment in Satmex in 2003. Our equity losses in Satmex in 2003 of $52 million include the write-off of our remaining investment in Satmex of $29 million (see Note 9 to the financial statements).
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Minority Interest |
Discontinued Operations |
Cumulative Effect of Change in Accounting Principle |
Extraordinary Gain on Acquisition of Minority Interest |
Preferred Dividends |
Backlog |
2005 | 2004 | ||||||||
Satellite Services | $ | 453 | $ | 544 | |||||
Satellite Manufacturing | 815 | 483 | |||||||
Total backlog before eliminations | 1,268 | 1,027 | |||||||
Satellite Services eliminations | (20 | ) | (33 | ) | |||||
Satellite Manufacturing eliminations | — | (12 | ) | ||||||
Total backlog | $ | 1,248 | $ | 982 | |||||
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Critical Accounting Matters
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported for the period. Actual results could differ from estimates.
Fresh-Start Accounting |
In connection with our emergence from Chapter 11 we adopted fresh-start accounting as of October 1, 2005, which requires all of our assets and liabilities to be stated at estimated fair value. We engaged an independent appraisal firm to assist in determining such fair values (see Note 4 to the financial statements). Significant judgment is exercised by both the appraisal firm and by management in estimating the fair values. We expect to finalize these fair values in the first half of 2006, as additional information becomes available.
Revenue recognition |
Most of our Satellite Manufacturing revenue is associated with long-term fixed-price contracts. Revenue and profit from satellite sales under these long-term contracts are recognized using the cost-to-cost percentage of completion method, which requires significant estimates. We use this method because reasonably dependable estimates can be made based on historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including estimated amounts for penalties, performance incentives and orbital incentives that will be received as the satellite performs on orbit) and the potential for component obsolescence in connection with long-term procurements. These estimates are assessed continually during the term of the contract and revisions are reflected when the conditions become known. Provisions for losses on contracts are recorded when estimates determine that a loss will be incurred on a contract at completion. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract; accordingly, favorable changes in estimates in a period will result in additional revenue and profit, and unfavorable changes in estimates will result in a reduction of revenue and profit or the recording of a loss that will be borne solely by us.
Depreciation |
Depreciation is provided for on the straight-line method for satellites over the estimated useful life of the satellite, which is determined by engineering analyses performed at the satellite’s in-service date and re-evaluated periodically. A decrease in the useful life of a satellite would result in increased depreciation expense.
Billed receivables, vendor financing and long-term receivables |
We are required to estimate the collectibility of our billed receivables, vendor financing and long-term receivables. A considerable amount of judgment is required in assessing the collectibility of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. Charges for (recoveries of) bad debts recorded to the income statement on billed receivables during the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to December 31, 2005 and for the years ended December 31, 2004, and 2003 were $1.0 million, $(2.9) million, $(2.1) million and $7.2 million, respectively. At December 31, 2005 and 2004, billed receivables were net of allowances for doubtful accounts of $5.5 million and $6.4 million, respectively. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its financial obligations due to a deterioration of its financial condition, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are re-evaluated periodically.
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Inventories |
Inventories are reviewed for estimated obsolescence or unusable items and, if appropriate, are written down to the net realizable value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those we project, additional inventory write-downs may be required. These are considered permanent adjustments to the cost basis of the inventory. Charges for inventory obsolescence recorded to the income statement during the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004, and 2003 were $1.5 million, $2.1 million, $3.3 million and $49.5 million, respectively.
Evaluation of Satellites and Other Long-Lived Assets For Impairment |
We periodically evaluate potential impairment loss relating to our satellites and other long-lived assets, when a change in circumstances occurs, by assessing whether the carrying amount of these assets can be recovered over their remaining lives through future undiscounted expected cash flows generated by those assets (excluding financing costs). If the expected undiscounted future cash flows are less than the carrying value of the long-lived asset, an impairment charge would be recorded based on such asset’s estimated fair value. Changes in estimates of future cash flows could result in a write-down of the asset in a future period. Estimated future cash flows could be impacted by, among other things:
• | Changes in estimates of the useful life of the satellite | |
• | Changes in estimates of our ability to operate the satellite at expected levels | |
• | Changes in the manner in which the satellite is to be used | |
• | The loss of one or several significant customer contracts on the satellite |
If an impairment loss was indicated for a satellite, such amount would be recognized in the period of occurrence, net of any insurance proceeds to be received so long as such amounts are determinable and receipt is probable. If no impairment loss was indicated in accordance with SFAS 144, and we received insurance proceeds, the proceeds would be recognized in our consolidated statement of operations.
Taxation |
New Loral, as a Delaware company, is subject to U.S. federal, state and local income taxation on its worldwide income. Prior to the Effective Date, Old Loral, as a Bermuda company, was subject to U.S. taxation on any income that was effectively connected with the conduct of a U.S. trade or business as well as a withholding tax on dividends and interest received from its U.S. subsidiaries. Our U.S subsidiaries continue to be subject to U.S. taxation on their worldwide income and foreign taxes on certain income from sources outside the United States. Our foreign subsidiaries are subject to taxation in local jurisdictions.
We use the liability method in accounting for taxes whereby income taxes are recognized during the year in which transactions enter into the determination of financial statement income or loss. Deferred taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying statutory tax rates in effect for the year during which the differences are expected to reverse. We assess the recoverability of our deferred tax assets and, based upon this analysis, record a valuation allowance against the deferred tax assets to the extent recoverability does not satisfy the “more likely than not” recognition criteria in SFAS 109. Based upon this analysis, we concluded during the fourth quarter of 2002 that, due to insufficient positive evidence substantiating recoverability, a 100% valuation allowance should be established for our net deferred tax assets. As of December 31, 2005, we had gross deferred tax assets of approximately $558.8 million, which when offset by our deferred tax liabilities of $234.4 million and our valuation allowance of $337.3 million, resulted in a net deferred tax liability of $12.9 million on our consolidated balance sheet.
For the period October 2, 2005 to December 31, 2005, we continued to maintain the 100% valuation allowance against our net deferred tax assets, other than the $2.0 million asset for our AMT credit carryforwards, increasing the valuation allowance at October 1, 2005 of $336.9 million by $0.4 million to a
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Our policy is to establish tax contingency liabilities for potential audit issues. The tax contingency liabilities are based on our estimate of the probable amount of additional taxes that may be due in the future. Any additional taxes due would be determined only upon completion of current and future federal, state and international tax audits. At December 31, 2005, the Company had $41.8 million and $0.4 million of tax contingency liabilities included in long-term liabilities and income taxes payable, respectively. At December 31, 2004, the Company had $38.9 million of tax contingency liabilities included in liabilities subject to compromise (see Notes 3, 11 and 14 to the financial statements).
Pension and other employee benefits |
We maintain a pension plan and a supplemental retirement plan. These plans are defined benefit pension plans. In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents. These pension and other employee benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in these pension and other employee postretirement benefit costs may occur in the future due to changes in these assumptions, as well as our actual experience.
The discount rate is subject to change each year, consistent with changes in applicable high-quality long-term corporate bond indices, such as the Moody’s AA Corporate Bond Index. The discount rate determined on this basis was 5.75% as of December 31, 2005, a decline of 25 basis points from December 31, 2004. This had the effect of increasing our accumulated benefit obligations (“ABO”) for pensions by $10.7 million and for other employee benefits by $2.3 million as of December 31, 2005, as compared with December 31, 2004 .
The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the plan’s projected benefit obligation, asset mix and the fact that its assets are actively managed to mitigate risk. Allowable investment types include equity investments and fixed income investments. Pension plan assets are managed by Russell Investment Corp. (“Russell”), which allocates the assets into specified Russell-designed funds as we direct. Each specified Russell fund is then managed by investment managers chosen by Russell. The targeted short and long-term allocation of our pension plan assets is 60% in equity investments and 40% in fixed income investments. Based on this target allocation, the fifteen-year historical return of our investment managers has been 10.5%. The expected long-term rate of return on plan assets determined on this basis was 9.0% for 2005, 2004 and 2003.
These pension and other employee postretirement benefit costs are expected to decrease to approximately $20 million in 2006 from $24 million in 2005, primarily due to reduced amortization expense as a result of the recognition of cumulative actuarial losses in connection with our adoption of fresh-start accounting on October 1, 2005. Lowering the discount rate, and the expected long-term rate of return each by 0.5%, would have increased these pensions and other employee postretirement benefits costs by approximately $2.1 million and $1.2 million, respectively, in 2005.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) requires a federal subsidy for sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. These subsidy payments will first be payable to plan sponsors in 2006. In May 2004, the FASB released Financial Accounting Standards Board Position 106-2 (“FSP 106-2”) to provide guidance on accounting and disclosure requirements related to MMA. We adopted FSP 106-2 effective as of the beginning of the fourth quarter of 2004, the earliest the required actuarial information was available. As a result of the adoption of FSP 106-2 our net periodic cost for 2005 and the fourth quarter of 2004 was reduced by $1.1 million and $0.2 million, respectively, and we estimate that it will reduce the 2006 net periodic cost by
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The ABO for the pension plan exceeded the fair value of plan assets by $120 million at December 31, 2005 (the “unfunded ABO”). This was primarily due to the negative returns on the pension funds in previous years arising from the overall decline in the equity markets, and a decline in the discount rate used to estimate the pension liability as a result of declining interest rates. Therefore, Loral was previously required to establish a minimum liability and record an additional $19.0 million during 2004, for a total charge to equity of $88.3 million as of December 31, 2004, for the unfunded ABO, to the extent not already reflected as a liability. As a result of the adoption of fresh-start accounting as of October 1, 2005, we increased our recorded liability by $78 million, net of the charge to equity previously recorded, offset by a reorganization adjustment of $19 million due to a reduction of certain benefits. The ABO was measured using a discount rate of 5.75% as of December 31, 2005 and October 1, 2005 and 6.0% as of December 31, 2004. Lowering the discount rate by 0.5% would have increased the ABO by approximately $21 million. Market conditions and interest rates significantly affect future assets and liabilities of Loral’s pension plans.
Stock-Based Compensation |
Effective October 1, 2005, in connection with our adoption of fresh-start accounting, we adopted the fair value method of accounting for stock options for all options granted by us after October 1, 2005 pursuant to the prospective method provisions of SFAS No. 123(R),Share-Based Payment (“SFAS 123R”). We use the Black-Scholes-Merton option-pricing model to measure fair value of these stock option awards. This is the same method we used in prior years for disclosure purposes. The Black-Scholes-Merton model requires us to make significant judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption, the expected life of the option award, the risk-free rate of return and dividends during the expected term. We emerged from bankruptcy on November 21, 2005, and as a result, we do not have sufficient stock price history upon which to base our volatility assumption. In determining the volatility used in our model, we considered the volatility of the stock prices of selected companies in the satellite industry, the nature of those companies, our emergence from bankruptcy and other factors in determining our stock price volatility. For 2005, we used a stock price volatility assumption of 27%. We based our estimate of the average life of a stock option of 4.75 years using the midpoint between the vesting and expiration dates as allowed by SEC Staff Accounting Bulletin No. 107 based upon the vesting period of 4 years and the option term of seven years. Our risk-free rate of return assumption for options granted in 2005, of 4.4%, was based on the quoted yield for five-year U.S. treasury bonds as of the date of grant (see Note 15 to the financial statements). We assumed no dividends during the expected term.
Prior to October 1, 2005, we followed the disclosure-only provisions of SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”) an amendment of SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”). We accounted for stock-based compensation for employees using the intrinsic value method (as defined below) as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”), and related interpretations. Under APB 25, no compensation expense was recognized for employee share option grants because the exercise price of the options granted equalled the market price of the underlying shares on the date of grant (the “intrinsic value method”).
Deferred Compensation |
Pursuant to the Plan of Reorganization we entered into deferred compensation arrangements for certain key employees that vest generally over four years and expire after seven years. The initial deferred compensation awards were calculated by multiplying $9.44 by the number of stock options granted to these key employees (see Note 15 to the financial statements). We are accreting the liability by charges to income over the vesting period. The deferred compensation cost charged against income, net of estimated forfeitures, was $0.2 million for the period October 2, 2005 to December 31, 2005. As of December 31, 2005, there was an additional $6.6 million of unrecognized deferred compensation (not including an additional $5.8 million for which recognition of the awards were delayed to 2006) that will be charged to income over the remaining
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Goodwill and Other Intangible Assets |
Goodwill represents the amount by which the Company’s reorganization equity value exceeded the fair value of its tangible assets and identified intangible assets less its liabilities allocated in accordance with the provisions of SFAS 141 as of December 31, 2005. Pursuant to the provisions of SFAS 142, goodwill is not amortized and is subject to an annual impairment test which we perform in the fourth quarter of each fiscal year. Our 2005 test of goodwill impairment did not result in any goodwill impairment.
Intangible assets consist primarily of backlog, internally developed software and technology, orbital slots, trade names and customer relationships all of which were recorded in connection with the adoption of fresh-start accounting. We used the work of an independent appraiser to assist us in determining the fair value of our intangible assets. The fair values were calculated using several approaches that encompassed the use of excess earnings, relief from royalty and the build-up methods. The excess earnings, relief from royalty and build-up approaches are variations of the income approach. The income approach, more commonly known as the discounted cash flow approach, estimates fair value based on the cash flows that an asset can be expected to generate over its useful life. Identifiable intangible assets with finite useful lives are generally amortized on a straight-line basis over the estimated useful lives of the assets (see Note 10 to the financial statements).
Contingencies |
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. The most important contingencies affecting our financial statements are detailed in Note 19 to the financial statements, Commitments and Contingencies.
Liquidity and Capital Resources
Cash and Available Credit |
As of December 31, 2005, we had $276 million of available cash and $12 million of restricted cash ($2 million included in other current assets and $10 million included in other assets on our consolidated balance sheet). The Company believes that cash as of December 31, 2005 and net cash provided by operating activities will be adequate to meet its expected cash requirement through at least the next 12 months.
Cash required to pay the remaining claims from the Plan of Reorganization and the expenses associated with completing the reorganization activity, in the aggregate approximately $54 million, will be paid from existing cash on hand.
Cash flow from Satellite Services is fairly predictable because it is derived from an existing base of long-term customer contracts. The Company believes that the Satellite Services cash flow from operations will be sufficient to provide for its maintenance capital requirements and pay its interest and preferred dividend obligations. Cash required to fund the construction of the Telstar 11N satellite that is not available from operations will be funded from cash on hand within the Company or through financing activity.
Cash requirements at Satellite Manufacturing are driven primarily by working capital requirements to fund long-term receivables associated with satellite contracts and capital spending required to maintain and expand the manufacturing facility. The Company believes that the Satellite Manufacturing cash flow from operations is sufficient to fund the capital required to maintain the current manufacturing operations and working capital associated with typical satellite contracts. Capital requirements to expand the manufacturing facility beyond its current capabilities, and offer customer financing terms beyond standard terms, will be funded by cash on hand within the Company or through financing activity.
On November 21, 2005, Loral Skynet completed the sale of $126 million of Senior Secured Notes (the “Loral Skynet Notes”) at par. The Loral Skynet Notes mature on November 15, 2015 and bear interest at
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Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Debt(1) | $ | 126,000 | $ | — | $ | — | $ | — | $ | 126,000 | ||||||||||
Interest on debt(1) | 176,106 | 10,780 | 35,280 | 35,280 | 94,766 | |||||||||||||||
Operating leases(2) | 123,767 | 22,225 | 35,095 | 26,634 | 39,813 | |||||||||||||||
Unconditional purchase obligations(3) | 346,270 | 285,941 | 59,270 | 1,059 | — | |||||||||||||||
Other long-term obligations(4) | 83,894 | 28,739 | 30,774 | 20,704 | 3,677 | |||||||||||||||
Total contractual cash obligations | $ | 856,037 | $ | 347,685 | $ | 160,419 | $ | 83,677 | $ | 264,256 | ||||||||||
Other Commercial Commitments: |
Amount of Commitment Expiration Per Period | ||||||||||||||||||||
Total | ||||||||||||||||||||
Amounts | Less than | More than | ||||||||||||||||||
Committed | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Standby letters of credit(5) | $ | 2,427 | $ | 2,427 | $ | — | $ | — | $ | — | ||||||||||
(1) | Represents cash obligations for principal payments and interest payments on Loral Skynet 14% senior secured notes (see Note 12 to the financial statements for further detail on our debt obligations). |
(2) | Represents future minimum payments under operating leases with initial or remaining terms of one year or more, net of sub-lease rentals of $0.3 million. |
(3) | SS/ L has entered into various purchase commitments with suppliers due to the long lead times required to produce purchased parts. |
(4) | Primarily represents vendor financing related amounts owed to subcontractors and amounts due to APT, representing Loral’s share of the project cost of Telstar 18 and commitments under employment agreements. |
(5) | Letters of credit have a maturity of one year and are renewed annually. |
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Net Cash (Used in) Provided by Continuing Operating Activities |
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Successor | ||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||
For the Period | For the Period | |||||||||||||||
October 2, | January 1, | Years Ended | ||||||||||||||
2005 to | 2005 to | December 31, | ||||||||||||||
December 31, | October 1, | |||||||||||||||
2005 | 2005 | 2004 | 2003 | |||||||||||||
Revenues | $ | 4.1 | $ | 10.0 | $ | 7.8 | $ | 27.7 | ||||||||
Elimination of Loral’s proportionate share of (profits) losses relating to affiliate transactions | (2.9 | ) | 0.6 | 2.4 | 4.4 | |||||||||||
Profits (losses) relating to affiliate transactions not Eliminated | 2.3 | (0.5 | ) | (1.9 | ) | (3.6 | ) |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Foreign Currency |
Japanese Yen | U.S.$ | |||||||
Future revenues | ¥ | 324 | $ | 2.7 | ||||
Future expenditures | 2,178 | 18.5 | ||||||
Contracts-in-process (unbilled receivables) | 69 | 0.6 |
Interest |
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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 |
Evaluation of Disclosure Controls and Procedures |
Management’s Report on Internal Control Over Financial Reporting |
Changes in Internal Controls Over Financial Reporting |
Inherent Limitations on Effectiveness of Controls |
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Item 9B. | Other Information |
None.
PART III
Item 10. | Directors and Executive Officers of the Registrant |
Directors
Loral has three classes of directors, with the term of the initial Class 1 directors expiring at the first annual meeting of stockholders after the Effective Date, the term of the initial Class 2 directors expiring at the second annual meeting of stockholders after the Effective Date, and the term of the initial Class 3 directors expiring at the third annual meeting of stockholders after the Effective Date. Thereafter, each director will serve for a term of three years from the date of his election. The following sets forth information concerning Loral’s directors as of March 10, 2006.
Michael B. Targoff | ||
Age: | 61 | |
Director Since: | November 2005 | |
Class: | Class II | |
Business Experience: | Mr. Targoff is Chief Executive Officer of Loral since March 1, 2006 and Vice Chairman of Loral since November 21, 2005. Prior to that, Mr. Targoff was founder and principal of Michael B. Targoff & Co. | |
Other Directorships: | Chairman of the Board and Chairman of the Audit Committee of Communication Power Industries, a director and Chairman of the Audit Committee of Leap Wireless International, Inc. and a director of ViaSat, Inc. | |
Sai S. Devabhaktuni | ||
Age: | 34 | |
Director Since: | November 2005 | |
Class: | Class III | |
Business Experience: | Mr. Devabhaktuni is a managing principal of MHR Fund Management LLC and affiliates. | |
Hal Goldstein | ||
Age: | 40 | |
Director Since: | November 2005 | |
Class: | Class III | |
Business Experience: | Mr. Goldstein is a co-founder and managing principal of MHR Fund Management LLC and affiliates. | |
Other Directorships: | Director of GF Health Products Inc. | |
John D. Harkey, Jr. | ||
Age: | 45 | |
Director Since: | November 2005 | |
Class: | Class I | |
Business Experience: | Mr. Harkey is Chairman and Chief Executive Officer of Consolidated Restaurant Companies, Inc. | |
Other Directorships: | Director and member of the Audit Committees of Leap Wireless International, Inc., Energy Transfer Partners, L.L.C. and Pizza Inn. |
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Dean Olmstead | ||
Age: | 50 | |
Director Since: | November 2005 | |
Class: | Class II | |
Business Experience: | Mr. Olmstead is President of Arrowhead Global Solutions, Inc. and founder and Chairman of Satellite Development LLC since October 2004. From November 2001 to September 2004, Mr. Olmstead was President and Chief Executive Officer of SES Americom and a member of the SES Global Executive Committee. Prior to that, he was a member of the SES Astra Management Committee. | |
Other Directorships: | Chairman of the Board of Satellite Development LLC (dba BBSat) | |
Mark H. Rachesky, M.D. | ||
Age: | 47 | |
Director Since: | November 2005 | |
Class: | Class III | |
Business Experience: | Dr. Rachesky is non-executive Chairman of the Board of Directors of Loral since March 1, 2006. Dr. Rachesky is a co-founder and President of MHR Fund Management LLC and affiliates | |
Other Directorships: | Director of Leap Wireless International, Inc., Neose Technologies, Inc., NationsHealth Inc. and Emisphere Technologies, Inc. | |
Arthur L. Simon | ||
Age: | 74 | |
Director Since: | November 2005* | |
Class: | Class I | |
Business Experience: | Mr. Simon is an independent part-time consultant. | |
Other Directorships: | Director and member of the Audit and Governance Committees of L-3 Communications Corporation |
The Plan of Reorganization provided that the initial composition of the Board of Directors would be comprised of Mr. Schwartz (who retired from Loral on March 1, 2006), Mr. Targoff, two persons designated by Mr. Schwartz and five persons designated by the creditors’ committee appointed in the Chapter 11 Cases of Old Loral. Mr. Simon, along with Mr. Robert Hodes, a director of Old Loral, were selected by Mr. Schwartz, and Messrs. Devabhaktuni, Goldstein, Harkey, Olmstead and Rachesky were selected by the creditors’ committee. Mr. Hodes resigned from the Board of Directors on February 28, 2006. As provided in Loral’s Certificate of Incorporation, the vacancies on the Board resulting from Mr. Schwartz’s retirement and Mr. Hodes’ resignation will be filled by the Board of Directors.
* | Prior to November 21, 2005, Mr. Simon served as a director of Old Loral. |
Audit Committee
The Board of Directors has a standing Audit Committee, the current members of which are Messrs. Harkey and Simon. Mr. Simon is the Chairman of the Committee. Mr. Targoff was a member of the Audit Committee between November 21, 2005 and February 9, 2006, when he resigned after agreeing to become Chief Executive Officer on March 1, 2006 upon Mr. Schwartz’s retirement. The Board of Directors has determined that Mr. Simon meets the requirements of a financial expert within the meaning of Section 401(h) of Regulation S-K because of, among other things, Mr. Simon’s business experience as a former partner of Coopers & Lybrand L.L.P., Certified Public Accountants. The Board of Directors has further determined that all members of the committee are independent, within the meaning of Schedule 14A
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In March 2006, the Company received a NASDAQ Staff Deficiency Letter indicating that, as a result of the appointment of Mr. Targoff as Chief Executive Officer of the Company and his related resignation from the Company’s Audit Committee, the Company was not in compliance with NASDAQ’s audit committee requirements which require listed companies to have audit committees composed of at least three independent directors. The NASDAQ letter further indicated that the Company has a cure period until the earlier of the Company’s next annual stockholders’ meeting or February 9, 2007 to regain compliance. The Company is currently considering the composition of its Audit Committee and intends to appoint a third independent member thereto within the specified cure period.
Executive Officers of the Registrant
The following table sets forth information concerning the executive officers of Loral as of March 10, 2006.
Name | Age | Position | ||||
Michael B. Targoff | 61 | Chief Executive Officer since March 1, 2006; Vice Chairman of the Board of Directors since November 2005. Prior to that, founder of Michael B. Targoff & Co. | ||||
Eric J. Zahler | 55 | President and Chief Operating Officer since November 2005. President and Chief Operating Officer of Old Loral since February 2000. | ||||
Richard J. Townsend | 55 | Executive Vice President and Chief Financial Officer since November 2005. Executive Vice President and Chief Financial Officer of Old Loral since March 2003. Prior to that, Senior Vice President and Chief Financial Officer of Old Loral since October 1998. | ||||
Patrick K. Brant | 54 | Vice President since November 2005. President of Loral Skynet since November 2005 and President of Loral Skynet, a division of Loral SpaceCom, since August 2004. Senior Vice President of Iridium Satellite LLC from July 2004 to August 2004. From June 2003 to July 2004 consultant and prior to that, Chief Operating Officer of Loral Skynet since 1999. | ||||
C. Patrick DeWitt | 59 | Vice President since November 2005. Vice President of Old Loral since January 2002. President of SS/L since November 2001. Prior to that, Executive Vice President of SS/L since 1996. | ||||
Avi Katz | 47 | Vice President, General Counsel and Secretary since November 2005. Vice President, General Counsel and Secretary of Old Loral since November 1999. | ||||
Richard P. Mastoloni | 41 | Vice President and Treasurer since November 2005. Vice President and Treasurer of Old Loral since February 2002. Prior to that, Vice President since September 2001 and Assistant Treasurer since August 2000. | ||||
Harvey B. Rein | 52 | Vice President and Controller since November 2005. Vice President and Controller of Old Loral since April 1996. |
In addition to being officers and directors of Old Loral and certain of its subsidiaries which filed in July 2003 voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code, Messrs. Zahler, Townsend, Katz, Mastoloni and Rein either currently serve or have previously served as executive officers of Globalstar and certain of its subsidiaries, Loral/ Qualcomm Satellite Services, L.P., the managing general partner of Globalstar, its general partner, Loral/ Qualcomm Partnership, L.P., and certain of Loral’s subsidiaries that served as general partners of Loral/ Qualcomm Partnership, L.P.
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Procedure for Stockholder Nominations of Directors
As provided in Loral’s Amended and Restated Bylaws, nominations of persons for election to the Board of Directors may be made at a meeting of stockholders only (a) pursuant to the Company’s notice of meeting (or any supplement thereto), (b) by or at the direction of the Board of Directors or any committee thereof or (c) by any stockholder of the Company who was a stockholder of record when the notice of proposed nomination is delivered to the Company, who is entitled to vote at the meeting and who complies with the notice procedures set forth in the bylaws. Only such persons who are nominated in accordance with the procedures set forth in the bylaws are eligible to be selected at an annual or special meeting of stockholders of the Company to serve as directors. For a complete description of the procedure for stockholder nominations of directors, see the Company’s Amended and Restated Bylaws, filed as Exhibit 3.2 to this Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our executive officers, directors and persons who own more than 10% of our common stock, to file reports with the SEC. An initial distribution of New Loral common stock pursuant to the Plan of Reorganization occurred on December 7, 2005. Based solely on a review of the copies of reports furnished to us, Loral believes that during 2005, all filing requirements were met on a timely basis.
Code of Ethics
Loral has adopted a Code of Ethics for all of its employees, including all of its executive officers. This Code of Ethics is available on Loral’s web site at www.loral.com. Any amendments or waivers to this Code of Ethics with respect to Loral’s principal executive officer, principal financial officer, principal accounting officer or controller (or persons performing similar functions) will be posted on such web site. One may also obtain, without charge, a copy of this Code of Ethics by contacting our Investor Relations Department at (212) 338-5347.
