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Commitments and Contingencies
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Jun. 30, 2011
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| Commitments and Contingencies [Abstract] | ||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies |
15. Commitments and Contingencies
Financial Matters
SS/L has deferred revenue and accrued liabilities for warranty payback obligations relating to
performance incentives for satellites sold to customers, which could be affected by future
performance of the satellites. These reserves for expected costs for warranty reimbursement and
support are based on historical failure rates. However, in the event of a catastrophic failure of a
satellite, which cannot be predicted, these reserves likely will not be sufficient. SS/L
periodically reviews and adjusts the deferred revenue and accrued liabilities for warranty reserves
based on the actual performance of each satellite and remaining warranty period. A reconciliation
of such deferred amounts for the six months ended June 30, 2011, is as follows (in thousands):
Many of SS/L’s satellite contracts permit SS/L’s customers to pay a portion of the purchase
price for the satellite over time subject to the continued performance of the satellite (“orbital
incentives”), and certain of SS/L’s satellite contracts require SS/L to provide vendor financing to
its customers, or a combination of these contractual terms. Some of these arrangements are provided
to customers that are start-up companies, companies in the early stages of building their
businesses or highly leveraged companies, including some with near-term debt maturities. There can
be no assurance that these companies or their businesses will be successful and, accordingly, that
these customers will be able to fulfill their payment obligations under their contracts with SS/L.
We believe that these provisions will not have a material adverse effect on our consolidated
financial position or our results of operations, although no assurance can be provided. Moreover,
SS/L’s receipt of orbital incentive payments is subject to the continued performance of its
satellites generally
over the contractually stipulated life of the satellites. Because these orbital receivables
could be affected by future satellite performance, there can be no assurance that SS/L will be able
to collect all or a portion of these receivables. Orbital receivables included in our consolidated
balance sheet as of June 30, 2011 were $330 million, net of fair value adjustments of $17 million.
Approximately $211 million of the gross orbital receivables are related to satellites launched as
of June 30, 2011, and $136 million are related to satellites under construction as of June 30,
2011.
On October 19, 2010, TerreStar Networks Inc. (“TerreStar”), an SS/L customer, filed for
bankruptcy under chapter 11 of the Bankruptcy Code. As of June 30, 2011, SS/L had $19 million of
past due receivables from TerreStar related to an in-orbit SS/L built satellite and other related
ground system deliverables and $16 million of past due receivables from TerreStar related to a
second satellite under construction. SS/L had previously exercised its contractual right to stop
work on the satellite under construction as a result of TerreStar’s payment default. The in-orbit
satellite long-term orbital receivable balance, net of fair value adjustment, reflected on the
balance sheet at June 30, 2011 is $15 million. The long term orbital receivable balance reflected
on the balance sheet for the satellite under construction is $13 million.
In July 2011, the TerreStar Bankruptcy Court approved an agreement between TerreStar and a
subsidiary of DISH Network Corporation (“DISH Subsidiary”) pursuant to which DISH Subsidiary agreed
to purchase substantially all of TerreStar’s assets. In connection with the sale, pursuant to a
Stipulation and Order entered into between TerreStar and SS/L and approved by the TerreStar
Bankruptcy Court in July 2011, the parties agreed to amend the satellite construction contract for
the in-orbit satellite, the contract for related ground system deliverables and the contract for
the satellite under construction, and TerreStar agreed to assume and assign to DISH Subsidiary, and
DISH Subsidiary will take assignment of, such contracts as amended. The contract amendments provide
for restructuring of certain past due payments and payments to become due as a result of which
SS/L will maintain the collective profit position of the contracts and will not realize any
impairment to its receivables. In addition, SS/L will be entitled to an allowed unsecured claim
against TerreStar in the amount of approximately $5 million. The assumption will be effective as of
the earlier of the closing of the asset sale to DISH Subsidiary or the effective date of
confirmation of a plan of reorganization for TerreStar. The assignment will be effective as of the
closing of the asset sale to DISH Subsidiary. The asset sale is subject to a number of conditions,
including, among others, FCC and other regulatory approvals. Pending assumption and assignment of
the contracts, TerreStar is required to make payments that fall due in the ordinary course of
business under the contracts as amended. Assuming closing of the asset sale to DISH Subsidiary and
assumption and assignment of the contracts as amended, SS/L believes that it will not incur a loss
with respect to the receivables due from TerreStar.