Item 11. | Executive Compensation |
Executive Compensation
The following table summarizes the compensation paid to the named executive officers set forth below (“NEOs”). For the period prior to November 21, 2005, such compensation was paid by Loral SpaceCom
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Long Term | |||||||||||||||||||||||||||||
Compensation | |||||||||||||||||||||||||||||
Annual Compensation | |||||||||||||||||||||||||||||
Securities | |||||||||||||||||||||||||||||
Other | Restricted | Underlying | |||||||||||||||||||||||||||
Name & | Annual | Stock | Stock | All Other | |||||||||||||||||||||||||
Principal Position | Year | Salary | Bonus | Compensation | Awards | Options | Compensation(b) | ||||||||||||||||||||||
Bernard L. Schwartz, | |||||||||||||||||||||||||||||
Chairman of the Board of | 2005 | $ | 1,869,214 | $ | 1,043,051 | $ | 0 | 0 | $ | 32,560 | |||||||||||||||||||
Directors and Chief | 2004 | $ | 1,518,767 | (c) | $ | 0 | $ | 0 | 0 | $ | 32,380 | ||||||||||||||||||
Executive Officer(a) | 2003 | $ | 292,150 | (c) | $ | 0 | $ | 42,763 | (d) | 0 | $ | 32,200 | |||||||||||||||||
Eric J. Zahler, President | 2005 | $ | 1,232,308 | $ | 648,960 | $ | 0 | 120,000 | $ | 466,806 | |||||||||||||||||||
and Chief Operating | 2004 | $ | 1,142,308 | $ | 480,000 | $ | 0 | 0 | $ | 191,626 | |||||||||||||||||||
Officer | 2003 | $ | 1,000,000 | $ | 400,000 | $ | 0 | 0 | $ | 53,946 | |||||||||||||||||||
Richard J. Townsend, | |||||||||||||||||||||||||||||
Executive Vice President | 2005 | $ | 870,831 | $ | 470,063 | $ | 0 | 85,000 | $ | 351,795 | |||||||||||||||||||
and Chief Financial | 2004 | $ | 838,462 | $ | 360,000 | $ | 0 | 0 | $ | 131,615 | |||||||||||||||||||
Officer | 2003 | $ | 770,000 | $ | 360,000 | $ | 0 | 0 | $ | 21,435 | |||||||||||||||||||
C. Patrick DeWitt, Vice | |||||||||||||||||||||||||||||
President and President | 2005 | $ | 476,415 | $ | 391,000 | $ | 0 | 75,000 | $ | 133,112 | |||||||||||||||||||
of Space Systems/ | 2004 | $ | 447,435 | $ | 271,109 | $ | 0 | 0 | $ | 139,305 | |||||||||||||||||||
Loral, Inc. | 2003 | $ | 426,675 | $ | 0 | (e) | $ | 0 | 0 | $ | 14,751 | ||||||||||||||||||
Avi Katz, Vice President, | 2005 | $ | 433,901 | $ | 227,785 | $ | 0 | 50,000 | $ | 168,156 | |||||||||||||||||||
General Counsel and | 2004 | $ | 420,390 | $ | 170,000 | $ | 0 | 0 | $ | 66,726 | |||||||||||||||||||
Secretary | 2003 | $ | 400,404 | $ | 150,000 | $ | 0 | 0 | $ | 15,921 |
(a) | Mr. Schwartz retired from Loral effective March 1, 2006. |
(b) | For 2005, includes (i) annual Board of Directors fee from Old Loral in the amount of $25,000 to each of Messrs. Schwartz and Zahler, (ii) Company matching contributions to the Savings Plan in the amount of $7,560 for each of Messrs. Schwartz, Zahler, Townsend and Katz and $8,112 for Mr. DeWitt and (iii) the value of supplemental life insurance premiums in the amounts of $21,746, $14,235 and $8,721 for Messrs. Zahler, Townsend and Katz, respectively. Also includes payments of $412,500, $330,000, $125,000 and $151,875 to Messrs. Zahler, Townsend, Dewitt and Katz, respectively, under Old Loral’s Key Employee Retention Plan (“KERP”) approved by the Bankruptcy Court in December 2003. |
(c) | At Mr. Schwartz’s request, Old Loral’s Compensation Committee agreed to amend his employment agreement to provide for no base salary for the twelve-month period commencing March 1, 2003. Salary paid in 2003 is for the period of January 1, 2003 through February 28, 2003. Salary paid in 2004 is for the period March 1, 2004 through December 31, 2004. |
(d) | Represents the aggregate incremental cost to Old Loral for use of Old Loral’s corporate jet by Mr. Schwartz. |
(e) | Mr. DeWitt received a $125,000 payment under the KERP in 2004 in lieu of his 2003 bonus. |
Employment Contracts, Change in Control and Other Compensation Arrangements
As of the November 21, 2005, the effective date of the Plan of Reorganization, (i) Loral entered into employment agreements with Bernard L. Schwartz and the following NEOs (the “Loral Executives”): Avi Katz, Richard J. Townsend and Eric J. Zahler; and (ii) SS/ L entered into an employment agreement with its President, C. Patrick DeWitt.
Bernard L. Schwartz |
Effective March 1, 2006, Mr. Schwartz retired from all officer and director positions he held with the Company and its subsidiaries and affiliates, including his positions as Chairman of the Board and Chief Executive Officer of the Company. Accordingly, the Company has no further obligations to Mr. Schwartz under his employment agreement. The following is a summary of the terms of Mr. Schwartz’s employment agreement in effect prior to his retirement.
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Michael B. Targoff |
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Mr. Targoff’s employment agreement also provides for the reimbursement of his attorney’s fees in connection with the negotiation of the employment agreement and a tax gross-up payment to cover his taxes for any such reimbursement.
Loral Skynet and SS/ L guarantee the payment and performance of Loral’s obligations under the employment contract with Mr. Targoff.
The above description of Mr. Targoff’s employment agreement is not intended to be complete and is qualified in its entirety by reference to the full text of the agreement attached to this report as Exhibit 10.10.
Other Named Executive Officers |
Each of the employment agreements with the Loral Executives and the employment agreement with Mr. C. Patrick DeWitt (Mr. DeWitt, together with the Loral Executives, the “Executives” and each an “Executive”) are substantially identical.
Each of the employment agreements with the Executives is for an initial term of two years and sets forth the Executive’s position and duties, annual salary, target annual bonus opportunity, and entitlement to an initial stock option grant (as summarized in the table below). In addition, each Executive is entitled to participate in employee benefits generally provided to similarly situated employees.
Target | ||||||||||||||
Annual | ||||||||||||||
Bonus as a | ||||||||||||||
Percentage | Initial Option | |||||||||||||
Executive | Position | Annual Salary | of Salary | Grant | ||||||||||
Eric J. Zahler | President and Chief Operating Officer | $ | 1,248,000 | 40.0 | 120,000 | |||||||||
Richard J. Townsend | Executive Vice President and Chief Financial Officer | $ | 881,920 | 41.0 | 85,000 | |||||||||
C. Patrick DeWitt | Vice President, and President of SS/L | $ | 485,040 | 50.0 | 75,000 | |||||||||
Avi Katz | Vice President, General Counsel and Secretary | $ | 438,048 | 40.0 | 50,000 |
Upon any Executive’s termination of employment on account of death or permanent disability during the contract term, such Executive is entitled to, among other payments, (i) such Executive’s accrued and unpaid bonus for the preceding year, (ii) a pro rated annual bonus for the year of termination, (iii) accelerated vesting of stock options that would have vested on the next vesting date, and (iv) in the case of such Executive’s death, salary through the end of the month of his death.
In the event that, during the contract term, an Executive’s employment is terminated by Loral without “cause” or the Executive resigns for “good reason” (as such terms are defined in the employment contract), the Executive will be entitled to a severance payment, in a lump sum, of the greater of (i) a specified percentage of the Executive’s 2003 salary, plus one week’s pay for each year of service with Loral and Old Loral (“Base Severance Amount”), or (ii) the salary the Executive would have earned from the date the Executive terminates employment through November 21, 2007. The Base Severance Amount for each of the Executives as of November 21, 2005, is as follows: Mr. Zahler ($1,750,000), Mr. Townsend ($1,400,000), Mr. Katz ($708,750) and Mr. DeWitt ($425,040). Each Executive will also be entitled to any accrued and unpaid annual bonus for the preceding year and a prorated annual bonus for the year in which any such termination of employment occurs, and to be fully vested in all outstanding stock options and deferred compensation relating thereto. In addition, the Executive will be entitled to coverage under Loral’s medical, dental and life insurance plans in effect immediately prior to such termination until the earlier of (i) the expiration of a period determined by dividing the Executive’s lump sum severance payment by the Executive’s monthly salary rate and (ii) the date the Executive commences new employment and is eligible for comparable benefits. Severance payments and benefits are contingent upon the execution of a release.
During the term of an Executive’s employment agreement and for a twelve-month period following a termination of employment during the term of the agreement, each Executive is restricted from (i) engaging
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Loral Skynet and SS/ L guarantee the payment and performance obligations of Loral under the employment agreements for the Loral Executives.
The above description of the Executives’ employment agreements is not intended to be complete and is qualified in its entirety by reference to the full text of the agreements attached to this report as Exhibits 10.11 through 10.14.
Other Arrangements |
Prior to 2005, the Company established a Supplemental Life Insurance Plan for certain key employees including Messrs. Zahler, Townsend, DeWitt and Katz. For Messrs. Zahler, Townsend, DeWitt and Katz, the Plan is funded with “universal” life insurance policies with death benefit amounts of $1,500,000, $1,000,000, $250,000 and $1,000,000, respectively.
Option Grants in Last Fiscal Year
In December 2005, Loral granted an aggregate of 1,390,452 stock options to all employees. The following table presents the number of such options issued to the NEOs.
Individual Grants | ||||||||||||||||||||
% of Total | ||||||||||||||||||||
Number of | Options | |||||||||||||||||||
Securities | Granted to | Grant Date | ||||||||||||||||||
Underlying | Employees in | Exercise or | Present Value $ | |||||||||||||||||
Name | Options Granted | Fiscal Year | Base Price | Expiration Date | (a) | |||||||||||||||
Bernard L. Schwartz | — | — | — | — | — | |||||||||||||||
Eric J. Zahler | 120,000 | (b)(c) | 8.63 | % | $ | 28.441 | December 21, 2012 | $ | 818,400 | |||||||||||
Richard J. Townsend | 85,000 | (b)(c) | 6.11 | % | $ | 28.441 | December 21, 2012 | $ | 579,700 | |||||||||||
C. Patrick DeWitt | 75,000 | (b)(c) | 5.39 | % | $ | 28.441 | December 21, 2012 | $ | 511,500 | |||||||||||
Avi Katz | 50,000 | (b)(c) | 3.60 | % | $ | 28.441 | December 21, 2012 | $ | 341,000 |
(a) | Option grant date present value is calculated using the Black-Scholes-Merton method assuming: (1) a risk-free rate of return of 4.4%; (2) a 48-month vesting schedule; (3) expected volatility of the market price of the common stock of 27%; (4) a seven-year option term; and (5) an expected option life of 4.75 years. These assumptions are the same assumptions used to determine stock-based compensation expense included in the Company’s financial statements for 2005. |
(b) | One-fourth of such options vests on November 21, 2006 and one-fourth of such options vest on each successive anniversary through November 21, 2009. |
(c) | On December 21, 2005, a deferred compensation account was established for each individual crediting such accounts with an amount equal to the number of options granted above multiplied by $9.441 (difference between $19.00 and the market value at December 21, 2005). These deferred compensation awards vest according to the same vesting schedule for the options as described in footnote (b) above. |
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Option exercises and Year-End Value Table
There were no option exercises by the NEOs in 2005. The following table presents the year-end values of options held by the NEOs at the end of 2005.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities | Value of Unexercised In-the- | |||||||||||||||
Underlying Unexercised | Money Options at Fiscal | |||||||||||||||
Options at Fiscal Year-End | Year-End | |||||||||||||||
Name | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||
Bernard L. Schwartz | — | — | — | — | ||||||||||||
Eric J. Zahler | — | 120,000 | — | — | ||||||||||||
Richard J. Townsend | — | 85,000 | — | — | ||||||||||||
C. Patrick DeWitt | — | 75,000 | — | — | ||||||||||||
Avi Katz | — | 50,000 | — | — |
Pension Plan
Loral maintains a defined benefit pension plan and trust (the “Pension Plan”) that is qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan provides retirement benefits for eligible employees of Loral and its operating affiliates, including executive officers. Executive officers also participate in a supplemental executive retirement plan (the “SERP”) which provides supplemental retirement benefits to cover certain reductions in retirement benefits under the Pension Plan that are caused by various limitations imposed by the Internal Revenue Code. Loral recognizes all credited service, contributory service and compensation of Old Loral for purposes of these benefits. The benefit formulas differ by operating affiliate. Compensation used in determining benefits under the Pension Plan and SERP includes annual salary and bonus for executives employed by Loral and Loral Skynet and annual salary only for employees of SS/ L. Compensation is the same salary and bonus as disclosed in the summary compensation table except for employees of SS/ L. For these employees, the salary on December 31 is annualized and recognized as compensation for that year.
The benefit formula for executive officers employed by Loral, such as Messrs. Schwartz, Zahler, Townsend and Katz, for the period ending December 31, 1996 will generally provide an annual benefit equal to the greater of (A) or (B), where (A) equals (i) 1.2% of compensation up to the Social Security Wage Base and 1.45% of compensation in excess of the Social Security Wage Base for each year prior to the calendar year in which a participant completes 15 years of employment, plus (ii) 1.5% of compensation up to the Social Security Wage Base and 1.75% of compensation in excess of the Social Security Wage Base for the calendar year in which the participant has completed 15 years of employment and for each year thereafter; and (B) equals (i) 1.2% of average annual compensation paid during 1992-1996 up to the 1996 Social Security Wage Base and 1.45% of average annual compensation paid during 1992-1996 in excess of the 1996 Social Security Wage Base for each year prior to the calendar year in which a participant completes 15 years of employment, plus (ii) 1.5% of average annual compensation paid during 1992-1996 up to the 1996 Social Security Wage Base and 1.75% of average annual compensation paid during 1992-1996 in excess of the 1996 Social Security Wage Base for the calendar year in which the participant has completed 15 years of employment and for each year thereafter. The benefit for periods subsequent to December 31, 1996 will be based on (A) above. The estimated credited years of service through December 31, 2005 for Messrs. Schwartz, Zahler, Townsend and Katz are 33.75, 13.75, 7.25 and 9.37, respectively.
For executive officers employed by SS/ L, such as Mr. DeWitt, the benefit formula for contributory service (in which a 1% post-tax contribution is required) provides an annual benefit equal to 1.3% of the final five year average salary times years of contributory service plus 0.45% of final five year average salary over 150% of the Social Security Covered Compensation for each year up to 35 years. The benefit formula for non-contributory service provides an annual benefit of $252 for each year of credited service. (See also the
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Years of Contributory Service | ||||||||||||||||||||||||
Final Average Salary | 10 | 15 | 20 | 25 | 30 | 35 | ||||||||||||||||||
$100,000 | $ | 14,350 | $ | 21,530 | $ | 28,700 | $ | 35,880 | $ | 43,050 | $ | 50,230 | ||||||||||||
125,000 | 18,730 | 28,090 | 37,450 | 46,810 | 56,180 | 65,540 | ||||||||||||||||||
150,000 | 23,100 | 34,650 | 46,200 | 57,750 | 69,300 | 80,850 | ||||||||||||||||||
175,000 | 27,480 | 41,210 | 54,950 | 68,690 | 82,430 | 96,160 | ||||||||||||||||||
200,000 | 31,850 | 47,780 | 63,700 | 79,630 | 95,550 | 111,480 | ||||||||||||||||||
225,000 | 36,230 | 54,340 | 72,450 | 90,560 | 108,680 | 126,790 | ||||||||||||||||||
250,000 | 40,600 | 60,900 | 81,200 | 101,500 | 121,800 | 142,100 | ||||||||||||||||||
275,000 | 44,980 | 67,460 | 89,950 | 112,440 | 134,930 | 157,410 | ||||||||||||||||||
300,000 | 49,350 | 74,030 | 98,700 | 123,380 | 148,050 | 172,730 | ||||||||||||||||||
350,000 | 58,100 | 87,150 | 116,200 | 145,250 | 174,300 | 203,350 | ||||||||||||||||||
400,000 | 66,850 | 100,280 | 133,700 | 167,130 | 200,550 | 233,980 | ||||||||||||||||||
450,000 | 75,600 | 113,400 | 151,200 | 189,000 | 226,800 | 264,600 | ||||||||||||||||||
500,000 | 84,350 | 126,530 | 168,700 | 210,880 | 253,050 | 295,230 |
The table above shows estimated benefits payable under the Plan and SERP including amounts attributable to employee contributions, determined on a straight life annuity basis. Such estimated benefits shown have been offset by Social Security Covered Compensation.
Annual Benefits
Bernard L. Schwartz |
Bernard L. Schwartz is a participant in the Pension Plan as well as the SERP. Effective April 1, 1997 and prior to March 1, 2004 (the “Suspension Date”), under the minimum distribution rules prescribed by the Internal Revenue Code, Mr. Schwartz began receiving an annual benefit under the Pension Plan and SERP of $2,165,700, determined on a joint and 50% survivor basis. Effective as of the Suspension Date, benefits payable to Mr. Schwartz under the SERP were suspended, but his annual Pension Plan benefit of $166,633 continued. In connection with the Plan of Reorganization, Mr. Schwartz and Loral agreed to amend the SERP to provide for a reduction of Mr. Schwartz’s benefit under the SERP to $250,000 annually (the “Reduced Rate”). This amendment was effective as of the Suspension Date. Pursuant to this amendment, the monthly annuity benefit payable to Mr. Schwartz under the SERP resumed at the Reduced Rate commencing on the first normal monthly benefit payment date under the SERP following November 21, 2005, the date on which Loral emerged from Chapter 11 (the “Resumption Date”). The first such monthly payment included a lump sum payment equal to the benefit amounts owed to Mr. Schwartz under the SERP at the Reduced Rate from the Suspension Date through the Resumption Date. In addition, to the extent that, at the time of his death, Mr. Schwartz has received $1.5 million or more in benefits under the SERP after the Suspension Date (the “Minimum Amount”), neither his estate nor his beneficiaries will be entitled to any post-retirement death benefits or any other benefits under the SERP following Mr. Schwartz’s death. To the extent that Mr. Schwartz has received less than the Minimum Amount from the Suspension Date through the date of his death, following his death his beneficiaries shall be entitled to the post-retirement death benefits provided for under the SERP in an aggregate amount not to exceed the excess of the Minimum Amount over the amount actually received by Mr. Schwartz from the Suspension Date through the date of his death. This amendment relates solely to the participation of and benefits payable to Mr. Schwartz under the SERP and has no effect on the participation of or benefits payable to any other participant under the SERP.
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Other Named Executive Officers |
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Indemnification of Directors and Officers
Indemnification Agreements |
As of November 21, 2005, the effective date of the Plan of Reorganization, Loral entered into Officers’ and Directors’ Indemnification Agreements (each, an “Indemnification Agreement”) with the NEOs and other officers of Loral who entered into employment agreements with Loral. In addition, Loral entered into Indemnification Agreements with each director of Loral as of the date such person became a director (each officer and director with an Indemnification Agreement, an “Indemnitee”). The Indemnification Agreement requires Loral to indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (as that term is used in the Indemnification Agreement), except with regard to any Proceeding by or in the right of Loral to procure a judgment in its favor, against all Expenses and Losses (as those terms are used in the Indemnification Agreement), including judgments, fines, penalties and amounts paid in settlement, subject to certain conditions, actually and reasonably incurred in connection with such Proceeding, if the Indemnitee acted in good faith for a purpose which he or she reasonably believed to be in or not opposed to the best interests of Loral. With regard to Proceedings by or in the right of Loral, the Indemnification Agreement provides similar terms of indemnification; however no indemnification will be made with respect to any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to Loral, unless a court determines that the Indemnitee is entitled to indemnification for such portion of the Expenses as the court deems proper, all as detailed further in the Indemnification Agreement. The Indemnification Agreement also requires Loral to indemnify an Indemnitee where the Indemnitee is successful, on the merits or otherwise, in the defense of any claim, issue or matter therein, as well as in other circumstances delineated in the Indemnification Agreement. The indemnification provided for by the Indemnification Agreement is subject to certain exclusions detailed therein. SS/ L and Loral Skynet both guarantee the due and punctual payment of all of Loral’s obligations under the Indemnification Agreement. This brief description of the Indemnification Agreement is not intended to be complete and is qualified in its entirety by reference to the full text of the form of Indemnification Agreement attached as Exhibit 10.15 to this Form 10-K.
As of November 21, 2005, SS/ L entered into an Officers’ and Directors’ Indemnification Agreement with Mr. DeWitt, its President, attached hereto as Exhibit 10.16 and incorporated by reference herein. The Indemnification Agreement for Mr. DeWitt is substantially identical to the Indemnification Agreement entered into with the Loral officers and directors.
D&O Insurance |
We have purchased insurance from various insurance companies insuring us against obligations we might incur as a result of our indemnification of officers and directors for certain liabilities they might incur, and insuring such officers and directors for additional liabilities for which they might not be indemnified by us. The cost to Loral for the annual insurance premiums covering the period ending November 2006 was approximately $1,548,000.
Compensation Committee Interlocks and Insider Participation
The Board of Directors has a standing Compensation Committee, consisting of Dr. Mark Rachesky, as Chairman, and Mr. Harkey. None of the members of the Compensation Committee of the Company are present or former officers or employed by the Company or its subsidiaries. Michael B. Targoff was a member of this committee between November 21, 2005 and March 1, 2006, when he resigned after becoming Chief Executive Officer upon Mr. Schwartz’s retirement. Mr. Hodes was a member of the Compensation Committee prior to his resignation on February 28, 2006. The members of the Compensation Committee of the Board of Directors of Old Loral were Donald H. Shapiro, as Chairman, and Arthur L. Simon and Sally Minard. None of the members of the Compensation Committee of Old Loral were present or former officers or employed by Old Loral or its subsidiaries.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table shows, based upon filings made with the Company, certain information concerning persons who may be deemed beneficial owners of 5% or more of the outstanding shares of Loral common stock because they possessed or shared voting or investment power with respect to the shares of Loral common stock:
Amount and Nature of Beneficial | Percent of | ||||||||
Name and Address | Ownership | Class(1) | |||||||
Various funds affiliated with MHR Fund Management LLC(2) | 7,180,629 | 35.9 | % | ||||||
40 West 57th Street, 24th Floor, New York, NY 10019 | |||||||||
MacKay Shields LLC(3) | 1,500,122 | 7.5 | % | ||||||
9 West 57th Street, New York, NY 10019 | |||||||||
EchoStar Communications Corporation and Charles W. Ergen(4) | 1,401,485 | 7.0 | % | ||||||
9601 S. Meridian Blvd., Englewood, Colorado 80112 |
(1) | Percent of class refers to percentage of class beneficially owned as the term beneficial ownership is defined in Rule 13d-3 under the Exchange Act and is based upon the 20,000,000 shares of Loral common stock issued pursuant to the Plan of Reorganization. An initial distribution of 18,668,177 shares of Loral common stock occurred on December 7, 2005. The remaining balance of the 20,000,000 shares will be distributed in accordance with the Plan of Reorganization upon resolution of disputed claims. |
(2) | Information based on a Schedule 13D and Form 3, filed with the SEC on November 30, 2005 and November 22, 2005, respectively, relating to securities held for the accounts of MHR Capital Partners (500) LP (1,040,153 shares), MHR Capital Partners (100) LP (138,927 shares), MHR Institutional Partners II LP (“Institutional Partners II”) (958,132 shares), MHR Institutional Partners IIA, LP (2,413,827 shares), MHR Institutional Partners, LP (2,119,585 shares), MHRA LP (205,073 shares) and MHRM LP (304,932 shares), each a Delaware limited partnership. MHR Advisors LLC, MHR Institutional Advisors II LLC, MHR Institutional Advisors LLC and Institutional Partners II serve as the general partner of one or more of the above-named partnerships and, accordingly, may be deemed to be the beneficial owner of securities held by the partnerships. Similarly, Dr. Mark Rachesky may be deemed to be a beneficial owner of such securities because he is a managing member of each of such general partner entities. According to the Schedule 13D, (i) each of the reporting persons has sole dispositive and voting power with respect to the shares reported and (ii) the total number of shares of Loral common stock described therein represent the number of shares of Loral common stock expected to be issued to the reporting persons pursuant to the Plan of Reorganization. |
(3) | Information based solely on a Schedule 13G, filed with the SEC on January 11, 2005, by MacKay Shields LLC. MacKay Shields, an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is deemed to be the beneficial owner of such shares as a result of its acting as investment adviser to various clients. According to the Schedule 13G, MacKay Shields has sole voting and dispositive power with respect to all of the shares set forth in the table. |
(4) | Information based solely on a Schedule 13G, filed with the SEC on December 19, 2005, by EchoStar Communications Corporation (“EchoStar”) and Charles W. Ergen. The Schedule 13G provides that Mr. Ergen is the beneficial owner of 1,401,485 shares, of which EchoStar owns 1,350,532 of such shares. According to the Schedule 13G, each reporting person has sole voting and dispositive power with respect to the shares of common stock indicated to be held by such person. |
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The following table presents the number of shares of Loral common stock beneficially owned by the directors, the NEOs and all directors, NEOs and all other executive officers as a group as of March 10, 2006. Individuals have sole voting and dispositve power over the stock unless otherwise indicated in the footnotes:
Amount and Nature of Beneficial | Percent of | |||||||
Name of Individual | Ownership | Class(2) | ||||||
Bernard L. Schwartz | % | |||||||
Patrick K. Brant | ||||||||
C. Patrick DeWitt | ||||||||
Sai S. Devabhaktuni | ||||||||
Hal Goldstein | ||||||||
John D. Harkey, Jr | ||||||||
Robert B. Hodes(3) | 72 | * | ||||||
Avi Katz | ||||||||
Richard P. Mastoloni | ||||||||
Dean Olmstead | ||||||||
Mark H. Rachesky, M.D. | 7,180,629 | (1) | 35.9% | |||||
Harvey Rein | ||||||||
Arthur L. Simon | 72 | * | ||||||
Michael B. Targoff | 35,961 | * | ||||||
Richard J. Townsend | ||||||||
Eric J. Zahler | ||||||||
All directors, NEOS and other executive officers as a group (16 persons) | 7,216,734 | 36.1% |
* | Represents holdings of less than one percent. |
(1) | Dr. Rachesky is deemed to be the beneficial owner of 7,180,629 shares of Loral common stock by virtue of his status as a managing principal of various entities affiliated with funds that hold such shares. See discussion in Footnote 2 of the table above. |
(2) | Percent of class refers to percentage of class beneficially owned as the term beneficial ownership is defined in Rule 13d-3 under the Securities Exchange Act of 1934 and is based upon the 20,000,000 shares of Loral common stock issued pursuant to the Plan of Reorganization. An initial distribution of 18,668,177 shares of Loral common stock occurred on December 7, 2005. The remaining balance of the 20,000,000 shares will be distributed in accordance with the Plan of Reorganization upon resolution of disputed claims. |
(3) | Mr. Hodes resigned from the Board of Directors effective February 28, 2006. |
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
Number of | |||||||||||||
securities | |||||||||||||
remaining available | |||||||||||||
Number of | Weighted- | for future issuance | |||||||||||
securities to be | average exercise | under equity | |||||||||||
issued upon | price of | compensation | |||||||||||
exercise of | outstanding | plans (excluding | |||||||||||
outstanding | options, | securities reflected | |||||||||||
options, warrants | warrants and | in column (a)) | |||||||||||
Plan Category | and rights (a) | rights (b) | (c) | ||||||||||
Equity compensation plans approved by security holders | |||||||||||||
Equity compensation plans not approved by security holders | 1,390,452 | $ | 28.441 | 0 | |||||||||
Total | 1,390,452 | $ | 28.441 | 0 | |||||||||
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Equity Compensation Plan Not Approved by Security Holders: 2005 Stock Incentive Plan
On November 21, 2005, the Loral Space & Communications Inc. 2005 Stock Incentive Plan (the “Stock Incentive Plan”) became effective pursuant to the Plan of Reorganization. The purpose of the Stock Incentive Plan is to attract, retain, motivate and reward employees, directors and other service providers who are providing substantial services to Loral and to promote the creation of long-term value for stockholders of Loral.