As of June 30, 2011, SS/L had receivables included in contracts in process from DBSD Satellite
Services G.P. (formerly known as ICO Satellite Services G.P. and referred to herein as “ICO”), a
customer with an SS/L-built satellite in orbit, in the aggregate amount of approximately $1
million. In addition, under its contract, ICO has future payment obligations to SS/L that total
approximately $23 million, of which approximately $11 million (including $9 million of orbital
incentives) is included in long-term receivables. After receiving Bankruptcy Court approval, ICO,
which sought to reorganize under chapter 11 of the Bankruptcy Code in May 2009, assumed its
contract with SS/L, with certain modifications. The contract modifications do not have a material
adverse effect on SS/L, and, although the timing of certain payments to be received from ICO has
changed (for example, certain significant payments become due only on or after the effective date
of a chapter 11 plan of reorganization for ICO), SS/L will receive substantially the same net
present value from ICO as SS/L was entitled to receive under the original contract. In March 2011,
the ICO Bankruptcy Court approved an investment agreement pursuant to which DISH Network
Corporation (“DISH”) agreed to acquire ICO. In connection with this investment agreement, in April
2011, DISH purchased certain claims against ICO, including SS/L claims aggregating approximately
$7.0 million plus approximately $1.4 million of accrued interest. SS/L believes that, based upon
completion of the tender offer and other payments by ICO to SS/L under the modified contract, it is
not probable that SS/L will incur a material loss with respect to the receivables from ICO.
Although in July 2011, the ICO Bankruptcy Court confirmed a plan of reorganization for ICO, closing
of DISH’s acquisition of ICO and ICO’s emergence from chapter 11 is still subject to certain other
conditions, including, FCC regulatory approval.
See Note 18 — Related Party Transactions — Transactions with Affiliates — Telesat for
commitments and contingencies relating to our agreement to indemnify Telesat for certain
liabilities and our arrangements with ViaSat, Inc. and Telesat.
Satellite Matters
Satellites are built with redundant components or additional components to provide excess
performance margins to permit their continued operation in case of component failure, an event that
is not uncommon in complex satellites. Thirty-five of the satellites built by SS/L, launched since
1997 and still on-orbit have experienced some loss of power from their solar arrays. There can be
no assurance that one or more of the affected satellites will not experience additional power loss.
In the event of additional power loss, the extent of the performance degradation, if any, will
depend on numerous factors, including the amount of the additional power loss,
the level of redundancy built into the affected satellite’s design, when in the life of the
affected satellite the loss occurred, how many transponders are then in service and how they are
being used. It is also possible that one or more transponders on a satellite may need to be removed
from service to accommodate the power loss and to preserve full performance capabilities on the
remaining transponders. A complete or partial loss of a satellite’s capacity could result in a loss
of performance incentives by SS/L. SS/L has implemented remediation measures that SS/L believes
will reduce this type of anomaly for satellites launched after June 2001. Based upon information
currently available relating to the power losses, we believe that this matter will not have a
material adverse effect on our consolidated financial position or our results of operations,
although no assurance can be provided.
Non-performance can increase costs and subject SS/L to damage claims from customers and
termination of the contract for SS/L’s default. SS/L’s contracts contain detailed and complex
technical specifications to which the satellite must be built. It is very common that satellites
built by SS/L do not conform in every single respect to, and contain a small number of minor
deviations from, the technical specifications. Customers typically accept the satellite with such
minor deviations. In the case of more significant deviations, however, SS/L may incur increased
costs to bring the satellite within or close to the contractual specifications or a customer may
exercise its contractual right to terminate the contract for default. In some cases, such as when
the actual weight of the satellite exceeds the specified weight, SS/L may incur a predetermined
penalty with respect to the deviation. A failure by SS/L to deliver a satellite to its customer by
the specified delivery date, which may result from factors beyond SS/L’s control, such as delayed
performance or non-performance by its subcontractors or failure to obtain necessary governmental
licenses for delivery, would also be harmful to SS/L unless mitigated by applicable contract terms,
such as excusable delay. As a general matter, SS/L’s failure to deliver beyond any contractually
provided grace period would result in the incurrence of liquidated damages by SS/L, which may be
substantial, and if SS/L is still unable to deliver the satellite upon the end of the liquidated
damages period, the customer will generally have the right to terminate the contract for default.
If a contract is terminated for default, SS/L would be liable for a refund of customer payments
made to date, and could also have additional liability for excess re-procurement costs and other
damages incurred by its customer, although SS/L would own the satellite under construction and
attempt to recoup any losses through resale to another customer. A contract termination for default
could have a material adverse effect on SS/L and us.
SS/L currently has two contracts-in-process with estimated delivery dates later than the
contractually specified dates after which the customers may terminate the contracts for default.
The customers are established operators which will utilize the satellites in the operation of their
existing businesses. SS/L and the customers are continuing to perform their obligations under the
contracts, and the customers continue to make milestone payments to SS/L. Although there can be no
assurance, the Company believes that the customers will take delivery of these satellites and will
not seek to terminate the contracts for default. If the customers should successfully terminate the
contracts for default, the customers would be entitled to a full refund of their payments and
liquidated damages, which through June 30, 2011 totaled approximately $371 million, plus
re-procurement costs and interest. In the event of terminations for default, SS/L would own the
satellites and would attempt to recoup any losses through resale to other customers.