The Stock Incentive Plan allows for the grant of several forms of stock-based compensation awards including stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other stock-based awards (collectively, the “Awards”). The total number of shares of Loral common stock reserved and available for delivery in connection with Awards under the Stock Incentive Plan is 1,390,452 shares; provided, however, that the number of shares available is subject to adjustment for recapitalization, merger and other similar events. In addition, shares of Loral common stock that expire, are forfeited or canceled, or withheld in payment of the exercise price or taxes relating to an Award, will again be available for Awards under the Stock Incentive Plan.
The Compensation Committee of Loral (the “Compensation Committee”) administers the Stock Incentive Plan. The Compensation Committee may select persons to receive Awards, determine the type, size and terms of such Awards and determine the number of shares covered by the Awards; provided, however, that in no event may options or stock appreciation rights be granted to any one individual in any calendar year in excess of 500,000 shares. The Compensation Committee also has the authority to interpret and construe the Stock Incentive Plan and any Award agreements and will make all other decisions necessary or advisable for the administration of the Stock Incentive Plan.
The Stock Incentive Plan provided for an automatic initial grant of options (the “Automatic Option Grant”) to purchase 1,390,452 shares of Loral common stock to certain designated individuals on the date that was thirty (30) days following the date on which Loral emerged from Chapter 11. Accordingly, on December 21, 2005 (the “Grant Date”), Loral granted options to purchase a total of 1,390,452 shares of Common Stock to certain executives and employees and the Vice Chairman of the Board. Twenty-five percent (25%) of the Automatic Option Grant vests on each of the first four anniversaries of the date on which Loral emerged from Chapter 11, subject to earlier vesting upon certain corporate transactions, as discussed below, or upon a termination of employment without Cause or for Good Reason, each, as defined in the Award holder’s employment agreement, if such Award holder is party to an employment agreement, and if not, as defined in the Stock Incentive Plan. The Automatic Option Grant has an exercise price per share equal to $28.441 which was the fair market value of a share of Loral common stock on the Grant Date determined pursuant to the Stock Incentive Plan. The Automatic Option Grant expires seven years following the Grant Date, subject to earlier expiration, in accordance with the Stock Incentive Plan, following the Award holder’s termination of employment.
If Loral undergoes a Change of Control (as defined in the Stock Incentive Plan), all outstanding Awards will become immediately vested and exercisable, any restrictions on such Awards will lapse and all such Awards will become immediately payable or subject to settlement. In the event of a Change in Control, the Compensation Committee may cancel any or all outstanding Awards in exchange for a cash payment to each Award holder having a value equal to the value of each such Award at the time of such Change in Control (or without any payment in the event that an outstanding Award has no value at the time of such Change in Control).
Following a sale of all or substantially all of the common stock or assets of Loral Skynet (a “Skynet Sale Event”) or SS/ L (a “SS/ L Sale Event”), all outstanding Awards held by employees or service providers of Loral Skynet or SS/ L, as applicable, will become immediately vested and exercisable, any restrictions on such Awards will lapse and all such Awards will become immediately payable or subject to settlement. In addition, options held by employees or service providers of Loral Skynet or SS/ L, as applicable, will remain exercisable following the sale for the shorter of (i) one year following the sale or (ii) the remaining term of the stock option as set forth in the applicable Award Agreement. For employees of Loral assigned to Loral’s corporate headquarters, if the Skynet Sale Event or SS/ L Sale Event occurs on or prior to the first anniversary of the
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The Board of Directors may amend the Stock Incentive Plan at any time, provided, that any such amendment may not increase the maximum number of shares of Loral common stock that may be issued (other than as a result of an adjustment for recapitalization, merger, and other similar events) without shareholder approval. Additionally, amendments may not impair the rights of any Award holder without such Award holder’s written consent. The Stock Incentive Plan will terminate on the day before the tenth anniversary of the date the plan was adopted by the Board of Directors; however, the Stock Incentive Plan will continue to be administered with respect to outstanding Awards until all such Awards have been fully exercised, paid or otherwise expire by their terms.
The Stock Incentive Plan provided that if the fair market value of a share of Loral common stock on the Grant Date is greater than $19, an individual selected to receive an Automatic Option Grant would receive an additional deferred compensation award in an amount equal to (i) the difference between the fair market value of a share of Loral common stock on the Grant Date and $19, multiplied by (ii) the number of shares of Loral common stock underlying such individual’s Automatic Option Grant. Accordingly, on December 21, 2005, concurrently with the Automatic Option Grant, the Company established deferred compensation bookkeeping accounts on behalf of each Award holder and credited to such accounts $9.441 multiplied by the number of shares of Loral common stock underlying such Award holder’s Automatic Option Grant.
In March 2006, we adopted an amendment to the Stock Incentive Plan to increase by 825,000 the number of shares available for grant thereunder and to increase to 1,000,000 the number of shares that may be granted to any one employee during any calendar year. This amendment is subject to stockholder approval at an annual or special meeting of our stockholders.
The description of the Stock Incentive Plan is not intended to be complete and is qualified in its entirety by reference to the full text of the Stock Incentive Plan and Form of Non-Qualified Stock Option Agreement under the Stock Incentive Plan for Senior Management attached as Exhibits 10.19 and 10.20, respectively, to this Form 10-K.
Item 13. | Certain Relationships and Related Transactions |
K&F Industries, Inc.
In 2005, we provided administrative and certain other services to K&F Industries, Inc. (“K&F”), a subsidiary of K&F Industries Holdings, Inc., and a company of which Bernard L. Schwartz was Chairman of the Board. K&F paid us a fee based on the cost of such services plus out of pocket expenses. For the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, we billed K&F $12,000 and $146,000, respectively.
In addition, K&F charged us $44,000 and $108,000 for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, respectively, for certain expenses and services.
MHR Fund Management LLC
Pursuant to the Plan of Reorganization, on November 21, 2005, Loral and Loral Skynet entered into a registration rights agreement with seven affiliated funds of MHR Fund Management LLC (“MHR”). Pursuant to the Plan of Reorganization, each holder of an Allowed Claim, as that term is used in the Plan of Reorganization, that receives a distribution pursuant to the plan of ten percent (10%) or greater of any of (i) Loral common stock, (ii) Loral Skynet preferred stock or (iii) Loral Skynet notes (collectively, the “Registrable Securities”) is entitled to receive certain registration rights under the registration rights
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Pursuant to the Plan of Reorganization, holders of certain claims at Loral Orion, Inc. were entitled to subscribe for up to $120 million of Loral Skynet notes. MHR and P. Schoenfeld Asset Management LLC agreed to backstop 95% and 5%, respectively, of the rights offering, in consideration of a $6 million fee, paid in additional Loral Skynet notes, as well as reimbursement of certain related costs and expenses. In connection with this backstop agreement, MHR received $5.7 million principal amount of Loral Skynet notes for its backstop commitment.
We have reimbursed fees and out-of-pocket expenses incurred by legal counsel to MHR in connection with our reorganization.
Dr. Rachesky and Mr. Goldstein are co-founders and managing principals of MHR. Mr. Devabhaktuni is also a managing principal of MHR. Dr. Rachesky, Mr. Goldstein and Mr. Devabhaktuni are directors of Loral.
Other Relationships
During 2005, we incurred $176,000 of expenses paid or payable to companies associated with Mr. Schwartz in connection with our use of his corporate jet.
Robert B. Hodes, a director and a member of the Compensation Committee until his resignation from the Board of Directors on February 28, 2006, is counsel to the law firm of Willkie Farr & Gallagher LLP, which acts as counsel to us.
For the year ended December 31, 2005, we paid fees and disbursements in the amount of approximately $91,000 for corporate communications consultations and related services to Kekst & Company Incorporated, of which company Gershon Kekst is President and principal stockholder. Prior to November 21, 2005, Mr. Kekst was a director of Old Loral.
Item 14. | Principal Accountant Fees and Services |
During 2005 and 2004, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the “Deloitte Entities”) billed or expected to bill the amounts listed below for each category of professional services rendered to us:
2005 | 2004 | |||||||
Audit Fees(a) | $ | 6,258,000 | $ | 3,366,000 | ||||
Audit Related Fees(b) | 75,900 | 352,000 | ||||||
Tax Consultation Fees | 194,000 | 167,000 | ||||||
All Other Fees(c) | 380,000 | 574,000 | ||||||
Total | $ | 6,907,900 | $ | 4,459,000 | ||||
(a) | Includes professional services rendered for the audit of our annual consolidated financial statements for the fiscal years ended December 31, 2005 and 2004, for the reviews of the condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q for the 2005 and 2004 fiscal years, stand-alone and statutory audits of our subsidiaries and accounting research and consultation related to the audits and reviews. | |
(b) | Relates primarily to research and consultation on a transfer of interest transaction and various other filings with the Securities and Exchange Commission. | |
(c) | Relates primarily to our Chapter 11 filing and related filings and activities. |
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Item 15. | Exhibits and Financial Statement Schedules |
Index to Financial Statements and Financial Statement Schedule | F-1 | ||||
Loral Space & Communications Inc. and Subsidiaries | |||||
Report of Independent Registered Public Accounting Firm | F-2 | ||||
Consolidated Balance Sheets as of December 31, 2005 (Successor Registrant) and 2004 (Predecessor Registrant) | F-4 | ||||
Consolidated Statements of Operations for the period October 2, 2005 to December 31, 2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant) | F-5 | ||||
Consolidated Statements of Shareholders’ (Deficit) Equity for the period October 2, 2005 to December 31, 2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant) | F-6 | ||||
Consolidated Statements of Cash Flows for the period October 2, 2005 to December 31, 2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant) | F-7 | ||||
Notes to Consolidated Financial Statements | F-8 | ||||
(a) 2. Financial Statement Schedules | |||||
Schedule I | F-69 | ||||
Schedule II | F-73 |
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Exhibit | ||||
Number | Description | |||
2 | .1 | Debtors’ Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated June 3, 2005(1) | ||
2 | .2 | Modification to Debtors’ Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated August 1, 2005(2) | ||
3 | .1 | Restated Certificate of Incorporation of Loral Space & Communications Inc. dated November 21, 2005(3) | ||
3 | .2 | Loral Space & Communications Inc. Amended and Restated Bylaws dated November 21, 2005(3) | ||
10 | .1 | Restated Certificate of Incorporation of Loral Skynet Corporation dated November 21, 2005(3) | ||
10 | .2 | Indenture in respect of Loral Skynet Corporation’s 14% Senior Secured Cash/ PIK Notes Due 2015 dated November 21, 2005(3) | ||
10 | .3 | Security Agreement in respect of Loral Skynet Corporation’s 14% Senior Secured Cash/ PIK Notes due 2015 dated November 21, 2005(3) | ||
10 | .4 | Hong Kong Security Agreement in respect of Loral Skynet Corporation’s 14% Senior Secured Cash/ PIK Notes due 2015 dated November 21, 2005(3) | ||
10 | .5 | Registration Rights Agreement among Loral Space & Communications Inc., Loral Skynet Corporation, MHR Capital Partners (500) LP, MHR Capital Partners (100) LP, MHR Institutional Partners II LP, MHR Institutional Partners LP, MHR Institutional Partner III LP, MHR Institutional Partner IIA LP, MHRM LP and MHRA LP dated November 21, 2005(3) | ||
10 | .6 | Lease Agreement by and between Loral Asia Pacific Satellite (HK) Limited and APT Satellite Company Limited dated as of August 18, 1999(4) | ||
10 | .7 | Consent Agreement among the United States Department of State, Loral Space & Communications Ltd. and Space Systems/ Loral, Inc. dated January 9, 2002(5) | ||
10 | .8 | Form of Conformed as Amended Apstar V Satellite Agreement between APT Satellite company Limited and Loral Orion, Inc. dated as of November 16, 2003(6) | ||
10 | .9 | Employment Agreement between Loral Space & Communications Inc. and Bernard L. Schwartz dated November 21, 2005(3)‡ | ||
10 | .10 | Employment Agreement between Loral Space & Communications Inc. and Michael B. Targoff dated March 28, 2006†‡ | ||
10 | .11 | Employment Agreement between Loral Space & Communications Inc. and Eric J. Zahler dated November 21, 2005†‡ | ||
10 | .12 | Employment Agreement between Loral Space & Communications Inc. and Richard J. Townsend dated November 21, 2005†‡ | ||
10 | .13 | Employment Agreement between Loral Space & Communications Inc. and Avi Katz dated November 21, 2005†‡ | ||
10 | .14 | Employment Agreement between Space Systems/ Loral, Inc. and C. Patrick DeWitt dated November 21, 2005(3)‡ | ||
10 | .15 | Form of Officers’ and Directors’ Indemnification Agreement between Loral Space & Communications Inc. and Loral Executives(3)‡ | ||
10 | .16 | Officers’ and Directors’ Indemnification Agreement between Space/ Systems Loral, Inc. and C. Patrick DeWitt dated November 21, 2005(3)‡ | ||
10 | .17 | Space Systems/ Loral, Inc. Supplemental Executive Retirement Plan dated January 7, 2003†‡ | ||
10 | .18 | Amendment to the Space Systems/ Loral, Inc. Supplemental Executive Retirement Plan dated November 21, 2005(3)‡ | ||
10 | .19 | Loral Space & Communications Inc. 2005 Stock Incentive Plan(3)‡ | ||
10 | .20 | Form of Non-Qualified Stock Option Agreement under Loral Space & Communications Inc. 2005 Stock Incentive Plan for Senior Management(3)‡ |
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Exhibit | ||||
Number | Description | |||
10 | .21 | Non-Qualified Stock Option Agreement under Loral Space & Communications Inc. 2005 Stock Incentive Plan for Michael B. Targoff dated March 28, 2006†‡ | ||
10 | .22 | $20,000,000 Amended and Restated Letter of Credit Reimbursement Agreement between Space Systems/ Loral, Inc. and JP Morgan Chase Bank, N.A. dated November 21, 2005(3) | ||
10 | .23 | Amended and Restated Cash Collateral Agreement dated November 21, 2005(3) | ||
12 | .1 | Statement Re: Computation of Ratios† | ||
14 | .1 | Code of Conduct(3) | ||
21 | .1 | List of Subsidiaries of the Registrant† | ||
31 | .1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002† | ||
31 | .2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002† | ||
32 | .1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002† | ||
32 | .2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002† |
(1) | Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 8, 2005. |
(2) | Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 5, 2005. |
(3) | Incorporated by reference from the Company’s Current Report on Form 8-K filed on November 23, 2005. |
(4) | Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 23, 1999. |
(5) | Incorporated by reference from the Company’s Current Report on Form 8-K filed on January 9, 2002. |
(6) | Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. |
† | Filed herewith. | |
‡ | Management compensation plan. |
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LORAL SPACE & COMMUNICATIONS INC. |
By: | /s/MICHAEL B. TARGOFF |
Michael B. Targoff | |
Chief Executive Officer | |
Dated: March 28, 2006 |
Signatures | Title | Date | ||||
/s/MICHAEL B. TARGOFF Michael B. Targoff | Vice Chairman of the Board and Chief Executive Officer | March 28, 2006 | ||||
�� | ||||||
/s/MARK H. RACHESKY, M.D. Mark H. Rachesky, M.D. | Director, Non-Executive Chairman of the Board | March 28, 2006 | ||||
/s/SAI S. DEVABHAKTUNI Sai S. Devabhaktuni | Director | March 28, 2006 | ||||
/s/HAL GOLDSTEIN Hal Goldstein | Director | March 28, 2006 | ||||
/s/JOHN D. HARKEY, JR. John D. Harkey, Jr. | Director | March 28, 2006 | ||||
/s/DEAN OLMSTEAD Dean Olmstead | Director | March 28, 2006 | ||||
/s/ARTHUR L. SIMON Arthur L. Simon | Director | March 28, 2006 | ||||
/s/RICHARD J. TOWNSEND Richard J. Townsend | Executive Vice President and CFO (Principal Financial Officer) | March 28, 2006 | ||||
/s/HARVEY B. REIN Harvey B. Rein | Vice President and Controller (Principal Accounting Officer) | March 28, 2006 |
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Loral Space & Communications Inc. and Subsidiaries | |||||
Report of Independent Registered Public Accounting Firm | F-2 | ||||
Consolidated Balance Sheets as of December 31, 2005 (Successor Registrant) and 2004 (Predecessor Registrant) | F-4 | ||||
Consolidated Statements of Operations for the period October 2, 2005 to December 31, 2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant) | F-5 | ||||
Consolidated Statements of Shareholders’ (Deficit) Equity for the period October 2, 2005 to December 31, 2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant) | F-6 | ||||
Consolidated Statements of Cash Flows for the period October 2, 2005 to December 31, 2005 (Successor Registrant), January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003 (Predecessor Registrant) | F-7 | ||||
Notes to Consolidated Financial Statements | F-8 | ||||
Schedule I | F-69 | ||||
Schedule II | F-73 |
F-1
F-2
F-3
Successor | Predecessor | |||||||||
Registrant | Registrant | |||||||||
December 31, | December 31, | |||||||||
2005 | 2004 | |||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 275,796 | $ | 147,773 | ||||||
Accounts receivable, net | 59,347 | 12,132 | ||||||||
Contracts-in-process | 73,584 | 19,040 | ||||||||
Inventories | 51,871 | 37,412 | ||||||||
Other current assets | 31,066 | 21,096 | ||||||||
Total current assets | 491,664 | 237,453 | ||||||||
Property, plant and equipment, net | 520,503 | 798,908 | ||||||||
Long-term receivables | 48,155 | 74,851 | ||||||||
Investments in and advances to affiliates | 104,616 | 49,181 | ||||||||
Deposits | 9,840 | 9,832 | ||||||||
Goodwill | 340,094 | — | ||||||||
Other assets | 164,105 | 48,508 | ||||||||
Total assets | $ | 1,678,977 | $ | 1,218,733 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 72,594 | $ | 33,248 | ||||||
Accrued employment costs | 35,277 | 34,385 | ||||||||
Customer advances and billings in excess of costs and profits | 172,995 | 164,981 | ||||||||
Deferred gain on sale of assets (Note 5) | — | 10,545 | ||||||||
Income taxes payable | 2,177 | 2,359 | ||||||||
Accrued interest and preferred dividends | 4,881 | — | ||||||||
Other current liabilities | 32,324 | 16,639 | ||||||||
Total current liabilities | 320,248 | 262,157 | ||||||||
Pension and other postretirement liabilities (Note 17) | 237,948 | 942 | ||||||||
Long-term debt | 128,191 | — | ||||||||
Long-term liabilities | 165,426 | 81,355 | ||||||||
Liabilities subject to compromise (Note 11) | — | 1,916,000 | ||||||||
Total liabilities | 851,813 | 2,260,454 | ||||||||
Minority interest (Note 15) | 200,000 | 2,380 | ||||||||
Commitments and contingencies (Notes 2, 8, 9, 11, 17, 18 and 19) Shareholders’ equity (deficit): | ||||||||||
Common stock, $.10 par value; 125,000,000 shares authorized, 44,125,202 shares issued and outstanding at December 31, 2004 | — | 4,413 | ||||||||
Common stock, $.01 par value; 40,000,000 shares authorized, 20,000,000 shares issued and outstanding at December 31, 2005 | 200 | — | ||||||||
Paid-in capital | 642,210 | 3,392,825 | ||||||||
Treasury stock, at cost; 17,420 shares at December 31, 2004 | — | (3,360 | ) | |||||||
Unearned compensation | — | (87 | ) | |||||||
Retained deficit | (15,261 | ) | (4,348,231 | ) | ||||||
Accumulated other comprehensive income (loss) | 15 | (89,661 | ) | |||||||
Total shareholders’ equity (deficit) | 627,164 | (1,044,101 | ) | |||||||
Total liabilities and shareholders’ equity (deficit) | $ | 1,678,977 | $ | 1,218,733 | ||||||
F-4
Successor | |||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | ||||||||||||||||
October 2, | January 1, | Years Ended | |||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
Revenues from satellite services | $ | 36,096 | $ | 110,596 | $ | 135,319 | $ | 147,156 | |||||||||
Revenues from sales-type lease arrangement — satellite services (Note 8) | — | — | 87,200 | — | |||||||||||||
Revenues from satellite manufacturing | 161,069 | 318,587 | 299,608 | 244,887 | |||||||||||||
Total revenues | 197,165 | 429,183 | 522,127 | 392,043 | |||||||||||||
Cost of satellite services | 26,386 | 94,169 | 189,330 | 191,989 | |||||||||||||
Cost of sales-type lease arrangement — satellite services (Note 8) | — | — | 79,543 | — | |||||||||||||
Cost of satellite manufacturing | 138,882 | 291,454 | 318,295 | 422,091 | |||||||||||||
Selling, general and administrative expenses | 36,842 | 79,419 | 118,848 | 141,552 | |||||||||||||
Loss from continuing operations before reorganization expenses due to bankruptcy | (4,945 | ) | (35,859 | ) | (183,889 | ) | (363,589 | ) | |||||||||
Reorganization expenses due to bankruptcy | — | (31,236 | ) | (30,456 | ) | (25,284 | ) | ||||||||||
Operating loss from continuing operations | (4,945 | ) | (67,095 | ) | (214,345 | ) | (388,873 | ) | |||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments | — | 1,101,453 | — | — | |||||||||||||
Interest and investment income | 4,128 | 6,438 | 9,953 | 15,203 | |||||||||||||
Interest expense (contractual interest was $36,610 for the period ended October 1, 2005 and $46,451 and $34,020 for the years ended December 31, 2004 and 2003, respectively (Note 12)) | (4,408 | ) | (17,214 | ) | (2,947 | ) | (14,080 | ) | |||||||||
Other income (expense) | (170 | ) | (931 | ) | (513 | ) | 1,495 | ||||||||||
Gain on investments | — | — | — | 17,900 | |||||||||||||
(Loss) income from continuing operations before income taxes, equity (losses) income in affiliates and minority interest | (5,395 | ) | 1,022,651 | (207,852 | ) | (368,355 | ) | ||||||||||
Income tax (provision) benefit | (1,752 | ) | 10,901 | (13,284 | ) | 6,330 | |||||||||||
(Loss) income from continuing operations before equity income (losses) in affiliates and minority interest | (7,147 | ) | 1,033,552 | (221,136 | ) | (362,025 | ) | ||||||||||
Equity (losses) income in affiliates | (5,447 | ) | (2,796 | ) | 46,654 | (51,153 | ) | ||||||||||
Minority interest | (2,667 | ) | 126 | 135 | 20 | ||||||||||||
(Loss) income from continuing operations | (15,261 | ) | 1,030,882 | (174,347 | ) | (413,158 | ) | ||||||||||
(Loss) income from discontinued operations, net of taxes | — | — | (2,348 | ) | 18,803 | ||||||||||||
Gain on sale of discontinued operations, net of taxes (Note 5) | — | 13,967 | — | — | |||||||||||||
(Loss) income before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (15,261 | ) | 1,044,849 | (176,695 | ) | (394,355 | ) | ||||||||||
Cumulative effect of change in accounting principle (Note 3) | — | — | — | (1,970 | ) | ||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | 13,615 | |||||||||||||
Net (loss) income | (15,261 | ) | 1,044,849 | (176,695 | ) | (382,710 | ) | ||||||||||
Preferred dividends | — | — | — | (6,719 | ) | ||||||||||||
Net (loss) income applicable to common shareholders | $ | (15,261 | ) | $ | 1,044,849 | $ | (176,695 | ) | $ | (389,429 | ) | ||||||
Basic and diluted (loss) earnings per share (Note 16): | |||||||||||||||||
Continuing operations | $ | (0.76 | ) | $ | 23.37 | $ | (3.96 | ) | $ | (9.58 | ) | ||||||
Discontinued operations | — | 0.32 | (0.05 | ) | 0.43 | ||||||||||||
(Loss) income before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (0.76 | ) | 23.69 | (4.01 | ) | (9.15 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.05 | ) | ||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | 0.31 | |||||||||||||
(Loss) earnings per share | $ | (0.76 | ) | $ | 23.69 | $ | (4.01 | ) | $ | (8.89 | ) | ||||||
Weighted average shares outstanding: | |||||||||||||||||
Basic and diluted | 20,000 | 44,108 | 44,108 | 43,819 | |||||||||||||
F-5
6% Series C&D | |||||||||||||||||||||||||||||||||||||||||
Convertible | |||||||||||||||||||||||||||||||||||||||||
Redeemable Preferred | Accumulated | ||||||||||||||||||||||||||||||||||||||||
Stock | Common Stock | Other | Total | ||||||||||||||||||||||||||||||||||||||
Unearned | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||||||||||||||
Shares | Shares | Paid-In | Treasury | Compen- | Retained | Income | (Deficit) | ||||||||||||||||||||||||||||||||||
Issued | Amount | Issued | Amount | Capital | Stock | sation | Deficit | (Loss) | Equity | ||||||||||||||||||||||||||||||||
Predecessor Registrant | |||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2003 | 4,479 | $ | 95,296 | 42,926 | $ | 4,293 | $ | 3,389,035 | $ | (3,360 | ) | $ | (151 | ) | $ | (3,782,107 | ) | $ | (57,233 | ) | $ | (354,227 | ) | ||||||||||||||||||
Shares issued: | |||||||||||||||||||||||||||||||||||||||||
Employee savings plan | 1,167 | 117 | 3,880 | 3,997 | |||||||||||||||||||||||||||||||||||||
Restricted stock option exercise | 30 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||
Reverse stock split | 2 | (109 | ) | (109 | ) | ||||||||||||||||||||||||||||||||||||
Reclassification of preferred stock on adoption of SFAS 150 | (4,479 | ) | (95,296 | ) | (95,296 | ) | |||||||||||||||||||||||||||||||||||
Amortization of unearned compensation | 75 | 75 | |||||||||||||||||||||||||||||||||||||||
Costs associated with conversion of preferred stock to common stock | (42 | ) | (42 | ) | |||||||||||||||||||||||||||||||||||||
Restricted stock grant | 92 | (92 | ) | — | |||||||||||||||||||||||||||||||||||||
Unearned compensation on grants to non-employees, including mark-to-market adjustment | (27 | ) | (27 | ) | |||||||||||||||||||||||||||||||||||||
Preferred dividends $3.00 per share | (6,719 | ) | (6,719 | ) | |||||||||||||||||||||||||||||||||||||
Net loss | (382,710 | ) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (20,615 | ) | |||||||||||||||||||||||||||||||||||||||
Comprehensive loss | (403,325 | ) | |||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2003 | — | — | 44,125 | 4,413 | 3,392,829 | (3,360 | ) | (168 | ) | (4,171,536 | ) | (77,848 | ) | (855,670 | ) | ||||||||||||||||||||||||||
Amortization of unearned compensation | 81 | 81 | |||||||||||||||||||||||||||||||||||||||
Cost associated with conversion of preferred stock to common stock | (4 | ) | (4 | ) | |||||||||||||||||||||||||||||||||||||
Net loss | (176,695 | ) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (11,813 | ) | |||||||||||||||||||||||||||||||||||||||
Comprehensive loss | (188,508 | ) | |||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2004 | — | — | 44,125 | 4,413 | 3,392,825 | (3,360 | ) | (87 | ) | (4,348,231 | ) | (89,661 | ) | (1,044,101 | ) | ||||||||||||||||||||||||||
Amortization of unearned compensation | 60 | 60 | |||||||||||||||||||||||||||||||||||||||
Net income | 1,044,849 | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (808 | ) | |||||||||||||||||||||||||||||||||||||||
Comprehensive income | 1,044,041 | ||||||||||||||||||||||||||||||||||||||||
Cancellation of Predecessor Registrant common stock | (44,125 | ) | (4,413 | ) | 4,413 | — | |||||||||||||||||||||||||||||||||||
Issuance of common stock to creditors | 20,000 | 200 | 642,068 | 642,268 | |||||||||||||||||||||||||||||||||||||
Fresh-start adjustment | (3,397,238 | ) | 3,360 | 27 | 3,303,382 | 90,469 | — | ||||||||||||||||||||||||||||||||||
Balance, October 1, 2005 | — | — | 20,000 | 200 | 642,068 | — | — | — | — | 642,268 | |||||||||||||||||||||||||||||||
Successor Registrant | |||||||||||||||||||||||||||||||||||||||||
Net loss | (15,261 | ) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | 15 | ||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | (15,246 | ) | |||||||||||||||||||||||||||||||||||||||
Amortization of stock option compensation | 142 | 142 | |||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2005 | — | $ | — | 20,000 | $ | 200 | $ | 642,210 | $ | — | $ | — | $ | (15,261 | ) | $ | 15 | $ | 627,164 | ||||||||||||||||||||||
F-6
Successor | ||||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||||
Years ended | ||||||||||||||||||
For the Period | For the Period | December 31, | ||||||||||||||||
October 2, 2005 to | January 1, 2005 to | |||||||||||||||||
December 31, 2005 | October 1, 2005 | 2004 | 2003 | |||||||||||||||
Operating activities: | ||||||||||||||||||
Net (loss) income | $ | (15,261 | ) | $ | 1,044,849 | $ | (176,695 | ) | $ | (382,710 | ) | |||||||
Non-cash items: | ||||||||||||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments | — | (1,101,453 | ) | |||||||||||||||
Gain on sale of discontinued operations, net of tax, (Note 5) | — | (13,967 | ) | |||||||||||||||
(Income) loss from discontinued operations, net of taxes | — | — | 2,348 | (18,803 | ) | |||||||||||||
Cumulative effect of change in accounting principle | — | — | — | 1,970 | ||||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | (13,615 | ) | |||||||||||||
Equity losses (income) in affiliates | 5,447 | 2,796 | (46,654 | ) | 51,153 | |||||||||||||
Minority interest | 2,667 | (126 | ) | (135 | ) | (20 | ) | |||||||||||
Deferred taxes | — | (16,134 | ) | 12,153 | (7,321 | ) | ||||||||||||
Depreciation and amortization | 16,024 | 61,277 | 134,796 | 134,663 | ||||||||||||||
Write-off of long-term receivables due to contract modifications | — | — | 11,265 | 20,177 | ||||||||||||||
Impairment charge on satellite and related assets | — | — | 11,989 | — | ||||||||||||||
Profit on sales-type lease arrangement (Note 8) | — | — | (7,657 | ) | — | |||||||||||||
Provisions for inventory obsolescence | 1,525 | 2,127 | 3,324 | 49,546 | ||||||||||||||
Valuation allowance on vendor financing receivables | — | — | — | 10,008 | ||||||||||||||
Warranty accruals | 2,704 | 11,850 | 9,692 | 2,200 | ||||||||||||||
Loss on cancellation of deposits | — | — | — | 23,500 | ||||||||||||||
Loss on acceleration of receipt of long-term receivables | — | — | — | 10,893 | ||||||||||||||
Charge on conversion of sales arrangement to lease arrangement (Note 8) | — | — | — | 10,098 | ||||||||||||||
Accrual for Alcatel settlement | — | — | — | 8,000 | ||||||||||||||
(Recoveries of) provisions for bad debts on billed receivables | 953 | (2,880 | ) | (2,144 | ) | 7,221 | ||||||||||||
Adjustment to revenue straightlining assessment | 46 | 1,031 | 1,149 | 9,034 | ||||||||||||||
Loss on equipment disposals | — | 3,456 | 394 | 4,804 | ||||||||||||||
Gain on investments | — | — | — | (17,900 | ) | |||||||||||||
Non cash net interest and (gain) loss on foreign currency transactions | — | 693 | (2,808 | ) | 4,887 | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||
Accounts receivable, net | 1,855 | 557 | 10,423 | (1,478 | ) | |||||||||||||
Contracts-in-process | 42,459 | (76,464 | ) | 29,082 | 33,988 | |||||||||||||
Inventories | (7,899 | ) | (10,212 | ) | 1,720 | 3,731 | ||||||||||||
Long-term receivables | (13,833 | ) | (22,361 | ) | 2,911 | 60,774 | ||||||||||||
Deposits | (35 | ) | — | — | 25,750 | |||||||||||||
Other current assets and other assets | (9,914 | ) | 11,981 | 7,533 | 35,930 | |||||||||||||
Accounts payable | (13,250 | ) | (1,285 | ) | 1,755 | 41,148 | ||||||||||||
Accrued expenses and other current liabilities | (64,039 | ) | 21,573 | (948 | ) | 1,139 | ||||||||||||
Customer advances | 5,739 | (62,212 | ) | 35,249 | 38,632 | |||||||||||||
Income taxes payable | 1,389 | 3,079 | (2,814 | ) | 1,847 | |||||||||||||
Pension and other postretirement liabilities | 3,077 | (3,650 | ) | 10,503 | 13,245 | |||||||||||||
Long-term liabilities | 335 | 1,844 | (7,080 | ) | (11,927 | ) | ||||||||||||
Other | 1,480 | (196 | ) | 216 | 501 | |||||||||||||
Net cash (used in) provided by operating activities of continuing operations | (38,531 | ) | (143,827 | ) | 39,567 | 151,065 | ||||||||||||
Net cash provided by operating activities of discontinued operations | — | — | 26,562 | 81,588 | ||||||||||||||
Net cash (used in) provided by operating activities | (38,531 | ) | (143,827 | ) | 66,129 | 232,653 | ||||||||||||
Investing activities: | ||||||||||||||||||
Capital expenditures for continuing operations | (4,972 | ) | (4,649 | ) | (24,786 | ) | (115,362 | ) | ||||||||||
(Increase) decrease in restricted cash restricted | (54 | ) | 1,566 | (5,049 | ) | (7,628 | ) | |||||||||||
Insurance proceeds received | — | 205,000 | — | — | ||||||||||||||
Proceeds from the sale of investments | — | — | — | 45,908 | ||||||||||||||
Investments in and advances to affiliates | (63 | ) | (7,354 | ) | (5,712 | ) | (19,200 | ) | ||||||||||
Net cash (used in) provided by investing activities of continuing operations | (5,089 | ) | 194,563 | (35,547 | ) | (96,282 | ) | |||||||||||
Proceeds from the sale of assets, net of expenses (Note 5) | — | 144 | 953,619 | — | ||||||||||||||
Capital expenditures for discontinued operations | — | — | (11,185 | ) | (61,202 | ) | ||||||||||||
Net cash provided by (used in) investing activities of discontinued operations | — | 144 | 942,434 | (61,202 | ) | |||||||||||||
Net cash (used in) provided by investing activities | (5,089 | ) | 194,707 | 906,887 | (157,484 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||
Proceeds from Skynet Notes | 120,763 | — | — | — | ||||||||||||||
Repayments of term loans | — | — | (576,500 | ) | (32,500 | ) | ||||||||||||
Repayments of revolving credit facilities | — | — | (390,387 | ) | — | |||||||||||||
Borrowings under revolving credit facilities | — | — | — | 71,387 | ||||||||||||||
Interest payments on 10% senior notes | — | — | — | (30,635 | ) | |||||||||||||
Repayments of export-import facility | — | — | — | (6,434 | ) | |||||||||||||
Proceeds from other stock issuances | — | — | — | 3,852 | ||||||||||||||
Payment of bank amendment costs | — | — | — | (5,131 | ) | |||||||||||||
Net cash provided by (used in) financing activities of continuing operations | 120,763 | — | (966,887 | ) | 539 | |||||||||||||
Net cash provided by financing activities of discontinued operations | — | — | — | — | ||||||||||||||
Net cash provided by (used in) financing activities | 120,763 | — | (966,887 | ) | 539 | |||||||||||||
Increase in cash and cash equivalents | 77,143 | 50,880 | 6,129 | 75,708 | ||||||||||||||
Cash and cash equivalents — beginning of period | 198,653 | 147,773 | 141,644 | 65,936 | ||||||||||||||
Cash and cash equivalents — end of period | $ | 275,796 | $ | 198,653 | $ | 147,773 | $ | 141,644 | ||||||||||
F-7
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Organization and Principal Business |
Loral Space & Communications Inc. (“New Loral”) together with its subsidiaries is a leading satellite communications company with substantial activities in satellite-based communications services and satellite manufacturing. New Loral was formed to succeed the business conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal bankruptcy laws on November 21, 2005 (the “Effective Date”).
We adopted fresh-start accounting as of October 1, 2005, in accordance with Statement of Position No. 90-7,Financial Reporting of Entities in Reorganization Under the Bankruptcy Code(“SOP 90-7”). Accordingly, our financial information disclosed under the heading “Successor Registrant” for the period ended and as of December 31, 2005, is presented on a basis different from, and is therefore not comparable to, our financial information disclosed under the heading “Predecessor Registrant” for the period ended and as of October 1, 2005 (the date we adopted fresh-start accounting) or for prior periods.
The terms, “Loral,” the “Company,” “we,” “our” and “us,” when used in this report with respect to the period prior to our emergence, are references to Old Loral, and when used with respect to the period commencing after our emergence, are references to New Loral. These references include the subsidiaries of Old Loral or New Loral, as the case may be, unless otherwise indicated or the context otherwise requires.
Loral is organized into two operating segments:
Satellite Services,conducted by our subsidiary Loral Skynet Corporation (“Loral Skynet”), generates its revenues and cash flows from leasing satellite capacity on its four-satellite fleet to commercial and governmental customers for video and direct to home (“DTH”) broadcasting, high-speed data distribution, Internet access and communications, as well as providing satellite-based networking services. It also provides professional services to other satellite operators including satellite construction oversight and fleet operating services.
Satellite Manufacturing,conducted by our subsidiary, Space Systems/ Loral, Inc. (“SS/ L”), generates its revenues and cash flows from designing and manufacturing satellites, space systems and space system components for commercial and government customers whose applications include fixed satellite services, DTH broadcasting, broadband data distribution, wireless telephony, digital radio, military communications, weather monitoring and air traffic management.
2. | Bankruptcy Filings and Reorganization |
Bankruptcy Filings |
On July 15, 2003, Old Loral and certain of its subsidiaries (the “Debtor Subsidiaries” and collectively with Old Loral, the “Debtors”), including Loral Space & Communications Holdings Corporation (formerly known as Loral Space & Communications Corporation), Loral SpaceCom Corporation (“Loral SpaceCom”), SS/ L and Loral Orion, Inc. (now known as Loral Skynet Corporation), filed voluntary petitions for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) (Lead Case No. 03-41710 (RDD), Case Nos. 03-41709 (RDD) through 03-41728 (RDD)) (the “Chapter 11 Cases”). Also on July 15, 2003, Old Loral and one of its Bermuda subsidiaries (the “Bermuda Group”) filed parallel insolvency proceedings in the Supreme Court of Bermuda (the “Bermuda Court”), and, on that date, the Bermuda Court entered an order appointing certain partners of KPMG as Joint Provisional Liquidators (“JPLs”) in respect of the Bermuda Group (see Basis of Presentation Note 3).
As a result of our voluntary petitions for reorganization, all of our prepetition debt obligations were accelerated (see below and Note 11). On July 15, 2003, we also suspended interest payments on all of our
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
prepetition unsecured debt obligations. A creditors’ committee (the “Creditors’ Committee”) was appointed in the Chapter 11 Cases to represent all unsecured creditors, including all debt holders. On March 29, 2005, the United States Trustee for the Southern District of New York appointed an official committee of equity security holders (the “Equity Committee”) (as amended on April 7, 2005 and April 11, 2005). In accordance with the provisions of the Bankruptcy Code, both the Creditors’ Committee and the Equity Committee had the right to be heard on all matters that came before the Bankruptcy Court.
Reorganization
The Debtors emerged from Chapter 11 on November 21, 2005 pursuant to the terms of their fourth amended joint plan of reorganization, as modified (the “Plan of Reorganization”). The Plan of Reorganization had previously been confirmed by order (the “Confirmation Order”) of the Bankruptcy Court entered on August 1, 2005.
Pursuant to the Plan of Reorganization:
• | The business and operations of Old Loral have been transferred to New Loral, and Loral Skynet and SS/ L have emerged intact as separate subsidiaries of reorganized Loral. | |
• | Our new common stock has been listed on NASDAQ under the symbol “LORL.” | |
• | SS/ L has emerged debt-free. | |
• | The initial distributions to creditors of Old Loral and its subsidiaries have been completed in accordance with the Plan of Reorganization as follows: |
• | All holders of allowed claims against SS/ L and Loral SpaceCom have been, or will be paid in cash in full, including interest from the petition date to the Effective Date. | |
• | 20 million shares of New Loral common stock were issued to our distribution agent on the Effective Date, 18.7 million of which have been distributed to creditors. | |
• | $200 million of Loral Skynet preferred stock was issued to our distribution agent on the Effective Date, $197.4 million of which has been distributed to creditors. | |
• | The remaining undistributed shares of New Loral common stock and Loral Skynet preferred stock have been reserved to cover disputed claims and will be distributed quarterly in accordance with the Plan of Reorganization upon resolutions of those claims. | |
• | Pursuant to a rights offering, Loral Skynet issued on the Effective Date, $126 million of senior secured notes (the “Loral Skynet Notes”, see Note 12) to certain creditors who subscribed for the notes and to certain creditors who committed to purchase any unsubscribed notes (i.e., “backstopped” the offering). | |
• | Old Loral will be liquidated; the common and preferred stock of Old Loral were cancelled on the Effective Date, and no distribution was made to the holders of such stock. |
Old Loral shareholders acting on behalf of the self-styled Loral Stockholders Protective Committee (“LSPC”) have filed appeals seeking to revoke the Confirmation Order, to overturn the Bankruptcy Court’s denial of the LSPC’s motion to compel Old Loral to hold a shareholders’ meeting and to rescind the approval of the Federal Communications Commission (“FCC”) of the transfer of our FCC licenses from Old Loral to New Loral (the “Appeals”). We believe that the Appeals are completely without merit and will not have any effect on the completed reorganization. For further details about the Appeals see Note 19.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. | Basis of Presentation |
Loral has a December 31 year end. The consolidated financial statements for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, and for each of the two years in the period ended December 31, 2004, include the results of Loral and its subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany transactions have been eliminated. References in these consolidated financial statements to the Predecessor Registrant refer to Loral until October 1, 2005 and references to the Successor Registrant refer to Loral after October 1, 2005 and after giving effect to the adoption of fresh-start accounting.
The accompanying consolidated financial statements for the Predecessor Registrant have been prepared in accordance with SOP 90-7 and on a going concern basis, which contemplates continuing operations, realization of assets and liquidation of liabilities in the ordinary course of business. SOP 90-7 requires us to distinguish prepetition liabilities subject to compromise from postpetition liabilities in our consolidated balance sheets. The caption “liabilities subject to compromise” reflects the carrying value of prepetition claims that were restructured in our Chapter 11 Cases. In addition, the consolidated statements of operations of the Predecessor Registrant portray our results of operations during the Chapter 11 proceedings. As a result, any revenue, expenses, realized gains and losses, and provision for losses resulting directly from the reorganization and restructuring of the organization are reported separately as reorganization items, except those required to be reported as discontinued operations and extraordinary items in conformity with Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“SFAS 144”) and SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections(“SFAS 145”). We did not prepare combining financial statements for Loral and its Debtor Subsidiaries, since the subsidiaries that did not file voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code were immaterial to our consolidated financial statements.
As noted above, we emerged from bankruptcy on November 21, 2005 and pursuant to SOP 90-7, we adopted fresh-start accounting as of October 1, 2005. We engaged an independent appraisal firm to assist us in determining the fair value of our assets and liabilities. Upon emergence, our reorganization enterprise value as determined by the Bankruptcy Court was approximately $970 million, which after reduction for the fair value of the Loral Skynet Notes and Series A Preferred Stock (see Notes 12 and 15), results in a reorganization equity value of approximately $642 million. This reorganization enterprise value was allocated to our assets and liabilities (see Note 4). Our assets and liabilities were stated at fair value in accordance with SFAS No. 141,Business Combinations(“SFAS 141”). In addition, our accumulated deficit was eliminated, and our new debt and equity were recorded in accordance with distributions pursuant to the Plan of Reorganization.
Investments in XTAR, L.L.C. (“XTAR”), as well as other affiliates, are accounted for using the equity method, due to our inability to control significant operating decisions. Income and losses of affiliates are recorded based on our beneficial interest. Intercompany profit arising from transactions with affiliates is eliminated to the extent of our beneficial interest. Advances to affiliates generally consist of amounts due under extended payment terms. Equity in losses of affiliates is not recognized after the carrying value of an investment, including advances and loans, has been reduced to zero, unless guarantees or other obligations exist. We capitalize interest cost on our investments, until such entities commence commercial operations. Capitalized interest on investments is amortized over the life of the primary asset of the affiliate. Certain of our affiliates are subject to the risks associated with new businesses (see Note 9).
Use of Estimates in Preparation of Financial Statements |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported for the period. Actual results could differ from estimates.
Most of our satellite manufacturing revenue is associated with long-term contracts which require significant estimates. These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the potential for component obsolescence in connection with long-term procurements. Significant estimates also include the estimated useful lives of our satellites.
Cash and Cash Equivalents |
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. As of December 31, 2005, we had $276 million of available cash and $12 million of restricted cash ($2 million included in other current assets and $10 million included in other assets on our consolidated balance sheet). As of December 31, 2004, we had $148 million of available cash and $13 million of restricted cash ($1 million included in other current assets and $12 million included in other assets on our consolidated balance sheet).
Concentration of Credit Risk |
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, foreign exchange contracts, contracts-in-process, long-term receivables and advances and loans to affiliates (see Note 9). Our cash and cash equivalents are maintained with high-credit-quality financial institutions. Historically, our customers have been primarily large multinational corporations and U.S. and foreign governments for which the creditworthiness was generally substantial. In recent years, we have added commercial customers which include companies in emerging markets or the development stage, some of which are highly leveraged or partially funded. Management believes that its credit evaluation, approval and monitoring processes combined with negotiated billing arrangements mitigate potential credit risks with regard to our current customer base.
Receivables |
As of December 31, 2005 and 2004, billed receivables (including accounts receivable) were reduced by an allowance for doubtful accounts of $5.5 million and $6.4 million, respectively.
Inventories |
Inventories consist principally of parts and subassemblies used in the manufacture of satellites which have not been specifically identified to contracts-in-process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost method. As of December 31, 2005 and 2004, inventory was reduced by an allowance for obsolescence of $33.7 million and $34.0 million, respectively.
Property, Plant and Equipment |
As of October 1, 2005, we adopted fresh-start accounting and our property, plant and equipment were recorded at their fair values based upon the appraised values of such assets. We used the work of an independent appraisal firm to assist us in determining the fair value of our property, plant and equipment. We and the independent appraiser determined the fair value of our property, plant and equipment using the planned future use of each asset or group of assets, quoted market prices for assets where a market exists for such assets, the expected future revenue and profitability of the business unit utilizing such assets and the expected future life of such assets. In our determination of fair value, we also considered whether an asset would be sold either individually or with other assets and the proceeds we expected to receive from such a sale.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumptions relating to the expected future use of individual assets could affect the fair value of such assets and the depreciation expense recorded related to such assets in the future. Depreciation is provided on the straight-line method for satellites and related equipment over the estimated useful lives of the related assets. Depreciation is provided primarily on an accelerated method and straight line for other owned assets over the estimated useful life of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Below are the estimated useful lives of our property, plant and equipment as of December 31, 2005:
Years | ||||
Land improvements | 20 | |||
Buildings | 25 to 45 | |||
Leasehold improvements | 5 to 25 | |||
Satellites-in-orbit | 5 to 13 | |||
Earth stations | 5 to 15 | |||
Equipment, furniture and fixtures | 3 to 20 |
Costs incurred in connection with the construction and successful deployment of Loral Skynet satellites and related equipment are capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch and in-orbit test insurance and construction period interest. Capitalized interest related to the construction of satellites for 2005, 2004 and 2003 was zero, $0.5 million and $12.9 million, respectively. All capitalized satellite costs are amortized over the estimated useful life of the related satellite. The estimated useful life of the satellites was determined by engineering analyses performed at the satellite’s in-service date. Satellite lives are reevaluated periodically. Losses from unsuccessful launches and in-orbit failures of our satellites, net of insurance proceeds (so long as such amounts are determinable and receipt is probable), are recorded in the period a loss occurs (see Valuation of Satellites, Long-Lived Assets and Investments in and Advances to Affiliates below).
Valuation of Satellites, Long-Lived Assets and Investments in and Advances to Affiliates |
The carrying value of our satellites, long-lived assets and investments in and advances to affiliates is reviewed for impairment in accordance with SFAS 144 and Accounting Principles Board (“APB”) Opinion No. 18,Equity Method of Accounting for Investments in Common Stock, respectively. We periodically evaluate potential impairment loss relating to our satellites and other long-lived assets, when a change in circumstances occurs, by assessing whether the carrying amount of these assets can be recovered over their remaining lives through future undiscounted expected cash flows generated by those assets (excluding financing costs). If the expected undiscounted future cash flows were less than the carrying value of the long-lived asset, an impairment charge would be recorded based on such asset’s estimated fair value. Changes in estimates of future cash flows could result in a write-down of the asset in a future period. Estimated future cash flows from our satellites could be impacted by, among other things:
• | Changes in estimates of the useful life of the satellite | |
• | Changes in estimates of our ability to operate the satellite at expected levels | |
• | Changes in the manner in which the satellite is to be used | |
• | The loss of one or several significant customer contracts on the satellite |
If an impairment loss was indicated for a satellite, such amount would be recognized in the period of occurrence, net of any insurance proceeds to be received so long as such amounts are determinable and receipt is probable. If no impairment loss was indicated in accordance with SFAS 144, and we received insurance proceeds, the proceeds would be recognized in our consolidated statement of operations.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deposits |
Deposits primarily represent prepaid amounts on satellite launch vehicles.
Investments |
Investments in publicly traded common stock are classified as available-for-sale, and are recorded at fair value, with the resulting unrealized gain or loss excluded from net loss and reported as a component of other comprehensive loss until realized (see Notes 6 and 18). Our Predecessor Registrant’s investment in Globalstar, L.P.’s $500 million credit facility was accounted for at fair value, with changes in the value (net of tax) recorded as a component of other comprehensive loss (see Note 9).
On March 7, 2003, Sirius Satellite Radio, Inc. (“Sirius”) completed its recapitalization plan and as part of this recapitalization, SS/L converted its entire vendor financing receivables of approximately $76 million into 59 million shares of common stock of Sirius. For the year ended December 31, 2003, SS/L realized net proceeds of $46 million from the sale of all of the shares of Sirius common stock that it received in the recapitalization, and realized gains on such sales of $18 million. In the first quarter of 2003, SS/L recorded a charge on the vendor financing receivables due from Sirius of $10 million, representing the difference between the carrying value of SS/L’s receivables of $38 million, and the value of the common shares received by SS/L based on the trading price of Sirius’s common stock on March 7, 2003 of $28 million.
Goodwill and Other Intangible Assets |
Goodwill represents the amount by which the Company’s reorganization equity value exceeded the fair value of its tangible assets and identified intangible assets less its liabilities allocated in accordance with the provisions of SFAS 141, as of October 1, 2005. Pursuant to the provisions of SFAS No. 142,Goodwill and Other Intangible Assets(“SFAS 142”), goodwill is not amortized and is subject to an annual impairment test which the Company performs on an annual basis in the fourth quarter of each fiscal year. Our test of goodwill impairment for 2005 did not result in any goodwill impairment. Goodwill was allocated to our reporting unit level (operating segment or one level below an operating segment). SFAS 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value (see Note 4).
Intangible assets consist primarily of backlog, internally developed software and technology, orbital slots, trade names and customer relationships, all of which were recorded in connection with the adoption of fresh-start accounting. We used the work of an independent appraiser to assist us in determining the fair value of our intangible assets. The fair values were calculated using several approaches that encompassed the use of excess earnings, relief from royalty and the build-up methods. The excess earnings, relief from royalty and build-up approaches are variations of the income approach. The income approach, more commonly known as the discounted cash flow approach, estimates fair value based on the cash flows that an asset can be expected to generate over its useful life. Identifiable intangible assets with finite useful lives are amortized on a straight-line basis over the estimated useful lives of the assets.
Revenue Recognition |
Revenue from satellite sales under long-term fixed-price contracts is recognized following the provisions of Statement of Position 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts, using the cost-to-cost percentage-of-completion method. Revenue includes the basic contract price and estimated amounts for penalties and incentive payments, including award fees, performance incentives, and estimated orbital incentives discounted to their present value at launch date. Costs include the
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
development effort required for the production of high-technology satellites, non-recurring engineering and design efforts in early periods of contract performance, as well as the cost of qualification testing requirements. Contracts are typically subject to termination for convenience or for default. If a contract is terminated for convenience by a customer or due to a customer’s default, we are generally entitled to our costs incurred plus a reasonable profit.
Revenue under cost-reimbursable type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the contract term.
U.S. government contract risks include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will not have a material effect on Loral’s financial position or its results of operations.
Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. In accordance with industry practice, contracts-in-process include unbilled amounts relating to contracts and programs with long production cycles, a portion of which may not be billable within one year.
We provide satellite capacity and network services under lease agreements that generally provide for the use of satellite transponders and, in certain cases, earth stations and other terrestrial communications equipment for periods generally ranging from one year to the end of life of the satellite. Some of these agreements have certain obligations, including providing spare or substitute capacity, if available, in the event of satellite failure. If no spare or substitute capacity is available, the agreement may be terminated. Revenue under transponder lease and network services agreements is recognized as services are performed, provided that a contract exists, the price is fixed or determinable and collectibility is reasonably assured. Revenues under contracts that include fixed lease payment increases are recognized on a straight-line basis over the life of the lease.
Lease contracts qualifying for capital lease treatment are accounted for as sales-type leases.
Other terrestrial communications equipment represents network elements (antennas, transmission equipment, etc.) necessary to enable communication between multiple terrestrial locations through a customer-selected satellite communications service provider. Revenue from equipment sales is primarily recognized upon acceptance by the customer, provided that a contract exists, the price is fixed or determinable and collectibility is reasonably assured. Revenue from equipment sales under long-term fixed price contracts is recognized using the cost-to-cost percentage-of-completion method. Losses on contracts are recognized when determined and revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. Revenues under arrangements that include both services and equipment elements are allocated based on the relative fair values of the elements of the arrangement; otherwise, revenue is recognized as services are provided over the life of the arrangement.
Research and Development |
Independent research and development costs, which are expensed as incurred, were $7 million and $5 million for the periods January 1, 2005 to October 1, 2005 and from October 2, 2005 to December 31, 2005, respectively, and $9 million and $9 million for 2004 and 2003, respectively, and are included in selling, general and administrative expenses.
Foreign Exchange Contracts |
We enter into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable under contracts-in-process which are denominated in foreign currencies. We
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
follow SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) as amended by SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which among other things requires that all derivative instruments be recorded on the balance sheet at their fair value.
Stock-Based Compensation |
Effective October 1, 2005, in connection with our adoption of fresh-start accounting, we adopted the fair value method of accounting for stock options for all options granted by us after October 1, 2005 pursuant to the prospective method provisions of SFAS No. 123(R),Share-Based Payment(“SFAS 123R”). We use the Black-Scholes-Merton option-pricing model to measure fair value of these stock option awards. This is the same method we used in prior years for disclosure purposes. The Black-Scholes-Merton model requires us to make significant judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption, the expected life of the option award, the risk-free rate of return and dividends during the expected term. We emerged from bankruptcy on November 21, 2005, and as a result, we do not have sufficient stock price history upon which to base our volatility assumption. In determining the volatility used in our model, we considered the volatility of the stock prices of selected companies in the satellite industry, the nature of those companies, our emergence from bankruptcy and other factors in determining our stock price volatility. For 2005, we used a stock price volatility assumption of 27%. We based our estimate of the average life of a stock option of 4.75 years using the midpoint between the vesting and expiration dates as allowed by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, based upon the vesting period of 4 years and the option term of seven years. Our risk-free rate of return assumption for options granted in 2005 of 4.4% was based on the quoted yield for five-year U.S. treasury bonds as of the date of grant (see Note 15). We assumed no dividends during the expected term.
Prior to October 1, 2005, we followed the disclosure-only provisions of SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS 148”) an amendment of SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”). We accounted for stock-based compensation for employees using the intrinsic value method (as defined below) as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”), and related interpretations. Under APB 25, no compensation expense was recognized for employee share option grants because the exercise price of the options granted equaled the market price of the underlying shares on the date of grant (the “intrinsic value method”). We used the Black-Scholes-Merton option pricing model to determine the pro forma effect with the following weighted average assumptions in our calculations: expected life, six to twelve months following vesting; stock volatility, 90%; risk free interest rate, 2.4% to 6.6% based on date of grant; and dividends, none during the expected term. Our calculations were based on a multiple option valuation approach and forfeitures were recognized as they occurred. The following table summarizes what our pro
F-15
Predecessor Registrant | ||||||||||||
For the Period | ||||||||||||
January 1, | Years Ended | |||||||||||
2005 to | December 31, | |||||||||||
October 1, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Reported income (loss) from continuing operations | $ | 1,030.9 | $ | (174.3 | ) | $ | (413.2 | ) | ||||
Less: Total stock based employee benefit (compensation) determined under the fair value method for all awards | — | (0.6 | ) | 7.6 | ||||||||
Pro forma income (loss) from continuing operations | 1,030.9 | (174.9 | ) | (405.6 | ) | |||||||
(Loss) income from discontinued operations, net of taxes | — | (2.3 | ) | 18.8 | ||||||||
Gain on sale of discontinued operations, net of taxes | 14.0 | — | — | |||||||||
Pro forma net income (loss) before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | 1,044.9 | (177.2 | ) | (386.8 | ) | |||||||
Cumulative effect of change in accounting principle | — | — | (2.0 | ) | ||||||||
Extraordinary gain on acquisition of minority interest | — | — | 13.6 | |||||||||
Pro forma net income (loss) | 1,044.9 | (177.2 | ) | (375.2 | ) | |||||||
Preferred dividends | — | — | (6.7 | ) | ||||||||
Pro forma net income (loss) applicable to common shareholders | $ | 1,044.9 | $ | (177.2 | ) | $ | (381.9 | ) | ||||
Reported basic and diluted income (loss) per share from continuing operations | $ | 23.37 | $ | (3.96 | ) | $ | (9.58 | ) | ||||
Pro forma basic and diluted income (loss) per share from continuing operations | 23.37 | (3.97 | ) | (9.41 | ) | |||||||
Reported basic and diluted income (loss) per share before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | 23.69 | (4.01 | ) | (9.15 | ) | |||||||
Pro forma basic and diluted income (loss) per share before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | 23.69 | (4.02 | ) | (8.98 | ) | |||||||
Reported income (loss) per share applicable to common shareholders | 23.69 | (4.01 | ) | (8.89 | ) | |||||||
Pro forma income (loss) per share applicable to common shareholders | 23.69 | (4.02 | ) | (8.72 | ) |
Deferred Compensation |
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of unrecognized deferred compensation (not including an additional $5.8 million for which recognition of the awards were delayed to 2006) that will be charged to income over the remaining vesting period. The value of the deferred compensation fluctuates depending on stock price performance, within a defined range, and vesting will accelerate if there is a change of control as defined.
Extraordinary Gain on Acquisition of Minority Interest |
On June 30, 2003, Loral entered into a master settlement agreement with Alcatel Space and Alcatel Space Industries (collectively, “Alcatel”) which resolved all claims among the parties. In connection with that agreement, Loral, among other things, acquired Alcatel’s minority interest in CyberStar, resulting in the recognition in the second quarter of 2003 of an extraordinary gain of $14 million, which represents the extinguishment of the minority interest liability less the fair value of the acquired net assets.
Income Taxes |
Deferred income taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying statutory tax rates in effect for the year during which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it is more likely than not that the deferred tax assets will not be realized (see Note 14).
In addition, our policy is to establish tax contingency liabilities for potential audit issues. The tax contingency liabilities are based on our estimate of the probable amount of additional taxes that may be due in the future. Any additional taxes due would be determined only upon completion of current and future federal, state and international tax audits. At December 31, 2005, the Company had $41.8 million and $0.4 million of tax contingency liabilities included in long-term liabilities and income taxes payable, respectively. At December 31, 2004, the Company had $38.9 million of tax contingency liabilities included in liabilities subject to compromise.
F-17
Additional Cash Flow Information |
Successor | ||||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||||
For the Period | For the Period | |||||||||||||||||
October 2, | January 1, | Years Ended | ||||||||||||||||
2005 to | 2005 to | December 31, | ||||||||||||||||
December 31, | October 1, | |||||||||||||||||
2005 | 2005 | 2004 | 2003 | |||||||||||||||
Non-cash activities: | ||||||||||||||||||
Minimum pension liability adjustment | $ | — | $ | (19,049 | ) | $ | (4,526 | ) | ||||||||||
Unrealized gains (losses) on available-for-sale securities, net of taxes | $ | (99 | ) | $ | 8,142 | $ | (16,815 | ) | ||||||||||
Unrealized net losses on derivatives, net of taxes | $ | (487 | ) | $ | (1,046 | ) | $ | (244 | ) | |||||||||
Increase in restricted cash related to debt proceeds | $ | 98,736 | ||||||||||||||||
Insurance proceeds receivable recorded for satellite loss and warranty obligations | $ | 122,770 | ||||||||||||||||
Accrual of preferred dividends | $ | 6,719 | ||||||||||||||||
Supplemental information: | ||||||||||||||||||
Interest paid, net of capitalized interest | $ | 15,548 | $ | — | $ | 23,550 | $ | 83,062 | ||||||||||
Taxes paid, net of refunds | $ | (418 | ) | $ | 2,166 | $ | 4,318 | $ | 1,342 | |||||||||
Cash (paid) received for reorganization items: | ||||||||||||||||||
Professional fees | $ | (9,650 | ) | $ | (17,533 | ) | $ | (18,745 | ) | $ | (7,598 | ) | ||||||
Employee retention costs | $ | (4,790 | ) | $ | — | $ | (6,468 | ) | $ | (2,680 | ) | |||||||
Severance costs | $ | — | $ | (1,722 | ) | |||||||||||||
Restructuring costs | $ | (55 | ) | |||||||||||||||
Interest income | $ | 2,536 | $ | 1,740 | $ | 708 | ||||||||||||
F-18
New Accounting Pronouncements |
FSP13-1 |
FIN 47 |
SFAS 154 |
SFAS 153 |
SFAS 150 |
F-19
SFAS 151 |
FSP 109-1 |
4. | Fresh-Start Accounting |
F-20
Predecessor | Plan | Fresh-Start | Successor | |||||||||||||||
October 1, | Reorganization | Valuation | October 1, | |||||||||||||||
2005 | Adjustments | Adjustments(e) | 2005 | |||||||||||||||
(in millions) | ||||||||||||||||||
ASSETS | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 198.7 | $ | — | $ | — | $ | 198.7 | ||||||||||
Accounts receivable, net | 14.4 | — | — | 14.4 | ||||||||||||||
Contracts-in-process | 91.4 | — | (14.3 | ) | 77.1 | |||||||||||||
Inventories | 45.5 | — | — | 45.5 | ||||||||||||||
Other current assets | 41.3 | 97.5 | (b) | 3.4 | 142.2 | |||||||||||||
Total current assets | 391.3 | 97.5 | (10.9 | ) | 477.9 | |||||||||||||
Property, plant and equipment, net | 536.5 | (3.5 | )(i) | 0.2 | 533.2 | |||||||||||||
Long-term receivables | 67.6 | — | (23.8 | ) | 43.8 | |||||||||||||
Investments in and advances to affiliates | 53.7 | — | 56.3 | 110.0 | ||||||||||||||
Deposits | 9.8 | — | — | 9.8 | ||||||||||||||
Goodwill | — | — | 340.1 | (g) | 340.1 | |||||||||||||
Other assets | 42.1 | 2.1 | (b)(j) | 126.7 | 170.9 | |||||||||||||
$ | 1,101.0 | $ | 96.1 | $ | 488.6 | $ | 1,685.7 | |||||||||||
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | ||||||||||||||||||
Current liabilities: | ||||||||||||||||||
Accounts payable | $ | 36.1 | $ | 45.1 | (c)(h) | $ | 1.2 | $ | 82.4 | |||||||||
Accrued employment costs | 33.9 | 0.5 | (c) | — | 34.4 | |||||||||||||
Customer advances and billings in excess of costs and profits | 108.4 | 24.9 | (c)(h) | (3.2 | ) | 130.1 | ||||||||||||
Interest payable | — | 19.1 | (c)(h) | — | 19.1 | |||||||||||||
Vendor financing payable | — | 37.1 | (c)(h) | — | 37.1 | |||||||||||||
Income taxes payable | — | 0.8 | (c) | — | 0.8 | |||||||||||||
Other current liabilities | 25.5 | 17.9 | (c)(h) | (1.7 | ) | 41.7 | ||||||||||||
Total current liabilities | 203.9 | 145.4 | (3.7 | ) | 345.6 | |||||||||||||
Pension and other postretirement liabilities | — | 156.6 | (c) | 78.2 | 234.8 | |||||||||||||
Long-term liabilities | 84.5 | 34.6 | (c) | 40.5 | 159.6 | |||||||||||||
Long-term debt | — | 103.4 | (b) | — | 103.4 | |||||||||||||
Total liabilities | 288.4 | 440.0 | 115.0 | 843.4 | ||||||||||||||
Liabilities subject to compromise | 1,914.0 | (1,914.0 | )(c) | — | — | |||||||||||||
Minority interest | 2.3 | 200.0 | (b) | (2.3 | ) | 200.0 | ||||||||||||
Shareholders’ equity: | ||||||||||||||||||
Common stock, par value $.01 and Paid-in capital | 3,397.2 | 642.3 | (d) | (3,397.2 | )(f) | 642.3 | ||||||||||||
Other | (93.8 | ) | — | 93.8 | (f) | — | ||||||||||||
Retained (deficit) earnings | (4,407.1 | ) | 727.8 | (c)(d) | 3,679.3 | (f) | — | |||||||||||
Total shareholders’ (deficit) equity | (1,103.7 | ) | 1,370.1 | 375.9 | 642.3 | |||||||||||||
$ | 1,101.0 | $ | 96.1 | $ | 488.6 | $ | 1,685.7 | |||||||||||
(a) | The Condensed Consolidated Balance Sheet reflects a reorganization enterprise value of $970 million based on the Bankruptcy Court’s determination (see Note 2), which, after reduction for the fair value of the Loral Skynet Notes and Series A Preferred |
F-21
Stock (see Notes 12 and 15), results in a reorganization equity value of approximately $642 million. This results in goodwill equal to the excess of reorganization equity value over fair value of identifiable net assets. | |
(b) | Reflects $98.7 million of proceeds from the rights offering of Loral Skynet Notes held in escrow as of October 1, 2005, and the related deferred debt issuance costs of $4.7 million and $200 million of Loral Skynet Preferred Stock pursuant to the Plan of Reorganization (see Notes 12 and 15). |
(c) | Reflects the discharge of prepetition liabilities in accordance with the Plan of Reorganization and the reclassification of the remaining liabilities subject to compromise to the appropriate liability accounts in accordance with the Plan of Reorganization. Discharge of Loral’s pre-petition liabilities is summarized as follows (in millions): |
To be exchanged for stock | $ | 1,298.0 | ||
To be cancelled | 292.2 | |||
To be reinstated and/or paid in cash | 323.8 | |||
$ | 1,914.0 | |||
(d) | Reflects the issuance of New Loral common stock to pre-petition creditors and the gain on the discharge of liabilities subject to compromise. |
(e) | Reflects changes to carrying values of assets and liabilities to reflect estimated fair values. |
(f) | Reflects the revaluation gain and the elimination of the retained deficit and other equity balances. |
(g) | Reflects goodwill equal to the excess of reorganization equity value over the estimated fair value of identifiable net assets. |
(h) | Amounts payable upon emergence are included in current liabilities. |
(i) | Reflects agreement to return certain fixed assets in settlement of certain pre-petition obligations. |
(j) | Reflects elimination of deferred charges related to the Old Loral debt and preferred stock, which were discharged in accordance with the Plan of Reorganization. |
Gain on discharge of pre-petition obligations | $ | 727.8 | |||
Gain on fresh-start valuation adjustments | 375.9 | ||||
Total gain on discharge of pre-petition obligations and fresh-start adjustments | 1,103.7 | ||||
Add interest expense to holders of claims paid in cash | 13.2 | ||||
Less tax benefit on Plan of Reorganization and fresh-start valuation adjustments | (15.4 | ) | |||
Total gain on discharge of pre-petition obligations and fresh-start adjustments excluding interest expense and income tax benefit | $ | 1,101.5 | |||
5. | Discontinued Operations |
F-22
Predecessor Registrant | ||||||||||||
For the Period | ||||||||||||
January 1, | Years Ended | |||||||||||
2005 to | December 31, | |||||||||||
October 1, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
Revenues of discontinued operations | $ | — | $ | 29,149 | $ | 143,564 | ||||||
Operating income | $ | — | $ | 22,408 | $ | 78,958 | ||||||
Interest expense on secured bank debt (Note 12) | — | (24,756 | ) | (49,178 | ) | |||||||
Income (loss) before income taxes | — | (2,348 | ) | 29,780 | ||||||||
Income tax provision | — | — | (10,977 | ) | ||||||||
Gain on sale of discontinued operations, net of tax | 13,967 | — | — | |||||||||
Income (loss) from discontinued operations | $ | 13,967 | $ | (2,348 | ) | $ | 18,803 |
F-23
6. | Accumulated Other Comprehensive Income (Loss) |
Consolidated Balance Sheet | Consolidated Statement of Operations | ||||||||||||||||||||||||
Successor | Predecessor | Successor | |||||||||||||||||||||||
Registrant | Registrant | Registrant | Predecessor Registrant | ||||||||||||||||||||||
For the Period | For the Period | ||||||||||||||||||||||||
October 2, | January 1, | Years Ended | |||||||||||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||||||||||
December 31, | December 31, | December 31, | October 1, | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||||||
Cumulative translation adjustment | $ | 15 | $ | (799 | ) | $ | 15 | $ | (222 | ) | $ | 140 | $ | 970 | |||||||||||
Derivatives classified as cash flow hedges, net of taxes: | |||||||||||||||||||||||||
Net (decrease) increase in foreign currency exchange contracts | — | — | 551 | ||||||||||||||||||||||
Reclassifications into revenues, cost of sales and income taxes from other comprehensive income | (487 | ) | (1,046 | ) | (355 | ) | |||||||||||||||||||
Reclassifications into interest expense from other comprehensive income for anticipated transactions that are no longer probable | — | — | (440 | ) | |||||||||||||||||||||
Unrealized net gains (losses) on derivatives | (604 | ) | (487 | ) | (1,046 | ) | (244 | ) | |||||||||||||||||
Unrealized (losses) gains on available-for-sale securities, net of taxes | — | (99 | ) | 8,142 | (16,815 | ) | |||||||||||||||||||
Minimum pension liability adjustment | (88,258 | ) | (19,049 | ) | (4,526 | ) | |||||||||||||||||||
Accumulated other comprehensive income (loss) | $ | 15 | $ | (89,661 | ) | $ | 15 | $ | (808 | ) | $ | (11,813 | ) | $ | (20,615 | ) | |||||||||
F-24
7. | Contracts-in-Process and Long-Term Receivables |
Contracts-in-Process |
Successor | Predecessor | ||||||||
Registrant | Registrant | ||||||||
December 31, | |||||||||
2005 | 2004 | ||||||||
U.S. government contracts: | |||||||||
Amounts billed | $ | 124 | $ | 1,936 | |||||
Unbilled receivables | 4,287 | 4,818 | |||||||
4,411 | 6,754 | ||||||||
Commercial contracts: | |||||||||
Amounts billed | 38,789 | 6,210 | |||||||
Unbilled receivables | 30,384 | 6,076 | |||||||
69,173 | 12,286 | ||||||||
$ | 73,584 | $ | 19,040 | ||||||
Long-Term Receivables |
F-25
Long-Term | ||||
Receivables | ||||
2006 | $ | 50,214 | ||
2007 | 10,255 | |||
2008 | 734 | |||
2009 | 2,024 | |||
2010 | 2,437 | |||
Thereafter | 32,705 | |||
98,369 | ||||
Less, current portion included in contracts-in-process | (50,214 | ) | ||
Long-term receivables | $ | 48,155 | ||
8. | Property, Plant and Equipment (see Note 3) |
Successor | Predecessor | |||||||
Registrant | Registrant | |||||||
December 31, | ||||||||
2005 | 2004 | |||||||
Land and land improvements | $ | 27,833 | $ | 24,827 | ||||
Buildings | 52,873 | 87,133 | ||||||
Leasehold improvements | 6,352 | 15,638 | ||||||
Satellites in-orbit, including satellite transponder rights of $116.7 million and $279.6 million in 2005 and 2004, respectively | 366,196 | 1,093,951 | ||||||
Satellites under construction | 197 | — | ||||||
Earth stations | 17,710 | 82,577 | ||||||
Equipment, furniture and fixtures | 61,937 | 276,948 | ||||||
Other construction in progress | 5,096 | 2,337 | ||||||
538,194 | 1,583,411 | |||||||
Accumulated depreciation and amortization | (17,691 | ) | (784,503 | ) | ||||
$ | 520,503 | $ | 798,908 | |||||
F-26
F-27
2006 | $ | 109,570 | ||
2007 | 70,293 | |||
2008 | 61,565 | |||
2009 | 55,809 | |||
2010 | 40,967 | |||
Thereafter | 95,019 | |||
$ | 433,223 | |||
9. | Investments in and Advances to Affiliates |
Successor | Predecessor | |||||||
Registrant | Registrant | |||||||
December 31, | ||||||||
2005 | 2004 | |||||||
XTAR equity investment | $ | 104,616 | $ | 49,181 |
Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | |||||||||||||||
October 2, | January 1, | Years Ended | ||||||||||||||
2005 to | 2005 to | December 31, | ||||||||||||||
DeSuccessor, | October 1, | |||||||||||||||
Registrant | 2005 | 2004 | 2003 | |||||||||||||
XTAR | $ | (5,384 | ) | $ | (2,796 | ) | $ | 87 | $ | (230 | ) | |||||
Satmex | — | — | — | (51,699 | )(1) | |||||||||||
Globalstar, L.P. and Globalstar service provider partnerships | — | — | 46,567 | 776 | ||||||||||||
Other | (63 | ) | — | — | — | |||||||||||
$ | (5,447 | ) | $ | (2,796 | ) | $ | 46,654 | $ | (51,153 | ) | ||||||
(1) | Includes the write-off of our remaining investment in Satélites Mexicanos, S.A. de C.V. (“Satmex”) of $29 million due to the financial difficulties that Satmex is having (see below). |
F-28
Predecessor Registrant | |||||||||||||||||
For the | |||||||||||||||||
For the Period | Period | ||||||||||||||||
October 2, | January 1, | Years Ended | |||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||
DSuccessor1, | October 1, | ||||||||||||||||
Registrant | 2005 | 2004 | 2003 | ||||||||||||||
Revenues | $ | 4,148 | $ | 10,025 | $ | 7,779 | $ | 27,716 | |||||||||
Investment income | — | — | — | 886 | |||||||||||||
Interest expense capitalized on development stage enterprises | — | — | 478 | 1,196 | |||||||||||||
Elimination of Loral’s proportionate share of (profits) losses relating to affiliate transactions | (2,949 | ) | 593 | 2,440 | 4,444 | ||||||||||||
Profits (losses) relating to affiliate transactions not eliminated | 2,318 | (466 | ) | (1,917 | ) | (3,621 | ) | ||||||||||
Amortization of deferred credit and profits relating to investments in affiliates | — | — | — | (783 | ) |
XTAR |
F-29
Year Ended | ||||
December 31, | ||||
2005 | ||||
Revenues | $ | 9.4 | ||
Operating loss | (5.4 | ) | ||
Net loss | (9.6 | ) |
December 31, | ||||
2005 | ||||
Current assets | $ | 7.4 | ||
Total assets | 142.8 | |||
Current liabilities | 21.1 | |||
Long-term liabilities | 30.2 | |||
Members equity | 91.5 |
Satmex |
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares, which would result in Loral losing nearly all of its investment stake in Satmex. A small portion of our ownership is comprised of direct equity interests in Satmex and such interest has not been pledged.
On June 30, 2004, Satmex’s floating rate notes came due and Satmex did not make the required principal payment of $203.4 million. On November 1, 2004, the fixed rate notes came due and Satmex did not make the required principal payment of $320.0 million. Also, Satmex did not make the August 1, 2003, February 1, 2004, and August 1, 2004 interest payments on the fixed rate notes or the interest due on maturity of the fixed rate notes. The aggregate amount of interest payment due was $56.7 million.
On December 29, 2004, the Government Obligation of approximately $125.1 million plus accrued interest of approximately $63 million came due and Servicios did not make payment of such amounts. As a result of the payment defaults under the Government Obligation, the Mexican government could initiate proceedings against Servicios, which may include foreclosure on the joint venture shares held by Loral and Principia which would result in a change of control of Satmex. The Mexican government is seeking to commence an involuntary proceeding against Servicios under applicable Mexican bankruptcy laws.
As a consequence of the defaults described above, on May 25, 2005, certain holders of Satmex fixed rate notes and the floating rate notes (the “Petitioning Creditors”) filed an involuntary petition (the “Involuntary Petition”) commencing a Chapter 11 case under the Bankruptcy Code against Satmex in the U.S. Bankruptcy Court. On June 29, 2005, Satmex filed a petition for reorganization in Mexico (the “Concurso Mercantil”). On July 7, 2005, Satmex filed a motion in the U.S. Bankruptcy Court to dismiss the bankruptcy filing for Satmex made by its U.S. creditors. Satmex subsequently reached a settlement agreement with the Petitioning Creditors premised upon, among other things, the parties consenting to Satmex commencing a case under section 304 of the Bankruptcy Code in the Bankruptcy Court, as a case ancillary to the Concurso Mercantil, and the voluntary dismissal of the involuntary Chapter 11 case commenced by the Petitioning Creditors. In January 2006, Satmex reached an agreement in principle with its creditors to restructure its debt, which is currently in default. As a result, we expect our ownership in Satmex to be reduced to less than five percent.
As of December 31, 2005, we had a 49% indirect economic interest in Satmex. We account for Satmex using the equity method. In the third quarter of 2003, we wrote off our remaining investment in Satmex of $29 million (as an increase to its equity loss), due to the financial difficulties that Satmex was having. As a result, and because we have no future funding requirements relating to this investment, there is no requirement for us to provide for our allocated share of Satmex’s net losses subsequent to September 30, 2003. In addition, Loral recorded reductions in estimated contract revenues from Satmex, resulting in an increase to our operating loss of approximately $24 million in 2003.
As a result of writing off our remaining investment in Satmex in the third quarter of 2003, the following table presents summary statement of operations data for Satmex for the nine months ended September 30, 2003 (in thousands):
Nine Months | ||||
Ended | ||||
September 30, | ||||
2003 | ||||
Revenues | $ | 59,212 | ||
Operating (loss) income | (4,195 | ) | ||
Net loss | (31,687 | ) | ||
Net loss applicable to common stockholders | (32,818 | ) |
Satmex Settlement Agreement |
On June 14, 2005, Loral Space & Communications Holdings Corporation (“LSCC”), Loral SpaceCom, a division of Loral SpaceCom, Loral Skynet Network Services, Inc. (“LSNS”) and SS/L (collectively the
F-31
Globalstar Related Activities |
F-32
10. | Accounting for Goodwill and Other Intangible Assets |
Goodwill |
Other Intangible Assets |
Successor Registrant | Predecessor Registrant | |||||||||||||||||||||
Weighted Average | December 31, 2005 | December 31, 2004 | ||||||||||||||||||||
Remaining | ||||||||||||||||||||||
Amortization Period | Gross | Accumulated | Gross | Accumulated | ||||||||||||||||||
(Years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||||
Internally developed software and technology | 5 | $ | 59.8 | $ | (2.7 | ) | $ | — | $ | — | ||||||||||||
Orbital slots | 7 | 15.8 | (0.8 | ) | 20.0 | (5.8 | ) | |||||||||||||||
Trade names | 20 | 13.2 | (0.2 | ) | — | — | ||||||||||||||||
Customer relationships | 14 | 20.0 | (0.3 | ) | — | — | ||||||||||||||||
Customer contracts | 7 | 32.0 | (2.1 | ) | ||||||||||||||||||
Regulatory fees | — | — | 2.5 | (1.9 | ) | |||||||||||||||||
Other intangibles | 4 | 2.7 | (0.1 | ) | 13.0 | (12.0 | ) | |||||||||||||||
Total | $ | 143.5 | $ | (6.2 | ) | $ | 35.5 | $ | (19.7 | ) | ||||||||||||
2006 | $ | 20.8 | ||
2007 | 19.9 | |||
2008 | 19.3 | |||
2009 | 18.3 | |||
2010 | 14.6 |
11. | Liabilities Subject to Compromise — Predecessor Registrant |
F-33
December 31, | ||||
2004 | ||||
Debt obligations (see Note 12) | $ | 1,269,977 | ||
Accounts payable | 52,728 | |||
Accrued employment costs | 542 | |||
Customer advances | 30,837 | |||
Accrued interest and preferred dividends | 40,428 | |||
Income taxes payable | 38,934 | |||
Pension and other postretirement liabilities | 178,647 | |||
Other liabilities | 79,926 | |||
6% Series C convertible redeemable preferred stock | 187,274 | |||
6% Series D convertible redeemable preferred stock | 36,707 | |||
$ | 1,916,000 | |||
12. | Debt Obligations |
Successor | Predecessor | |||||||||
Registrant | Registrant | |||||||||
December 31, | December 31, | |||||||||
2005 | 2004 | |||||||||
Loral Skynet 14.0% senior secured notes due 2015 (principal amount $126 million) | $ | 128,191 | $ | — | ||||||
Loral Orion 10.0% senior notes due 2006: | ||||||||||
Principal amount | — | 612,704 | ||||||||
Accrued interest (deferred gain on debt exchanges) | — | 214,446 | ||||||||
9.50% senior notes due 2006 | — | 350,000 | ||||||||
Non-recourse debt of Loral Orion: | ||||||||||
11.25% senior notes due 2007 (principal amount $37 million) | — | 39,402 | ||||||||
12.50% senior discount notes due 2007 (principal amount $49 million) | — | 53,425 | ||||||||
$ | 128,191 | $ | 1,269,977 | |||||||
Loral Skynet Notes |
F-34
SS/L Letter of Credit Facility |
F-35
13. | Reorganization Expenses Due to Bankruptcy |
Predecessor Registrant | |||||||||||||
For the Period | |||||||||||||
January 1, | July 15, 2003 | ||||||||||||
2005 to | Year Ended | (Filing Date) to | |||||||||||
October 1, | December 31, | December 31, | |||||||||||
2005 | 2004 | 2003 | |||||||||||
Professional fees | $ | 32,240 | $ | 20,898 | $ | 15,489 | |||||||
Employee retention costs | (917 | ) | 10,035 | 4,692 | |||||||||
Severance costs | 972 | 4,641 | — | ||||||||||
Facility closing costs | — | 1,963 | — | ||||||||||
Lease rejection claims (gains) | (265 | ) | 220 | 5,872 | |||||||||
Vendor settlement losses (gains) | 289 | (5,561 | ) | (61 | ) | ||||||||
Restructuring costs | 1,503 | — | — | ||||||||||
Interest income | (2,586 | ) | (1,740 | ) | (708 | ) | |||||||
Total reorganization expenses due to bankruptcy | $ | 31,236 | $ | 30,456 | $ | 25,284 | |||||||
14. | Income Taxes |
Successor | ||||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||||
For the Period | For the Period | |||||||||||||||||
October 2, | January 1, | Years Ended | ||||||||||||||||
2005 to | 2005 to | December 31, | ||||||||||||||||
December 31, | October 1, | |||||||||||||||||
2005 | 2005 | 2004 | 2003 | |||||||||||||||
Current: | ||||||||||||||||||
U.S. Federal | $ | (532 | ) | $ | (1,235 | ) | $ | — | $ | 358 | ||||||||
State and local | (429 | ) | (2,339 | ) | (335 | ) | (745 | ) | ||||||||||
Foreign | (791 | ) | (1,659 | ) | (796 | ) | (604 | ) | ||||||||||
Total | (1,752 | ) | (5,233 | ) | (1,131 | ) | (991 | ) | ||||||||||
Deferred: | ||||||||||||||||||
U.S. Federal | 325 | (259,373 | ) | 59,635 | 118,672 | |||||||||||||
State and local | 97 | (45,737 | ) | 12,891 | (16,811 | ) | ||||||||||||
Foreign | (3,650 | ) | 960 | |||||||||||||||
Valuation allowance | (422 | ) | 321,244 | (81,029 | ) | (95,500 | ) | |||||||||||
Total | — | 16,134 | (12,153 | ) | 7,321 | |||||||||||||
Total income tax (provision) benefit | $ | (1,752 | ) | $ | 10,901 | $ | (13,284 | ) | $ | 6,330 | ||||||||
F-36
F-37
Successor | ||||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||||
For the | ||||||||||||||||||
For the Period | Period | |||||||||||||||||
October 2, | January 1, | Years Ended | ||||||||||||||||
2005 to | 2005 to | December 31, | ||||||||||||||||
December 31, | October 1, | |||||||||||||||||
2005 | 2005 | 2004 | 2003 | |||||||||||||||
Tax benefit (provision) at U.S. Statutory Rate of 35% | $ | 1,888 | $ | (357,928 | ) | $ | 72,748 | $ | 128,924 | |||||||||
Permanent adjustments which change statutory amounts: | ||||||||||||||||||
State and local income taxes, net of federal income tax | (216 | ) | (31,249 | ) | 8,161 | (11,411 | ) | |||||||||||
Non-U.S. income and losses taxed at lower rates | (847 | ) | (6,308 | ) | (4,575 | ) | (9,121 | ) | ||||||||||
Reorganization expenses due to bankruptcy | (94 | ) | (9,944 | ) | (7,080 | ) | (5,885 | ) | ||||||||||
Plan of Reorganization and Fresh-Start valuation adjustments | — | 94,206 | — | — | ||||||||||||||
Nondeductible expenses | (1,410 | ) | (1,122 | ) | (1,548 | ) | (673 | ) | ||||||||||
Change in valuation allowance | (422 | ) | 321,244 | (81,029 | ) | (95,500 | ) | |||||||||||
Other, net | (651 | ) | 2,002 | 39 | (4 | ) | ||||||||||||
Total income tax (provision) benefit | $ | (1,752 | ) | $ | 10,901 | $ | (13,284 | ) | $ | 6,330 | ||||||||
F-38
Successor | Predecessor | |||||||||
Registrant | Registrant | |||||||||
December 31, | ||||||||||
2005 | 2004 | |||||||||
Deferred tax assets: | ||||||||||
Postretirement benefits other than pensions | $ | 30,912 | $ | 21,373 | ||||||
Inventoried costs | 36,114 | 30,718 | ||||||||
Net operating loss and tax credit carryforwards | 421,271 | 487,934 | ||||||||
Compensation and benefits | 7,662 | 8,669 | ||||||||
Premium on senior notes | — | 69,663 | ||||||||
Investments in and advances to affiliates | — | 38,108 | ||||||||
Other, net | 2,519 | 7,546 | ||||||||
Pension costs | 60,374 | 44,933 | ||||||||
Total deferred tax assets before valuation allowance | 558,852 | 708,944 | ||||||||
Less valuation allowance | (337,346 | ) | (659,783 | ) | ||||||
Net deferred tax asset | $ | 221,506 | $ | 49,161 | ||||||
Deferred tax liabilities: | ||||||||||
Property, plant and equipment | $ | 148,905 | $ | 66,436 | ||||||
Intangible assets | 43,528 | 831 | ||||||||
Investments in and advances to affiliates | 21,807 | — | ||||||||
Income recognition on long-term contracts | 20,145 | 12,501 | ||||||||
Total deferred tax liability | $ | 234,385 | $ | 79,768 | ||||||
Net deferred tax liability | $ | (12,879 | ) | $ | (30,607 | ) | ||||
F-39
15. | Shareholders’ Equity (Deficit) and Minority Interest |
Common Stock |
Loral Skynet Preferred Stock |
Stock Plans |
F-40
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average | Remaining | |||||||||||
Exercise | Contractual | |||||||||||
Shares | Price | Term | ||||||||||
Outstanding at October 2, 2005 | — | $ | — | — | ||||||||
Granted (weighted average fair value $6.82 per share) | 746,952 | 28.44 | 7 years | |||||||||
Exercised | — | — | — | |||||||||
Forfeited | — | — | — | |||||||||
Outstanding at December 31, 2005 | 746,952 | $ | 28.44 | 7 years | ||||||||
Exercisable at December 31, 2005 | — | |||||||||||
Common Stock |
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All shares of Old Loral common stock were cancelled upon our emergence pursuant to the terms of the Plan of Reorganization.
Old Loral Stock Plans |
On April 18, 2000, the Old Loral Board of Directors approved a new stock option plan (the “2000 Plan”). The 2000 Plan was intended to constitute a “broadly-based plan” as defined in Section 312.04(h) of the NYSE Listed Company Manual, which provides that at least 50% of grants thereunder exclude senior management. The 2000 Plan provided for the grant of non-qualified stock options only. As of December 31, 2004, up to 3.7 million shares of common stock were issuable under the 2000 Plan, of which approximately 1.2 million options at a weighted average exercise price of $18.69 per share were outstanding as of December 31, 2004.
In April 1996, Old Loral established the 1996 Stock Option Plan. An aggregate of 1.8 million shares of common stock were reserved for issuance, of which approximately 0.7 million options at a weighted average exercise price of $92.76 per share were outstanding as of December 31, 2004.
In connection with the acquisition of Loral Orion in 1998, Old Loral assumed the unvested employee stock options of Loral Orion.
The Plan of Reorganization does not provide for participation or recovery by Old Loral common shareholders and, accordingly, the above stock options have no value to the employees. A summary of the status of Old Loral’s stock option plans, as of November 21, 2005, and December 31, 2004 and 2003 and changes during the periods then ended is presented below. Options outstanding as of November 21, 2005 were forfeited in accordance with the Plan of Reorganization:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding at January 1, 2003 | 4,284,884 | $ | 62.90 | |||||
Granted below fair market value (weighted average fair value $3.06 per share) | 30,000 | 0.10 | ||||||
Exercised | (30,000 | ) | 0.10 | |||||
Forfeited | (1,897,671 | ) | 83.60 | |||||
Outstanding at December 31, 2003 | 2,387,213 | 46.45 | ||||||
Forfeited | (384,343 | ) | 39.12 | |||||
Outstanding at December 31, 2004 | 2,002,870 | 47.86 | ||||||
Forfeited | (2,002,870 | ) | 47.86 | |||||
Outstanding as of November 21, 2005 | — | — | ||||||
Options exercisable at December 31, 2003 | 1,945,227 | 52.21 | ||||||
Options exercisable at December 31, 2004 | 1,974,654 | 48.25 | ||||||
As of December 31, 2004, there were 3,380,146 shares of common stock available for future grant under the Old Loral’s stock plans.
In connection with an exchange offer for certain outstanding stock options completed on March 7, 2003, Old Loral accepted and cancelled existing stock options to purchase an aggregate of 1,488,440 shares of common stock that were tendered in the exchange offer and agreed to grant in exchange new stock options to purchase an aggregate of 602,149 shares of common stock. The new options were to be granted, subject to the terms and conditions of the exchange offer, on September 8, 2003. As a result of our Chapter 11 filing,
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
however, we were not able to grant the new stock options and any claims that option holders may have arising from such cancellations have been extinguished pursuant to the Plan of Reorganization. Any claims or rights that option holders whose options were cancelled may have had, were addressed in the context of the Chapter 11 Cases. These cancellations have been reflected as forfeitures in 2003.
16. | Earnings (Loss) Per Share |
Basic earnings (loss) per share is computed based upon the weighted average number of shares of common stock outstanding. Diluted loss per share excludes the assumed conversion of the Series C Preferred Stock and the Series D Preferred Stock for the Predecessor Registrant, as their effect would have been antidilutive. For the periods from October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005 and for the years ended December 31, 2004 and 2003, the effect of approximately 0.7 million, 2.0 million, 2.0 million and 2.4 million stock options, which would be calculated using the treasury stock method, were excluded from the calculation of diluted loss per share, as the effect would have been antidilutive.
F-43
Successor | |||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | ||||||||||||||||
October 2, | January 1, | ||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
(in thousands, except per share data) | |||||||||||||||||
Numerator for basic and diluted loss per share: | |||||||||||||||||
(Loss) income from continuing operations | $ | (15,261 | ) | $ | 1,030,882 | $ | (174,347 | ) | $ | (413,158 | ) | ||||||
(Loss) income from discontinued operations, net of taxes | — | — | (2,348 | ) | 18,803 | ||||||||||||
Gain on sale of discontinued operations, net of taxes | — | 13,967 | — | — | |||||||||||||
(Loss) income before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (15,261 | ) | 1,044,849 | (176,695 | ) | (394,355 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | — | (1,970 | ) | ||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | 13,615 | |||||||||||||
Net (loss) income | (15,261 | ) | 1,044,849 | (176,695 | ) | (382,710 | ) | ||||||||||
Preferred dividends | — | — | — | (6,719 | ) | ||||||||||||
Net (loss) income applicable to common stockholders | $ | (15,261 | ) | $ | 1,044,849 | $ | (176,695 | ) | $ | (389,429 | ) | ||||||
Denominator: | |||||||||||||||||
Weighted average common shares outstanding | 20,000 | 44,108 | 44,108 | 43,819 | |||||||||||||
Basic and diluted (loss) earnings per share: | |||||||||||||||||
Continuing operations | $ | (0.76 | ) | $ | 23.37 | $ | (3.96 | ) | $ | (9.58 | ) | ||||||
Discontinued operations | — | 0.32 | (0.05 | ) | 0.43 | ||||||||||||
Before cumulative effect of change in accounting principle and extraordinary gain on acquisition of minority interest | (0.76 | ) | 23.69 | (4.01 | ) | (9.15 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.05 | ) | ||||||||||||
Extraordinary gain on acquisition of minority interest | — | — | — | 0.31 | |||||||||||||
(Loss) earnings per share | $ | (0.76 | ) | $ | 23.69 | $ | (4.01 | ) | $ | (8.89 | ) | ||||||
17. | Pensions and Other Employee Benefits |
F-44
Other Benefits |
Pension Benefits | Other Benefits | ||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | ||||||||||||||||
Registrant | Registrant | Registrant | Registrant | ||||||||||||||||
December 31, | December 31, | December 31, | December 31, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | ||||||||||||||||
Reconciliation of benefit obligation | |||||||||||||||||||
Obligation at beginning of period | $ | 395,098 | $ | 353,881 | $ | 82,029 | $ | 69,337 | |||||||||||
Service cost | 10,683 | 9,694 | 935 | 1,212 | |||||||||||||||
Interest cost | 23,361 | 22,740 | 4,564 | 5,178 | |||||||||||||||
Participant contributions | 933 | 1,008 | 1,751 | 1,592 | |||||||||||||||
Actuarial (gain) loss | (3,246 | ) | 28,467 | (2,765 | ) | 9,748 | |||||||||||||
Benefit payments | (19,923 | ) | (20,692 | ) | (5,338 | ) | (5,038 | ) | |||||||||||
Obligation at December 31, | $ | 406,906 | $ | 395,098 | $ | 81,176 | $ | 82,029 | |||||||||||
Reconciliation of fair value of plan assets | |||||||||||||||||||
Fair value of plan assets at beginning of period | $ | 230,685 | $ | 218,897 | $ | 1,154 | $ | 1,380 | |||||||||||
Actual return on plan assets | 15,305 | 17,268 | 21 | 26 | |||||||||||||||
Employer contributions | 20,022 | 13,255 | 3,440 | 3,194 | |||||||||||||||
Participant contributions | 933 | 1,008 | 1,751 | 1,592 | |||||||||||||||
Benefit payments | (19,217 | ) | (19,743 | ) | (5,338 | ) | (5,038 | ) | |||||||||||
Fair value of plan assets at December 31, | $ | 247,728 | $ | 230,685 | $ | 1,028 | $ | 1,154 | |||||||||||
Funded status | |||||||||||||||||||
Unfunded status at end of period | $ | (159,178 | ) | $ | (164,413 | ) | $ | (80,148 | ) | $ | (80,875 | ) | |||||||
Unrecognized prior service cost | — | (225 | ) | — | (21,335 | ) | |||||||||||||
Unrecognized loss (gain) | 1,922 | 125,248 | (544 | ) | 50,041 | ||||||||||||||
Net amount recognized | $ | (157,256 | ) | $ | (39,390 | ) | $ | (80,692 | ) | $ | (52,169 | ) | |||||||
F-45
Successor | Predecessor | |||||||
Registrant | Registrant | |||||||
December 31, | ||||||||
2005 | 2004 | |||||||
Accrued benefit liability | $ | (157,256 | ) | $ | (127,648 | ) | ||
Accumulated other comprehensive loss | — | 88,258 | ||||||
Net amount recognized | $ | (157,256 | ) | $ | (39,390 | ) | ||
Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||||
Successor | Successor | |||||||||||||||||||||||||||||||
Registrant | Predecessor Registrant | Registrant | Predecessor Registrant | |||||||||||||||||||||||||||||
For the Period | For the Period | For the Period | For the Period | |||||||||||||||||||||||||||||
October 2, | January 1, | October 2, | January 1, | |||||||||||||||||||||||||||||
2005 to | 2005 to | December 31, | 2005 to | 2005 to | December 31, | |||||||||||||||||||||||||||
December 31, | October 1, | December 31, | October 1, | |||||||||||||||||||||||||||||
2005 | 2005 | 2004 | 2003 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||
Service cost | $ | 2,896 | $ | 7,787 | $ | 9,694 | $ | 10,647 | $ | 255 | $ | 680 | $ | 1,212 | $ | 3,139 | ||||||||||||||||
Interest cost | 5,760 | 17,601 | 22,740 | 22,021 | 1,157 | 3,407 | 5,178 | 5,647 | ||||||||||||||||||||||||
Expected return on plan assets | (5,545 | ) | (15,343 | ) | (19,415 | ) | (18,318 | ) | (23 | ) | (78 | ) | (74 | ) | (139 | ) | ||||||||||||||||
Amortization of prior service cost | — | (27 | ) | (36 | ) | (36 | ) | — | (1,443 | ) | (1,931 | ) | (1,429 | ) | ||||||||||||||||||
Amortization of net loss | — | 4,976 | 5,294 | 5,372 | — | 1,843 | 2,911 | 2,120 | ||||||||||||||||||||||||
Recognition of curtailment loss (gain) | — | — | — | 18 | — | — | — | (1,257 | ) | |||||||||||||||||||||||
Net periodic cost | $ | 3,111 | $ | 14,994 | $ | 18,277 | $ | 19,704 | $ | 1,389 | $ | 4,409 | $ | 7,296 | $ | 8,081 | ||||||||||||||||
F-46
Successor | |||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | ||||||||||||||||
October 2, | January 1, | ||||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
Discount rate | 5.75 | % | 6.00 | % | 6.25 | % | 6.75 | % | |||||||||
Expected return on plan assets | 9.00 | % | 9.00 | % | 9.00 | % | 9.00 | % | |||||||||
Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % |
Successor | |||||||||||||
Registrant | Predecessor Registrant | ||||||||||||
For the Period | |||||||||||||
Ended | |||||||||||||
December 31, | October 1, | December 31, | |||||||||||
2005 | 2005 | 2004 | |||||||||||
Discount rate | 5.75 | % | 5.75 | % | 6.00 | % | |||||||
Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % |
Successor | Predecessor | ||||||||
Registrant | Registrant | ||||||||
December 31, | |||||||||
2005 | 2004 | ||||||||
Equity investments | 56 | % | 56 | % | |||||
Fixed income investments | 44 | % | 44 | % | |||||
100 | % | 100 | % | ||||||
F-47
1% Increase | 1% Decrease | |||||||
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost | $ | 423 | $ | (356 | ) | |||
Effect on the health care component of the accumulated postretirement benefit obligation | $ | 6,921 | $ | (5,867 | ) |
Other Benefits | ||||||||||||
Gross | ||||||||||||
Pension | Benefit | Subsidy | ||||||||||
Benefits | Payments | Receipts | ||||||||||
2006 | $ | 21,346 | $ | 4,959 | $ | 309 | ||||||
2007 | 22,072 | 5,128 | 357 | |||||||||
2008 | 22,869 | 5,362 | 392 | |||||||||
2009 | 23,416 | 5,591 | 429 | |||||||||
2010 | 23,872 | 5,775 | 465 | |||||||||
2011 to 2015 | 127,300 | 31,776 | 2,877 |
Employee Savings Plan |
F-48
18. | Financial Instruments and Foreign Currency |
Financial Instruments |
Successor Registrant | Predecessor Registrant | |||||||||||||||
December 31, | ||||||||||||||||
2005 | 2004 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Cash and cash equivalents | $ | 275,796 | $ | 275,796 | $ | 147,773 | $ | 147,773 | ||||||||
Supplemental retirement plan assets | 6,637 | 6,637 | 7,444 | 7,444 | ||||||||||||
Long-term debt | 128,191 | 153,405 | 1,269,977 | 563,000 | ||||||||||||
Old Loral 6% Series C Preferred Stock | — | — | 187,274 | 1,000 | ||||||||||||
Old Loral 6% Series D Preferred Stock | — | — | 36,707 | — |
Foreign Currency |
Japanese Yen | U.S. $ | |||||||
Future revenues | ¥ | 324 | $ | 2.7 | ||||
Future expenditures | 2,178 | 18.5 | ||||||
Contracts-in-process (unbilled receivables) | 69 | 0.6 |
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2005, SS/ L also had future expenditures in EUROs of 119,389 ($141,410 U.S.) that were unhedged.
19. | Commitments and Contingencies |
Financial Matters |
We had outstanding letters of credit of approximately $2.4 million as of December 31, 2005.
Due to the long lead times required to produce purchased parts, we have entered into various purchase commitments with suppliers. These commitments aggregated approximately $346.3 million as of December 31, 2005, and primarily relate to satellite backlog.
We are obligated to pay $6.7 million over the next four years to the U.S Department of State pursuant to a consent agreement entered into by Old Loral and SS/ L.
SS/ L has deferred revenue and accrued liabilities for performance warranty obligations relating to satellites sold to customers, which could be affected by future performance. SS/ L accounts for satellite performance warranties in accordance with the product warranty provisions of FIN 45, which requires disclosure, but not initial recognition and measurement, of performance guarantees. SS/ L estimates the deferred revenue for its warranty obligations based on historical satellite performance. SS/ L periodically reviews and adjusts the deferred revenue and accrued liabilities for warranty reserves based on the actual performance of each satellite and remaining warranty period. A reconciliation of such deferred amounts for the periods October 2, 2005 to December 31, 2005 and January 1, 2005 to October 1, 2005, and for the years ended December 31, 2004 and 2003, is as follows (in millions):
Balance of deferred amounts at January 1, 2003 | $ | 14.1 | ||
Accruals for deferred amounts issued during the period | — | |||
Accruals relating to pre-existing contracts (including changes in estimates) | 2.2 | |||
Balance of deferred amounts at December 31, 2003 | 16.3 | |||
Accruals for deferred amounts issued during the period | 2.9 | |||
Accruals relating to pre-existing contracts (including changes in estimates) | 6.8 | |||
Balance of deferred amounts at December 31, 2004 | 26.0 | |||
Accruals for deferred amounts issued during the period | 1.3 | |||
Accruals relating to pre-existing contracts (including changes in estimates) | 10.5 | |||
Balance of deferred amounts at October 1, 2005 | 37.8 | |||
Accruals for deferred amounts issued during the period | — | |||
Accruals relating to pre-existing contracts (including changes in estimates) | 2.7 | |||
Balance of deferred amounts at December 31, 2005 | $ | 40.5 | ||
Many of SS/ L’s satellite contracts require SS/ L to provide vendor financing to its customers or, more customarily, for customers to pay a portion of the purchase price for the satellite over time subject to performance of the satellite (“orbitals”) or a combination of these terms. Although not always the case, in many cases these arrangements are provided to customers that are start-up companies or companies in the early stages of building their businesses. As of December 31, 2005, SS/ L had recorded vendor financing and orbital receivables totaling $99 million (of which $57 million was from start-up or early stage companies). Of this $57 million, SS/ L had received payments of $49 million as of March 2006. There can be no assurance that these companies or their businesses will be successful and, accordingly, that these customers will be able to fulfill their payment obligations under their contracts with SS/ L. Moreover, SS/ L’s receipt of orbital
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payments is subject to the continued performance of its satellites generally over the contractually stipulated life of the satellites. As of December 31, 2005, SS/ L had recorded orbital receivables of $41.7 million, payable over 16 years. Since these orbital receivables could be affected by future satellite performance, there can be no assurance that SS/ L will be able to collect all or a portion of these receivables.
Loral Skynet has in the past entered into prepaid leases, sales contracts and other arrangements relating to transponders on its satellites. Under the terms of these agreements, as of December 31, 2005, Loral Skynet continues to provide for a warranty for periods of two years to eight years for sales contracts and other arrangements (seven transponders), and prepaid leases (two transponders). Depending on the contract, Loral Skynet may be required to replace transponders which do not meet operating specifications. Substantially all customers are entitled to a refund equal to the reimbursement value if there is no replacement, which is normally covered by insurance. In the case of the sales contracts, the reimbursement value is based on the original purchase price plus an interest factor from the time the payment was received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In the case of prepaid leases, the reimbursement value is equal to the unamortized portion of the lease prepayment made by the customer. For other arrangements, in the event of transponder failure where replacement capacity is not available on the satellite, one customer is not entitled to reimbursement, and the other customer’s reimbursement value is based on contractually prescribed amounts that decline over time.
Satellite Matters |
Satellites are built with redundant components or additional components to provide excess performance margins to permit their continued operation in case of component failure, an event that is not uncommon in complex satellites. Twenty of the satellites built by SS/ L and launched since 1997, three of which are owned and operated by our subsidiaries or affiliates, have experienced losses of power from their solar arrays. There can be no assurance that one or more of the affected satellites will not experience additional power loss. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, the level of redundancy built into the affected satellite’s design, when in the life of the affected satellite the loss occurred, how many transponders are then in service and how they are being used. It is also possible that one or more transponders on a satellite may need to be removed from service to accommodate the power loss and to preserve full performance capabilities on the remaining transponders. A complete or partial loss of a satellite’s capacity could result in a loss of orbital incentive payments to SS/ L and, in the case of satellites owned by Loral Skynet and its affiliates, a loss of revenues and profits. With respect to satellites under construction and the construction of new satellites, based on its investigation of the matter, SS/ L has identified and has implemented remediation measures that SS/ L believes will prevent newly launched satellites from experiencing similar anomalies. SS/ L does not expect that implementation of these measures will cause any significant delay in the launch of satellites under construction or the construction of new satellites. Based upon information currently available, including design redundancies to accommodate small power losses, and that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, we believe that this matter will not have a material adverse effect on our condensed consolidated financial position or our results of operations, although no assurance can be provided.
In November 2004, Intelsat Americas 7 (formerly Telstar 7) experienced an anomaly which caused it to completely cease operations for several days before it was partially recovered. Four other satellites manufactured by SS/ L for other customers have designs similar to Intelsat Americas 7 and, therefore, could be susceptible to similar anomalies in the future. A partial or complete loss of these satellites could result in the incurrence of warranty payments by SS/ L of up to $18 million.
Certain of our satellites are currently operating using back-up components because of the failure of primary components. If the back-up components fail, however, and we are unable to restore redundancy, these
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
satellites could lose capacity or be total losses, which would result in a loss of revenues and profits. For example, in July 2005, in the course of conducting our normal operations, we determined that the primary command receiver on two of our satellites had failed. These satellites, which are equipped with redundant command receivers designed to provide full functional capability through the full design life of the satellite, continue to function normally and service to customers has not been affected. Moreover, SS/ L has successfully completed implementation of a software workaround that fully restores the redundant command receiver function on each of these satellites.
Two satellites owned by us have the same solar array configuration as one other 1300-class satellite manufactured by SS/ L that has experienced an event with a large loss of solar power. SS/ L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, we do not believe that this anomaly will affect our two satellites with the same solar array configuration. The insurance coverage for these satellites, however, provides for coverage of losses due to solar array failures only in the event of a capacity loss of 75% or more for one satellite and 80% or more for the other satellite.
We normally insure the on-orbit performance of the satellites in our Satellite Services segment. Typically such insurance is for one year subject to renewal. It may be difficult, however, to obtain full insurance coverage for satellites that have, or are part of a family of satellites that has, experienced problems in the past. We cannot assure that, upon the expiration of an insurance policy, we will be able to renew the policy on terms acceptable to us. Insurers may require either exclusions of certain components or may place limitations on coverage in connection with insurance renewals for such satellites in the future. The loss of a satellite would have a material adverse effect on our financial performance and may not be adequately mitigated by insurance.
In connection with an agreement reached in 1999 and an overall settlement reached in February 2005 with ChinaSat relating to the delayed delivery of ChinaSat 8, we have provided ChinaSat with usage rights to two Ku-band transponders on Telstar 10 for the life of the satellite and to one Ku-band transponder on Telstar 18 for the life of the Telstar 10 satellite plus two years.
SS/ L has completed repairs on a satellite that was damaged in transit, a significant portion of which was recovered through insurance coverage. The cost of repairs less the negotiated insurance recoveries have been reflected in these financial statements.
SS/ L has contracted to build a spot beam, Ka-band satellite for a customer planning to offer broadband data services directly to the consumer. As of December 31, 2005, SS/ L had billed and unbilled accounts receivable and vendor financing arrangements of $56 million (including accrued interest of $18 million) with this customer. In January 2006, the customer paid SS/ L $48.9 million, representing all outstanding accounts receivable and vendor financing, and the security arrangements that the customer had granted to SS/ L to secure payment of the outstanding vendor financing were terminated.
Regulatory Matters |
To prevent frequency interference, the regulatory process requires potentially lengthy and costly negotiations with third parties who operate or intend to operate satellites at or near the locations of our satellites. For example, as part of our coordination efforts on Telstar 12, we agreed to provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the satellite and have retained risk of loss with respect to those transponders. In the event of an unrestored failure, under Loral Skynet’s related warranty obligation, Eutelsat would be entitled to compensation on contractually prescribed amounts that decline over time. We also granted Eutelsat the right to acquire, at cost, four transponders on the replacement satellite for Telstar 12. We continue to be in discussions with other operators on coordination issues. We may be required to make additional financial concessions in the future in connection with our coordination efforts. The failure to reach
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
an appropriate arrangement with a third party having priority rights at or near one of our orbital slots may result in substantial restrictions on the use and operation of our satellite at that location.
SS/ L is required to obtain licenses and enter into technical assistance agreements, presently under the jurisdiction of the State Department, in connection with the export of satellites and related equipment, and with the disclosure of technical data to foreign persons. Due to the relationship between launch technology and missile technology, the U.S. government has limited, and is likely in the future to limit, launches from China and other foreign countries. Delays in obtaining the necessary licenses and technical assistance agreements have in the past resulted in, and may in the future result in, the delay of SS/ L’s performance on its contracts, which could result in the cancellation of contracts by its customers, the incurrence of penalties or the loss of incentive payments under these contracts.
Lease Arrangements |
We lease certain facilities, equipment and transponder capacity under agreements expiring at various dates. Certain leases covering facilities contain renewal and/or purchase options which may be exercised by us. Rent expense, net of sublease income is as follows (in thousands):
Gross | Sublease | |||||||||||
Rent | Income | Net Rent | ||||||||||
October 2, 2005 to December 31, 2005 | $ | 6,536 | $ | (38 | ) | $ | 6,498 | |||||
January 1, 2005 to October 1, 2005 | $ | 20,057 | $ | (261 | ) | $ | 19,796 | |||||
Year ended December 31, 2004 | $ | 36,565 | $ | (328 | ) | $ | 36,237 | |||||
Year ended December 31, 2003 | $ | 42,580 | $ | (974 | ) | $ | 41,606 |
Future minimum payments, by year and in the aggregate under operating leases with initial or remaining terms of one year or more consisted of the following as of December 31, 2005 (in thousands):
2006 | $ | 22,225 | ||
2007 | 19,102 | |||
2008 | 15,993 | |||
2009 | 14,068 | |||
2010 | 12,566 | |||
Thereafter | 39,812 | |||
$ | 123,766 | |||
Future minimum payments have been reduced by minimum sublease rentals of $0.3 million due in the future under non-cancelable subleases.
Legal Proceedings |
Class Action Securities Litigations |
In August 2003, plaintiffs Robert Beleson and Harvey Matcovsky filed a purported class action complaint against Bernard L. Schwartz in the United States District Court for the Southern District of New York. The complaint seeks, among other things, damages in an unspecified amount and reimbursement of plaintiffs’ reasonable costs and expenses. The complaint alleges (a) that Mr. Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about our financial condition relating to the sale of assets to Intelsat and our Chapter 11 filing and (b) that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged “controlling person” of
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Old Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Old Loral common stock during the period from June 30, 2003 through July 15, 2003, excluding the defendant and certain persons related to or affiliated with him. In November 2003, three other complaints against Mr. Schwartz with substantially similar allegations were consolidated into theBelesoncase. In February 2004, a motion to dismiss the complaint in its entirety was denied by the court. Defendant filed an answer in March 2004. The case has been stayed until mid-July 2006. Since this case was brought by or on behalf of holders of the common stock of Old Loral and was not brought against Old Loral, we believe, although no assurance can be given, that, to the extent that any award is ultimately granted to the plaintiffs in this action, the liability of New Loral, if any, with respect thereto is limited solely to claims for indemnification against Old Loral by the defendant as described below under “Indemnification Claims.”
In November 2003, plaintiffs Tony Christ, individually and as custodian for Brian and Katelyn Christ, Casey Crawford, Thomas Orndorff and Marvin Rich, filed a purported class action complaint against Bernard L. Schwartz and Richard J. Townsend in the United States District Court for the Southern District of New York. The complaint seeks, among other things, damages in an unspecified amount and reimbursement of plaintiffs’ reasonable costs and expenses. The complaint alleges (a) that defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Old Loral’s financial condition relating to the restatement in 2003 of the financial statements for the second and third quarters of 2002 to correct accounting for certain general and administrative expenses and the alleged improper accounting for a satellite transaction with APT Satellite Company Ltd. and (b) that each of the defendants is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged “controlling person” of Old Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Old Loral common stock during the period from July 31, 2002 through June 29, 2003, excluding the defendants and certain persons related to or affiliated with them. In October 2004, a motion to dismiss the complaint in its entirety was denied by the court. Defendants filed an answer to the complaint in December 2004. The case has been stayed until mid-July 2006. Since this case was brought by or on behalf of holders of the common stock of Old Loral and was not brought against Old Loral, we believe, although no assurance can be given, that to the extent that any award is ultimately granted to the plaintiffs in this action, the liability of New Loral, if any, with respect thereto is limited solely to claims for indemnification against Old Loral by the defendants as described below under “Indemnification Claims.”
Class Action ERISA Litigation |
In April 2004, two separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by former employees of Old Loral and participants in the Old Loral Savings Plan (the “Savings Plan”) were consolidated into one action titledIn re: Loral Space ERISA Litigation. In July 2004, plaintiffs in the consolidated action filed an amended consolidated complaint against the members of the Loral Space & Communications Ltd. Savings Plan Administrative Committee and certain existing and former members of the Board of Directors of SS/ L, including Bernard L. Schwartz. The amended complaint seeks, among other things, damages in the amount of any losses suffered by the Savings Plan to be allocated among the participants’ individual accounts in proportion to the accounts’ losses, an order compelling defendants to make good to the Savings Plan all losses to the Savings Plan resulting from defendants’ alleged breaches of their fiduciary duties and reimbursement of costs and attorneys’ fees. The amended complaint alleges (a) that defendants violated Section 404 of the Employee Retirement Income Security Act (“ERISA”), by breaching their fiduciary duties to prudently and loyally manage the assets of the Savings Plan by including Old Loral common stock as an investment alternative and by providing matching contributions under the Savings Plan in Old Loral stock, (b) that the director defendants violated Section 404 of ERISA by breaching their fiduciary duties to monitor the committee defendants and to provide them with accurate information, (c) that defendants violated Sections 404 and 405 of ERISA by failing to provide
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
complete and accurate information to Savings Plan participants and beneficiaries, and (d) that defendants violated Sections 404 and 405 of ERISA by breaching their fiduciary duties to avoid conflicts of interest. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all participants in or beneficiaries of the Savings Plan at any time between November 4, 1999 and the present and whose accounts included investments in Old Loral stock. In September 2005, the plaintiffs agreed in principle to settle this case for $7.5 million payable solely from proceeds of insurance coverage and without recourse to the individual defendants. The District Court has suspended further proceedings in this case pending the outcome of the insurance litigation referred to below and final approval of the settlement. Plaintiffs have also filed a proof of claim against Old Loral with respect to this case and have agreed that in no event will their claim against Old Loral with respect to this case exceed $22 million. If the settlement of this case does not, for whatever reason, go forward and plaintiffs’ claim ultimately becomes an allowed claim under the Plan of Reorganization, plaintiffs would be entitled to a distribution under the Plan of Reorganization of New Loral common stock based upon the amount of the allowed claim. Any such distribution of stock would be in addition to the 20 million shares of New Loral common stock being distributed under the Plan of Reorganization to other creditors.
In addition, two insurers under our directors and officers liability insurance policies have denied coverage with respect to the case titledIn re: Loral Space ERISA Litigation, each claiming that coverage should be provided under the other’s policy. In December 2004, one of the defendants in that case filed a lawsuit in the United States District Court for the Southern District of New York seeking a declaratory judgment as to his right to receive coverage under the policies. In March 2005, the insurers filed answers to the complaint and one of the insurers filed a cross claim against the other insurer which such insurer answered in April 2005. In August and October 2005, each of the two potentially responsible insurers moved separately for judgment on the pleadings, seeking a court ruling absolving it of liability to provide coverage of the ERISA action. Those motions are pending, and discovery has commenced and is ongoing. We believe, although no assurance can be given, that the liability of New Loral, if any, with respect to theIn re: Loral Space ERISA Litigation case or with respect to the related insurance coverage litigation is limited solely to claims for indemnification against Old Loral by the defendants as described below under “Indemnification Claims” and, to the extent that any award is ultimately granted to the plaintiffs in this action, to distributions under the Plan of Reorganization as described above.
Globalstar Related Class Action Securities Litigations |
On September 26, 2001, the nineteen separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by various holders of securities of Globalstar Telecommunications Limited (“GTL”) and Globalstar against GTL, Old Loral, Bernard L. Schwartz and other defendants were consolidated into one action titledIn re: Globalstar Securities Litigation. In November 2001, plaintiffs in the consolidated action filed a consolidated amended class action complaint against Globalstar, GTL, Globalstar Capital Corporation, Old Loral and Bernard L. Schwartz seeking, among other things, damages in an unspecified amount and reimbursement of plaintiffs’ costs and expenses. The complaints alleged (a) that all defendants (except Old Loral) violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Globalstar’s business and prospects, (b) that defendants Old Loral and Mr. Schwartz are secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as alleged “controlling persons” of Globalstar, (c) that defendants GTL and Mr. Schwartz are liable under Section 11 of the Securities Act of 1933 (the “Securities Act”) for untrue statements of material facts in or omissions of material facts from a registration statement relating to the sale of shares of GTL common stock in January 2000, (d) that defendant GTL is liable under Section 12(2)(a) of the Securities Act for untrue statements of material facts in or omissions of material facts from a prospectus and prospectus supplement relating to the sale of shares of GTL common stock in January 2000, and (e) that defendants Old Loral and Mr. Schwartz
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
are secondarily liable under Section 15 of the Securities Act for GTL’s primary violations of Sections 11 and 12(2)(a) of the Securities Act as alleged “controlling persons” of GTL. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of securities of Globalstar, Globalstar Capital and GTL during the period from December 6, 1999 through October 27, 2000, excluding the defendants and certain persons related to or affiliated with them. This case was preliminarily settled by Mr. Schwartz in July 2005 for $20 million with final approval of the settlement in December 2005, and he has commenced a lawsuit against Globalstar’s directors and officers liability insurers seeking to recover the full settlement amount plus legal fees and expenses incurred in enforcing his rights under Globalstar’s directors and officers liability insurance policy. In addition, Mr. Schwartz has filed a proof of claim against Old Loral asserting a general unsecured prepetition claim for, among other things, indemnification relating to this case. Mr. Schwartz and Old Loral have agreed that in no event will his claim against Old Loral with respect to the settlement of this case exceed $25 million. If Mr. Schwartz’s claim ultimately becomes an allowed claim under the Plan of Reorganization and assuming he is not reimbursed by Globalstar’s insurers, Mr. Schwartz would be entitled to a distribution under the Plan of Reorganization of New Loral common stock based upon the amount of the allowed claim. Any such distribution of stock would be in addition to the 20 million shares of New Loral common stock being distributed under the Plan of Reorganization to other creditors. We believe, although no assurance can be given, that New Loral will not incur any material loss as a result of this settlement.
On March 2, 2002, the seven separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by various holders of Old Loral common stock against Old Loral, Bernard L. Schwartz and Richard J. Townsend were consolidated into one action titledIn re: Loral Space & Communications Ltd. Securities Litigation. On May 6, 2002, plaintiffs in the consolidated action filed a consolidated amended class action complaint seeking, among other things, damages in an unspecified amount and reimbursement of plaintiffs’ costs and expenses. The complaint alleged (a) that all defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Old Loral’s financial condition and its investment in Globalstar and (b) that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged “controlling person” of Old Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Old Loral common stock during the period from November 4, 1999 through February 1, 2001, excluding the defendants and certain persons related to or affiliated with them. After oral argument on a motion to dismiss filed by Old Loral and Messrs. Schwartz and Townsend, in June 2003, the plaintiffs filed an amended complaint alleging essentially the same claims as in the original amended complaint. In February 2004, a motion to dismiss the amended complaint was granted by the court insofar as Messrs. Schwartz and Townsend are concerned. Pursuant to the Plan of Reorganization, plaintiffs received no distribution with respect to their claims in this lawsuit.
In addition, the primary insurer under the directors and officers liability insurance policy of Old Loral has denied coverage under the policy for theIn re: Loral Space & Communications Ltd. Securities Litigationcase and, on March 24, 2003, filed a lawsuit in the Supreme Court of New York County seeking a declaratory judgment upholding its coverage position. In May 2003, Old Loral and the other defendants served an answer and filed counterclaims seeking a declaration that the insurer is obligated to provide coverage and damages for breach of contract and the implied covenant of good faith. In May 2003, Old Loral and the other defendants also filed a third party complaint against the excess insurers seeking a declaration that they are obligated to provide coverage. Although we believe that the insurers have wrongfully denied coverage, the parties have voluntarily agreed not to proceed further with the action at this time, subject to their right to actively pursue the litigation at a later date. We believe, although no assurance can be given, that the liability of New Loral, if any, with respect to theIn re: Loral Space & Communications Ltd. Securities Litigationcase or with respect to the related insurance coverage litigation is limited solely to claims for indemnification against Old Loral by the defendants as described below under “Indemnification Claims.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Indemnification Claims |
Old Loral was obligated to indemnify its directors and officers for any losses or costs they may incur as a result of the lawsuits described above in Class Action Securities Litigations, Class Action ERISA Litigation and Globalstar Related Class Action Securities Litigations. The Plan of Reorganization provides that the direct liability of New Loral post-emergence in respect of such indemnity obligation is limited to theIn re: Loral Space ERISA LitigationandIn re: Loral Space & Communications Ltd. Securities Litigationcases in an aggregate amount of $2.5 million. In addition, most directors and officers have filed proofs of claim in unliquidated amounts with respect to the prepetition indemnity obligations of the Debtors. The Debtors and these directors and officers, including Mr. Schwartz with respect to all claims he may have other than the Globalstar settlement referred to above, have agreed that in no event will their indemnity claims against Old Loral and Loral Orion in the aggregate exceed $25 million and $5 million, respectively. If any of these claims ultimately becomes an allowed claim under the Plan of Reorganization, the claimant would be entitled to a distribution under the Plan of Reorganization of New Loral common stock based upon the amount of the allowed claim. Any such distribution of stock would be in addition to the 20 million shares of New Loral common stock being distributed under the Plan of Reorganization to other creditors. We believe, although no assurance can be given, that New Loral will not incur any substantial losses as a result of these claims.
Reorganization Matters |
In connection with our Plan of Reorganization, certain claims have been filed against Old Loral and its Debtor Subsidiaries, the validity or amount of which we dispute. We are in the process of resolving these disputed claims, which may involve litigation in the Bankruptcy Court. To the extent any disputed claims become allowed claims, the claimants would be entitled to distributions under the Plan of Reorganization based upon the amount of the allowed claim, payable either in cash for claims against SS/ L or Loral SpaceCom or in New Loral common stock for all other claims. We have accrued only the amount we believe is valid for disputed claims payable in cash, although there can be no assurance that this amount will be sufficient to cover all such claims that ultimately become allowed claims. We have reserved 1.3 million of the 20 million shares of New Loral Common Stock distributable under the Plan of Reorganization for disputed claims that may ultimately be payable in Common Stock. To the extent that disputed claims do not become allowed claims, shares held in reserve on account of such claims will be distributed pursuant to the Plan of Reorganization pro rata to claimants with allowed claims.
Confirmation of our Plan of Reorganization was opposed by the Official Committee of Equity Security Holders (the “Equity Committee”) appointed in the Chapter 11 Cases and by the self-styled Loral Stockholders Protective Committee (the “LSPC”). Shortly before the hearing to consider confirmation of the Plan of Reorganization, the Equity Committee also filed a motion seeking authority to prosecute an action on behalf of the estates of Old Loral and its debtor subsidiaries seeking to unwind as fraudulent, a guarantee provided by Old Loral in 2001, of certain indebtedness of Loral Orion (the “Motion to Prosecute”). By separate Orders dated August 1, 2005, the Bankruptcy Court confirmed the Plan of Reorganization (the “Confirmation Order”) and denied the Motion to Prosecute (the “Denial Order”). On or about August 10, 2005, the LSPC appealed (the “Appeal”) to the United States District Court for the Southern District of New York (the “District Court”) the Confirmation Order and the Denial Order. On February 3, 2006, we filed with the District Court a motion to dismiss the Appeal.
On or about January 27, 2006, the LSPC filed with the Bankruptcy Court a motion pursuant to section 1144 of the Bankruptcy Code (the “Revocation Motion”), pursuant to which the LSPC seeks revocation of the Confirmation Order. On February 6, 2006, we filed an objection to the Revocation Motion, in which the we objected to the relief sought in the Revocation Motion and requested that the Bankruptcy Court impose sanctions against the LSPC. A hearing on the Revocation Motion currently is scheduled for April 10, 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At a hearing held on March 29, 2005, the Bankruptcy Court denied the “Motion of the LSPC for a Court Order for Relief From Automatic Stay and Order for the Annual Election of the Loral Board of Directors” (the “Election Motion”). Pursuant to the Election Motion, the LSPC sought an order compelling Old Loral to hold an annual meeting of shareholders. Although the Bankruptcy Court did not enter its Order denying the Election Motion until March 31, 2005, on March 30, 2005, the LSPC filed with the Bankruptcy Court a Notice of Appeal of the Bankruptcy Court’s denial of the Election Motion (the “Shareholder Meeting Appeal”). This appeal is currently on the court’s active calendar, and the LSPC has been instructed to file its brief. The court has stated, however, that we need not respond to that brief until further notice from the court, pending resolution of the motion to dismiss the appeal relating to the Confirmation Order and the Denial Order.
In November 2005, a shareholder of Old Loral on behalf of the LSPC filed with the FCC a petition for reconsideration of the FCC’s approval of the transfer of our FCC licenses from Old Loral to reorganized Loral in connection with the implementation of our Plan of Reorganization and a request for investigation by the FCC into the financial matters and actions of the Company (the “FCC Appeal”). In December 2005, we filed with the FCC our opposition to the FCC Appeal.
Other and Routine Litigation |
In October 2002, National Telecom of India Ltd. (“Natelco”) filed suit against Old Loral and a subsidiary in the United States District Court for the Southern District of New York. The suit relates to a joint venture agreement entered into in 1998 between Natelco and ONS Mauritius, Ltd., a Loral Orion subsidiary, the effectiveness of which was subject to express conditions precedent. In 1999, ONS Mauritius had notified Natelco that Natelco had failed to satisfy those conditions precedent. In Natelco’s amended complaint filed in March 2003, Natelco has alleged wrongful termination of the joint venture agreement, has asserted claims for breach of contract and fraud in the inducement and is seeking damages and expenses in the amount of $97 million. Natelco has filed a proof of claim in the Chapter 11 Cases and, in response, we have filed an objection stating our belief that the claims are without merit. The Bankruptcy Court has assumed jurisdiction over this claim. After a hearing on March 15, 2006, the Bankruptcy Court granted both our motion for summary judgment and our motion to dismiss with respect to Natelco’s claim for breach of contract. The Bankruptcy Court denied our motion for summary judgment and requested further briefing by March 31, 2006 with respect to our motion to dismiss Natelco’s fraudulent inducement claim and indicated that it would decide the motion to dismiss with respect to that claim after receipt of such briefs. We believe that, if Natelco’s pre-petition unsecured claim ultimately becomes an allowed claim, the liability of New Loral would be limited solely to a distribution of New Loral common stock under the Plan of Reorganization based upon the amount of the allowed claim.
SS/ L has entered into several long-term launch services agreements with various launch providers to secure future launches for its customers, including Loral and its affiliates. SS/ L had launch services agreements with International Launch Services (“ILS”) which covered a number of launches, three of which remained open. In November 2002, SS/ L elected to terminate one of those future launches, which had a termination liability equal to SS/ L’s deposit of $5 million. Subsequently, SS/ L received a letter from ILS alleging SS/ L’s breach of the agreements and purporting to terminate the launch service agreements and all remaining launches. Despite ILS’s wrongful termination of the agreements and all remaining launches, to protect its interest, SS/ L also terminated a second launch, which had a termination liability equal to its deposit of $5 million, but reserved all of its rights against ILS. As a result, SS/ L recognized a non-cash charge to earnings of $10 million in the fourth quarter of 2002 with respect to the two terminated launches. In June 2003, to protect its interest, SS/ L also terminated a third launch, which had a termination liability equal to $23.5 million, and SS/ L recognized a non-cash charge to earnings of $23.5 million in the second quarter of 2003 with respect to this launch. SS/ L also reserved all of its rights at that time against ILS. In April 2004, SS/ L commenced an adversary proceeding against ILS in the Bankruptcy Court to seek recovery of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$37.5 million of its deposits. In June 2004, ILS filed counterclaims in the Bankruptcy Court, and, in January 2005, the Bankruptcy Court dismissed two of ILS’s four counterclaims. In the two remaining counterclaims, ILS is seeking to recover damages, in an unspecified amount, as a result of our alleged failure to assign to ILS two satellite launches and $38 million in lost revenue due to our alleged failure to comply with a contractual obligation to assign to ILS the launch of another satellite. After a hearing in October 2005 on cross motions for summary judgment, the Bankruptcy Court ruled that SS/ L is entitled to recover from ILS at least $9 million, representing the excess of the deposits that SS/ L paid to ILS over the termination liabilities. The Bankruptcy Court further ruled that this $9 million payment is subject to ILS’s counterclaims which we believe are without merit and against which we intend to defend vigorously. In addition, the Bankruptcy Court ruled that ILS wrongfully terminated the launch service agreements with SS/ L but that whether SS/ L is entitled to the $28.5 million in remaining deposits involves factual questions that must be the subject of a trial after further discovery. We do not believe that this matter will have a material adverse effect on our consolidated financial position or results of operations, although no assurance can be provided.
In March 2001, Loral entered into an agreement (the “Rainbow DBS Sale Agreement”) with Rainbow DBS Holdings, Inc. (“Rainbow Holdings”) pursuant to which Loral agreed to sell to Rainbow Holdings its interest in Rainbow DBS Company, LLC (formerly R/ L DBS Company, LLC, “Rainbow DBS”) for a purchase price of $33 million plus interest at an annual rate of 8% from April 1, 2001. Loral’s receipt of this purchase price is, however, contingent on the occurrence of certain events, including without limitation, the sale of substantially all of the assets of Rainbow DBS. At the time of the Rainbow DBS Sale Agreement, Loral’s investment in Rainbow DBS had been recorded at zero and Loral did not record a receivable or gain from this sale. During the quarter ended March 31, 2005, Rainbow DBS entered into an agreement to sell its Rainbow 1 satellite and related assets to EchoStar Communications Corporation, which sale was consummated in November 2005. Rainbow Holdings, however, has informed Loral that it does not believe that Loral is entitled to receive an immediate payment of the purchase price under the Rainbow DBS Sale Agreement as a result of the EchoStar sale transaction. Loral disputes Rainbow Holdings’ interpretation of the agreement and, in September 2005, commenced a lawsuit in the Supreme Court of the State of New York to enforce its rights thereunder. Moreover, a third party has asserted a prepetition claim against Loral in the amount of $3 million with respect to the purchase price.
We are subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these legal proceedings and claims cannot be predicted with certainty, we do not believe that any of these other existing legal matters will have a material adverse effect on our consolidated financial position or our results of operations.
20. | Segments |
We are organized into two operating segments: Satellite Services and Satellite Manufacturing (see Note 1 regarding our operating segments and Note 5 regarding the sale of our North American satellites and related assets).
The common definition of EBITDA is “Earnings Before Interest, Taxes, Depreciation and Amortization”. In evaluating financial performance, we use revenues and operating income (loss) from continuing operations before depreciation and amortization, including amortization of unearned stock compensation, and reorganization expenses due to bankruptcy (“Adjusted EBITDA”) as the measure of a segment’s profit or loss. Adjusted EBITDA is equivalent to the common definition of EBITDA before amortization of stock compensation; reorganization expenses due to bankruptcy; gain on discharge of pre-petition obligations and fresh-start adjustments, gain (loss) on investments; other income (expense); equity in net income (losses) of affiliates, minority interest, net of tax; income (loss) from discontinued operations, net of taxes; cumulative effect of change in accounting principle, net of tax, and extraordinary gain on acquisition of minority interest, net of tax. Interest expense has been excluded from Adjusted EBITDA to maintain comparability with the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
performance of competitors using similar measures with different capital structures. During the period we were in Chapter 11, we only recognized interest expense on the actual interest payments we made. During this period, we did not expect to make any further interest payments on our debt obligations after March 17, 2004, the date we repaid our secured bank debt. Reorganization expenses due to bankruptcy were only incurred during the period we were in Chapter 11. These expenses have been excluded from Adjusted EBITDA to maintain comparability with our results during periods we were not in Chapter 11 and with the results of competitors using similar measures. Adjusted EBITDA should be used in conjunction with U.S. GAAP financial measures and is not presented as an alternative to cash flow from operations as a measure of our liquidity or as an alternative to net income as an indicator of our operating performance.
We believe the use of Adjusted EBITDA along with U.S. GAAP financial measures enhances the understanding of our operating results and is useful to investors in comparing performance with competitors, estimating enterprise value and making investment decisions. Adjusted EBITDA allows investors to compare operating results of competitors exclusive of depreciation and amortization, net losses of affiliates and minority interest. Adjusted EBITDA is a useful tool given the significant variation that can result from the timing of capital expenditures, the amount of intangible assets recorded, the differences in assets’ lives, the timing and amount of investments, and effects of investments not managed by us. Adjusted EBITDA as used here may not be comparable to similarly titled measures reported by competitors. We also use Adjusted EBITDA to evaluate operating performance of our segments, to allocate resources and capital to such segments, to measure performance for incentive compensation programs, and to evaluate future growth opportunities.
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Satellite | Satellite | |||||||||||||||
Services | Manufacturing | Corporate(1) | Total | |||||||||||||
Revenues and Adjusted EBITDA: | ||||||||||||||||
Revenues(2) | $ | 36.1 | $ | 161.0 | $ | 197.1 | ||||||||||
Intersegment revenues | 0.9 | 0.8 | 1.7 | |||||||||||||
Operating segment revenues | $ | 37.0 | $ | 161.8 | 198.8 | |||||||||||
Eliminations(3) | (1.6 | ) | ||||||||||||||
Operating revenues as reported | $ | 197.2 | ||||||||||||||
Segment Adjusted EBITDA before eliminations(4)(5)(9) | $ | 11.5 | $ | 11.8 | $ | (11.0 | ) | $ | 12.3 | |||||||
Eliminations(3) | (1.2 | ) | ||||||||||||||
Adjusted EBITDA | 11.1 | |||||||||||||||
Depreciation and amortization(6)(7) | (16.0 | ) | ||||||||||||||
Operating loss from continuing operations | (4.9 | ) | ||||||||||||||
Interest and investment income | 4.1 | |||||||||||||||
Interest expense | (4.4 | ) | ||||||||||||||
Other expense | (0.2 | ) | ||||||||||||||
Income tax provision | (1.8 | ) | ||||||||||||||
Equity loss in affiliates | (5.4 | ) | ||||||||||||||
Minority interest | (2.7 | ) | ||||||||||||||
Loss from continuing operations | $ | (15.3 | ) | |||||||||||||
Other Data: | ||||||||||||||||
Depreciation and amortization(6)(7) | $ | 12.4 | $ | 3.2 | $ | 0.4 | $ | 16.0 | ||||||||
Capital expenditures(7) | $ | 2.0 | $ | 3.0 | $ | — | $ | 5.0 | ||||||||
Total assets(7) | $ | 741.4 | $ | 871.5 | $ | 66.1 | $ | 1,679.0 | ||||||||
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Satellite | Satellite | |||||||||||||||
Services | Manufacturing | Corporate(1) | Total | |||||||||||||
Revenues and Adjusted EBITDA: | ||||||||||||||||
Revenues(2) | $ | 111.3 | $ | 318.6 | $ | 429.9 | ||||||||||
Intersegment revenues | 3.2 | 10.9 | 14.1 | |||||||||||||
Operating segment revenues | $ | 114.5 | $ | 329.5 | 444.0 | |||||||||||
Eliminations(3) | (14.8 | ) | ||||||||||||||
Operating revenues as reported | $ | 429.2 | ||||||||||||||
Segment Adjusted EBITDA before eliminations(4)(5)(9) | $ | 39.8 | $ | 15.2 | $ | (17.3 | ) | $ | 37.7 | |||||||
Eliminations(3) | (12.3 | ) | ||||||||||||||
Adjusted EBITDA | 25.4 | |||||||||||||||
Depreciation and amortization(6)(7) | (61.3 | ) | ||||||||||||||
Reorganization expenses due to bankruptcy | (31.2 | ) | ||||||||||||||
Operating loss from continuing operations | (67.1 | ) | ||||||||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments(10) | 1,101.5 | |||||||||||||||
Interest and investment income | 6.4 | |||||||||||||||
Interest expense(10) | (17.2 | ) | ||||||||||||||
Other expense | (0.9 | ) | ||||||||||||||
Income tax benefit(10) | 10.9 | |||||||||||||||
Equity loss in affiliates | (2.8 | ) | ||||||||||||||
Minority interest | 0.1 | |||||||||||||||
Income from continuing operations | $ | 1,030.9 | ||||||||||||||
Other Data: | ||||||||||||||||
Depreciation and amortization(6)(7) | $ | 48.8 | $ | 11.9 | $ | 0.6 | $ | 61.3 | ||||||||
Capital expenditures(7) | $ | 2.2 | $ | 2.4 | $ | — | $ | 4.6 | ||||||||
Total assets(7) | $ | 521.5 | $ | 510.7 | $ | 68.8 | $ | 1,101.0 | ||||||||
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Satellite | Satellite | |||||||||||||||
Services | Manufacturing | Corporate(1) | Total | |||||||||||||
Revenues and Adjusted EBITDA: | ||||||||||||||||
Revenues(2) | $ | 136.7 | $ | 299.6 | $ | 436.3 | ||||||||||
Revenues from sales-type lease arrangement (see Note 8) | 87.2 | 87.2 | ||||||||||||||
Intersegment revenues | 4.5 | 137.0 | 141.5 | |||||||||||||
Operating segment revenues | $ | 228.4 | $ | 436.6 | 665.0 | |||||||||||
Eliminations(3) | (142.9 | ) | ||||||||||||||
Operating revenues as reported | $ | 522.1 | ||||||||||||||
Segment Adjusted EBITDA before eliminations(4)(5)(9) | $ | 23.3 | $ | (13.5 | ) | $ | (34.9 | ) | $ | (25.1 | ) | |||||
Eliminations(3) | (24.0 | ) | ||||||||||||||
Adjusted EBITDA | (49.1 | ) | ||||||||||||||
Depreciation and amortization(6)(7) | (134.8 | ) | ||||||||||||||
Reorganization expenses due to bankruptcy | (30.4 | ) | ||||||||||||||
Operating loss from continuing operations | (214.3 | ) | ||||||||||||||
Interest and investment income | 9.9 | |||||||||||||||
Interest expense | (2.9 | ) | ||||||||||||||
Other expense | (0.5 | ) | ||||||||||||||
Income tax provision | (13.2 | ) | ||||||||||||||
Equity income in affiliates | 46.6 | |||||||||||||||
Minority interest | 0.1 | |||||||||||||||
Loss from continuing operations | $ | (174.3 | ) | |||||||||||||
Other Data: | ||||||||||||||||
Depreciation and amortization(6)(7) | $ | 111.3 | $ | 22.9 | $ | 0.6 | $ | 134.8 | ||||||||
Capital expenditures(7) | $ | 22.8 | $ | 1.8 | $ | 0.2 | $ | 24.8 | ||||||||
Total assets(7) | $ | 780.8 | $ | 382.2 | $ | 55.7 | $ | 1,218.7 | ||||||||
F-63
Satellite | Satellite | |||||||||||||||
Services | Manufacturing | Corporate(1) | Total | |||||||||||||
Revenues and Adjusted EBITDA: | ||||||||||||||||
Revenues(2) | $ | 150.0 | $ | 245.0 | $ | 395.0 | ||||||||||
Intersegment revenues | 4.3 | 229.0 | 233.3 | |||||||||||||
Operating segment revenues | $ | 154.3 | $ | 474.0 | 628.3 | |||||||||||
Eliminations(3) | (236.3 | ) | ||||||||||||||
Operating revenues as reported | $ | 392.0 | ||||||||||||||
Segment Adjusted EBITDA before eliminations(4)(5)(9) | $ | 7.5 | $ | (158.6 | ) | $ | (36.0 | ) | $ | (187.1 | ) | |||||
Eliminations(3) | (41.9 | ) | ||||||||||||||
Adjusted EBITDA | (229.0 | ) | ||||||||||||||
Depreciation and amortization(6)(7) | (134.6 | ) | ||||||||||||||
Reorganization expenses due to bankruptcy | (25.3 | ) | ||||||||||||||
Operating loss from continuing operations | (388.9 | ) | ||||||||||||||
Interest and investment income | 15.2 | |||||||||||||||
Interest expense | (14.1 | ) | ||||||||||||||
Other income | 1.5 | |||||||||||||||
Gain on investment | 17.9 | |||||||||||||||
Income tax benefit | 6.4 | |||||||||||||||
Equity losses in affiliates | (51.2 | ) | ||||||||||||||
Loss from continuing operations | $ | (413.2 | ) | |||||||||||||
Other Data: | ||||||||||||||||
Depreciation and amortization(6)(7) | $ | 106.9 | $ | 27.2 | $ | 0.5 | $ | 134.6 | ||||||||
Capital expenditures(7) | $ | 109.4 | $ | 6.0 | $ | — | $ | 115.4 | ||||||||
Total assets(7) | $ | 1,983.9 | $ | 362.0 | $ | 117.9 | $ | 2,463.8 | ||||||||
(1) | Represents corporate expenses incurred in support of our operations. |
(2) | Includes revenues from affiliates of $4.1 million for the period October 2, 2005 to December 31, 2005, $10.0 million for the period January 1, 2005 to October 1, 2005 and $7.8 million and $27.7 million in 2004 and 2003, respectively. |
(3) | Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under construction by SS/ L for wholly owned subsidiaries and in the year ended December 31, 2003, the reversal of cumulative satellite manufacturing sales of $83 million and cost of satellite manufacturing of $73 million on a satellite program that was changed to a lease arrangement in the third quarter of 2003 (see Note 8). |
(4) | Satellite manufacturing excludes charges of $24 million for the year ended December 31, 2004, as a result of the settlement of all orbital receivables on satellites sold to Intelsat. This settlement had the effect of reducing future orbital receipts by $25 million, including $15 million relating to a satellite that was under construction in 2004. Consistent with our internal reporting for satellite manufacturing, this decrease in contract value for the satellite that was under construction in 2004 was not being reflected as a decrease in satellite manufacturing revenues. These charges had no effect on our consolidated results in 2004. |
(5) | Satellite Services recognized for the year ended December 31, 2004, $7.7 million of EBITDA for a sales-type lease arrangement for satellite capacity (Note 8) and an impairment charge of $12.0 million relating to our Telstar 14/ Estrela do Sul-1 satellite and related assets to reduce the carrying values to the expected proceeds from insurance (Note 8). |
F-64
(6) | Includes additional depreciation expense of $9 million for 2004 and $14 million for 2003, due to accelerating the estimated end of depreciable life of our Telstar 11 satellite to June 2004 from March 2005. Also, includes amortization of unearned stock compensation charges. |
(7) | Amounts are presented after the elimination of intercompany profit and include $89.4 million, $250.7 million and zero goodwill for Satellite Services, Satellite Manufacturing and Corporate, respectively, as of December 31, 2005. |
(8) | The 2003 segment information has been adjusted to remove the operations of the North American satellites and related assets sold, which have been reclassified to discontinued operations (see Note 5). |
(9) | Satellite manufacturing includes: |
Successor | |||||||||||||||||
Registrant | Predecessor Registrant | ||||||||||||||||
For the Period | For the Period | ||||||||||||||||
October 2, | January 1, | Years Ended | |||||||||||||||
2005 to | 2005 to | December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
Adjusted EBITDA before specific identified charges | $ | 16.0 | $ | 29.1 | $ | 10.8 | $ | (21.3 | ) | ||||||||
Accrued warranty obligations | (2.7 | ) | (11.8 | ) | (9.7 | ) | (2.2 | ) | |||||||||
Write-off of long-term receivables due to contract modifications | — | — | (11.3 | ) | (20.2 | ) | |||||||||||
Provisions for inventory obsolescence | (1.5 | ) | (2.1 | ) | (3.3 | ) | (49.5 | ) | |||||||||
Loss on cancellation of a deposits | — | — | — | (23.5 | ) | ||||||||||||
Accrual for Alcatel settlement | — | — | — | (13.0 | ) | ||||||||||||
Loss on acceleration of receipt of long-term receivables | — | — | — | (10.9 | ) | ||||||||||||
Valuation allowance on vendor financing receivables | — | — | — | (10.0 | ) | ||||||||||||
Settlement of satellite contract dispute | — | — | — | (8.0 | ) | ||||||||||||
Satellite manufacturing segment Adjusted EBITDA before eliminations | $ | 11.8 | $ | 15.2 | $ | (13.5 | ) | $ | (158.6 | ) | |||||||
(10) | In connection with our emergence from Chapter 11 and our adoption of fresh-start accounting on October 1, 2005 we recognized a gain on discharge of pre-petition obligations and fresh-start adjustments of $1.101 billion, related interest expense of $13.2 million and a tax benefit of $15.4 million (see Note 4). |
Revenue by Customer Location |
Successor | ||||||||||||||||
Registrant | Predecessor Registrant | |||||||||||||||
For the Period | For the Period | |||||||||||||||
October 2, | January 1, | Years Ended | ||||||||||||||
2005 to | 2005 to | December 31, | ||||||||||||||
December 31, | October 1, | |||||||||||||||
2005 | 2005 | 2004 | 2003 | |||||||||||||
United States | $ | 170,103 | $ | 350,622 | $ | 303,258 | $ | 239,531 | ||||||||
Japan | 4,193 | 13,486 | 47,641 | 69,573 | ||||||||||||
Thailand | 2,711 | 6,010 | 20,378 | 54,436 | ||||||||||||
Spain | 3,418 | 7,483 | 5,292 | 30,903 | ||||||||||||
Mexico | 1,327 | 7,122 | 1,693 | (3,749 | ) | |||||||||||
People’s Republic of China (including Hong Kong)(1) | 2,411 | 4,498 | 97,628 | (66,047 | ) | |||||||||||
Other | 13,002 | 39,962 | 46,237 | 67,396 | ||||||||||||
$ | 197,165 | $ | 429,183 | $ | 522,127 | $ | 392,043 | |||||||||
(1) | The 2004 amount includes $87 million for a sales-type lease arrangement for satellite capacity. The 2003 amount includes the reversal of $83 million of sales on a satellite program with a customer where the contract was changed to a lease arrangement (see Note 8). |
F-65
21. | Related Party Transactions |
K&F Industries, Inc. |
MHR Fund Management LLC |
Other Relationships |
F-66
Lockheed Martin |
22. | Selected Quarterly Financial Information (unaudited, in thousands, except per share amounts) |
Successor | |||||||||||||||||||||
Predecessor Registrant | Registrant | ||||||||||||||||||||
Quarter Ended | |||||||||||||||||||||
October 2 to | |||||||||||||||||||||
March 31, | June 30, | September 30, | October 1, | December 31, | |||||||||||||||||
Year ended December 31, 2005 | |||||||||||||||||||||
Revenues | $ | 132,378 | $ | 136,762 | $ | 160,043 | $ | — | $ | 197,165 | |||||||||||
Operating loss from continuing operations | (23,959 | ) | (16,741 | ) | (26,395 | ) | — | (4,945 | ) | ||||||||||||
Loss from continuing operations | (26,221 | ) | (18,776 | ) | (27,800 | ) | — | (15,261 | ) | ||||||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments | — | — | — | 1,101,453 | — | ||||||||||||||||
Gain on sale of discontinued operations, net of taxes | — | 11,371 | 2,596 | — | — | ||||||||||||||||
Net (loss) income | (26,221 | ) | (7,405 | ) | (25,204 | ) | 1,103,679 | (15,261 | ) | ||||||||||||
Basic and diluted (loss) earnings per share(1): | |||||||||||||||||||||
Continuing operations | (0.59 | ) | (0.43 | ) | (0.63 | ) | 25.02 | (0.76 | ) | ||||||||||||
Discontinued operations | — | 0.26 | 0.06 | — | — | ||||||||||||||||
(Loss) earnings per share | (0.59 | ) | (0.17 | ) | (0.57 | ) | 25.02 | (0.76 | ) |
F-67
Quarter Ended | |||||||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||||||
Year ended December 31, 2004 | |||||||||||||||||
Revenues | $ | 103,684 | $ | 113,703 | $ | 198,615 | $ | 106,125 | |||||||||
Operating loss from continuing operations | (68,078 | ) | (58,489 | ) | (35,127 | ) | (52,651 | ) | |||||||||
Loss from continuing operations | (68,016 | ) | (22,827 | ) | (31,701 | ) | (51,803 | ) | |||||||||
Income (loss) from discontinued operations | (11,620 | ) | 158 | 299 | 8,815 | ||||||||||||
Net loss | (79,636 | ) | (22,669 | ) | (31,402 | ) | (42,988 | ) | |||||||||
Basic and diluted loss per share(1): | |||||||||||||||||
Continuing operations | (1.54 | ) | (0.51 | ) | (0.72 | ) | (1.17 | ) | |||||||||
Discontinued operations | (0.26 | ) | — | 0.01 | 0.20 | ||||||||||||
Loss per share | (1.80 | ) | (0.51 | ) | (0.71 | ) | (0.97 | ) |
(1) | The quarterly earnings per share information is computed separately for each period. Therefore, the sum of such quarterly per share amounts may differ from the total for the year. |
F-68
Successor | Predecessor | ||||||||||
Parent | Parent | ||||||||||
December 31, | December 31, | ||||||||||
2005 | 2004 | ||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 8,309 | $ | 1,525 | |||||||
Accounts receivable | 227 | — | |||||||||
Other current assets | 1,627 | 2,331 | |||||||||
Total current assets | 10,163 | 3,856 | |||||||||
Property, plant and equipment, net | 1,758 | — | |||||||||
Investments in and advances to subsidiaries | 685,321 | — | |||||||||
Other assets | 6,637 | 4,197 | |||||||||
Total assets | $ | 703,879 | $ | 8,053 | |||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 5,555 | $ | 499 | |||||||
Accrued employment costs | 5,551 | — | |||||||||
Other current liabilities | 17,550 | 1,220 | |||||||||
Total current liabilities | 28,656 | 1,719 | |||||||||
Pension and other postretirement liabilities | 15,529 | — | |||||||||
Long-term liabilities | 32,530 | 30,607 | |||||||||
Liabilities subject to compromise | — | 456,078 | |||||||||
Investments in and advances to subsidiaries | — | 563,750 | |||||||||
Total liabilities | 76,715 | 1,052,154 | |||||||||
Shareholders’ equity (deficit): | |||||||||||
Common stock | 200 | 4,413 | |||||||||
Paid-in capital | 642,210 | 3,392,825 | |||||||||
Treasury stock, at cost | — | (3,360 | ) | ||||||||
Unearned compensation | — | (87 | ) | ||||||||
Retained deficit | (15,261 | ) | (4,348,231 | ) | |||||||
Accumulated other comprehensive (loss) | 15 | (89,661 | ) | ||||||||
Total shareholders’ equity (deficit) | 627,164 | (1,044,101 | ) | ||||||||
Total liabilities and shareholders’ (deficit) equity | $ | 703,879 | $ | 8,053 | |||||||
F-69
Successor Parent | Predecessor Parent | ||||||||||||||||
For the Period | For the Period | ||||||||||||||||
October 2, | January 1, | ||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | |||||||||||||||
December 31, | October 1, | ||||||||||||||||
2005 | 2005 | 2004 | 2003 | ||||||||||||||
Selling, general and administrative expenses | $ | 516 | $ | — | $ | 4,279 | $ | 8,937 | |||||||||
Loss from continuing operations before reorganization expenses due to bankruptcy | (516 | ) | — | (4,279 | ) | (8,937 | ) | ||||||||||
Reorganization expenses due to bankruptcy | — | (5,539 | ) | (3,885 | ) | (1,900 | ) | ||||||||||
Loss from continuing operations | (516 | ) | (5,539 | ) | (8,164 | ) | (10,837 | ) | |||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments | — | 352,202 | — | — | |||||||||||||
Interest and investment income | 2,724 | 20 | 10 | 12,198 | |||||||||||||
Interest expense | — | (389 | ) | — | (21,675 | ) | |||||||||||
Other expense | — | (3 | ) | — | — | ||||||||||||
Income (loss) from continuing operations before income taxes, equity income (losses) in subsidiaries and affiliates | 2,208 | 346,291 | (8,154 | ) | (20,314 | ) | |||||||||||
Income tax (provision) benefit | (3,225 | ) | 32,099 | (1,077 | ) | (3,656 | ) | ||||||||||
Income (loss) from continuing operations before equity (losses) income in subsidiaries and affiliates | (1,017 | ) | 378,390 | (9,231 | ) | (23,970 | ) | ||||||||||
Equity (loss) income in subsidiaries, net of taxes | (14,244 | ) | 666,459 | (167,464 | ) | (334,995 | ) | ||||||||||
Equity loss in affiliates | — | — | — | (21,775 | ) | ||||||||||||
(Loss) income from continuing operations before cumulative effect of change in accounting principle | (15,261 | ) | 1,044,849 | (176,695 | ) | (380,740 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | — | (1,970 | ) | ||||||||||||
Net (loss) income | $ | (15,261 | ) | $ | 1,044,849 | $ | (176,695 | ) | $ | (382,710 | ) | ||||||
F-70
Successor | ||||||||||||||||||
Parent | Predecessor Parent | |||||||||||||||||
For the Period | For the Period | |||||||||||||||||
October 2, | January 1, | |||||||||||||||||
2005 to | 2005 to | Years Ended December 31, | ||||||||||||||||
December 31, | October 1, | |||||||||||||||||
2005 | 2005 | 2004 | 2003 | |||||||||||||||
Operating activities: | ||||||||||||||||||
Net (loss) income | $ | (15,261 | ) | $ | 1,044,849 | $ | (176,695 | ) | $ | (382,710 | ) | |||||||
Non-cash items: | ||||||||||||||||||
Gain on discharge of pre-petition obligations and fresh-start adjustments | — | (352,202 | ) | — | — | |||||||||||||
Cumulative effect of change in accounting principle | — | — | — | 1,970 | ||||||||||||||
Equity income in affiliates | — | — | — | 21,775 | ||||||||||||||
Equity losses in subsidiaries | 14,244 | (666,459 | ) | 167,464 | 334,995 | |||||||||||||
Deferred taxes | 1,427 | (30,607 | ) | — | 3,656 | |||||||||||||
Depreciation and amortization | 464 | — | — | — | ||||||||||||||
Due (to) from subsidiaries | (19,902 | ) | 58 | 4,527 | 2,080 | |||||||||||||
Accounts receivable | (62 | ) | — | — | — | |||||||||||||
Other current assets and other assets | (53 | ) | 1,732 | 1,147 | (964 | ) | ||||||||||||
Accounts payable | (37 | ) | (1,536 | ) | — | — | ||||||||||||
Accrued expenses and other current liabilities | (9,667 | ) | 1,418 | (476 | ) | 1,253 | ||||||||||||
Pension and other postretirement liabilities | (222 | ) | — | — | ||||||||||||||
Income taxes payable | 1,661 | (1,492 | ) | — | — | |||||||||||||
Long-term liabilities | 696 | — | 1,077 | — | ||||||||||||||
Merger of subsidiary into parent in connection with Plan of Reorganization | — | 34,012 | — | — | ||||||||||||||
Other | — | — | — | 67 | ||||||||||||||
Net cash (used in) provided by operating activities | (26,712 | ) | 29,773 | (2,956 | ) | (17,878 | ) | |||||||||||
Investing activities: | ||||||||||||||||||
Capital expenditures for continuing operations | (24 | ) | ||||||||||||||||
Investments in and advances to subsidiaries | — | — | (288 | ) | ||||||||||||||
Investments in and advances to affiliates | — | 3,747 | — | — | ||||||||||||||
Net cash (used in) provided by investing activities | (24 | ) | 3,747 | — | (288 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||
Proceeds from note receivable from subsidiary | — | — | 17,284 | |||||||||||||||
Proceeds from other stock issuances | — | — | — | 3,849 | ||||||||||||||
Net cash used in financing activities | — | — | — | 21,133 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | (26,736 | ) | 33,520 | (2,956 | ) | 2,967 | ||||||||||||
Cash and cash equivalents — beginning of period | 35,045 | 1,525 | 4,481 | 1,514 | ||||||||||||||
Cash and cash equivalents — end of period | $ | 8,309 | $ | 35,045 | $ | 1,525 | $ | 4,481 | ||||||||||
F-71
1) the litigation with ILS | |
2) the litigation with Rainbow DBS Holdings, Inc. |
F-72
Additions | |||||||||||||||||||||
Balance at | Charged to | Charged to | Deductions | Balance at | |||||||||||||||||
Beginning | Costs and | Other | From | End of | |||||||||||||||||
Description | of Year | Expenses | Accounts(1) | Reserves(2) | Year | ||||||||||||||||
Predecessor Registrant: | |||||||||||||||||||||
Year ended 2003 | |||||||||||||||||||||
Allowance for billed receivables | $ | 7,094 | $ | 7,221 | $ | 1,405 | $ | (4,017 | ) | $ | 11,703 | ||||||||||
Allowance for long-term receivables | 32,574 | 10,329 | 19,856 | (42,582 | ) | 20,177 | |||||||||||||||
Total Receivables allowance | $ | 39,668 | $ | 17,550 | $ | 21,261 | $ | (46,599 | ) | $ | 31,880 | ||||||||||
Inventory allowance | $ | 24,123 | $ | 49,546 | $ | — | $ | (31,933 | ) | $ | 41,736 | ||||||||||
Year ended 2004 | |||||||||||||||||||||
Allowance for billed receivables | $ | 11,703 | $ | (2,144 | ) | $ | (13 | ) | $ | (3,101 | ) | $ | 6,445 | ||||||||
Allowance for long-term receivables | 20,177 | — | — | (20,177 | ) | — | |||||||||||||||
Total Receivables allowance | $ | 31,880 | $ | (2,144 | ) | $ | (13 | ) | $ | (23,278 | ) | $ | 6,445 | ||||||||
Inventory allowance | $ | 41,736 | $ | 3,324 | $ | — | $ | (11,060 | ) | $ | 34,000 | ||||||||||
January 1, 2005-October 1, 2005 | |||||||||||||||||||||
Allowance for billed receivables | $ | 6,445 | $ | (2,880 | ) | $ | 2 | $ | 942 | $ | 4,509 | ||||||||||
Inventory allowance | $ | 34,000 | $ | 2,127 | $ | — | $ | (2,207 | ) | $ | 33,920 | ||||||||||
Successor Registrant: | |||||||||||||||||||||
October 2, 2005-December 31, 2005 | |||||||||||||||||||||
Allowance for billed receivables | $ | 4,509 | $ | 953 | $ | — | $ | — | $ | 5,462 | |||||||||||
Inventory allowance | $ | 33,920 | $ | 1,525 | $ | — | $ | (1,703 | ) | $ | 33,742 | ||||||||||
(1) | Allowance for long-term receivables recorded as a reduction to revenues. |
(2) | Write-offs of uncollectible accounts. |
F-73