SS/L is building a satellite known as CMBStar under a contract with EchoStar Corporation
(“EchoStar”). Satellite construction is substantially complete. EchoStar and SS/L have agreed to
suspend final construction of the satellite pending, among other things, further analysis relating
to efforts to meet the satellite performance criteria and/or confirmation that alternative
performance criteria would be acceptable. In May 2010, SS/L provided EchoStar, at its request, with
a proposal to complete construction and prepare the satellite for launch under the current
specifications. In August 2010, SS/L provided EchoStar, at its request, additional proposal
information. There can be no assurance that a dispute will not arise as to whether the satellite
meets its technical performance specifications or if such a dispute did arise that SS/L would
prevail. SS/L believes that if a loss is incurred with respect to this program, such loss would not
be material.
SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its
competitive position. There can be no assurance that infringement of existing third party patents
has not occurred or will not occur. In the event of infringement, we could be required to pay
royalties to obtain a license from the patent holder, refund money to customers for components that
are not useable or redesign our products to avoid infringement, all of which would increase our
costs. We may also be required under the terms of our customer contracts to indemnify our customers
for damages.
See Note 18 — Related Party Transactions — Transactions with Affiliates — Telesat for
commitments and contingencies relating to SS/L’s obligation to make payments to Telesat for
transponders on Telstar 18.
Regulatory Matters
SS/L is required to obtain licenses and enter into technical assistance agreements, presently
under the jurisdiction of the State Department, in connection with the export of satellites and
related equipment, and with the disclosure of technical data or provision of
defense services to foreign persons. Due to the relationship between launch technology and
missile technology, the U.S. government has limited, and is likely in the future to limit, launches
from China and other foreign countries. Delays in obtaining the necessary licenses and technical
assistance agreements have in the past resulted in, and may in the future result in, the delay of
SS/L’s performance on its contracts, which could result in the cancellation of contracts by its
customers, the incurrence of penalties or the loss of incentive payments under these contracts.
Legal Proceedings
Reorganization Matters
On July 15, 2003, Old Loral and certain of its subsidiaries (collectively with Old Loral, the
“Debtors”) filed voluntary petitions for reorganization under chapter 11 of title 11 of the United
States Code in the U.S. Bankruptcy Court for the Southern District of New York (Lead Case No.
03-41710 (RDD), Case Nos. 03-41709 (RDD) through 03-41728 (RDD)). The Debtors emerged from chapter
11 on November 21, 2005 pursuant to the Plan of Reorganization.
Indemnification Claims of Directors and Officers of Old Loral. Old Loral was obligated to
indemnify its directors and officers for, among other things, any losses or costs they may incur as
a result of the lawsuits described below in Old Loral Class Action Securities Litigations. Most
directors and officers filed proofs of claim (the “D&O Claims”) in unliquidated amounts with
respect to the prepetition indemnity obligations of the Debtors. The Debtors and these directors
and officers agreed that in no event will their indemnity claims against Old Loral and Loral Orion,
Inc. in the aggregate exceed $25 million and $5 million, respectively. If any of these claims
ultimately becomes an allowed claim under the Plan of Reorganization, the claimant would be
entitled to a distribution under the Plan of Reorganization of Loral common stock based upon the
amount of the allowed claim. Any such distribution of stock would be in addition to the 20 million
shares of Loral common stock distributed under the Plan of Reorganization to other creditors.
Instead of issuing such additional shares, Loral may elect to satisfy any allowed claim in cash in
an amount equal to the number of shares to which plaintiffs would have been entitled multiplied by
$27.75 or in a combination of additional shares and cash. We believe, although no assurance can be
given, that Loral will not incur any substantial losses as a result of these claims.
Old Loral Class Action Securities Litigations
Beleson. In August 2003, plaintiffs Robert Beleson and Harvey Matcovsky filed a purported
class action complaint against Bernard L. Schwartz, the former Chief Executive Officer of Old
Loral, in the United States District Court for the Southern District of New York. The complaint
sought, among other things, damages in an unspecified amount and reimbursement of plaintiffs’
reasonable costs and expenses. The complaint alleged (a) that Mr. Schwartz violated Section 10(b)
of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder,
by making material misstatements or failing to state material facts about our financial condition
relating to the sale of assets by Old Loral to Intelsat and Old Loral’s chapter 11 filing and (b)
that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section
20(a) of the Exchange Act as an alleged “controlling person” of Old Loral. The class of plaintiffs
on whose behalf the lawsuit has been asserted consists of all buyers of Old Loral common stock
during the period from June 30, 2003 through July 15, 2003, excluding the defendant and certain
persons related to or affiliated with him. In November 2003, three other complaints against Mr.
Schwartz with substantially similar allegations were consolidated into the Beleson case. The
defendant filed a motion for summary judgment in July 2008, and plaintiffs filed a cross-motion for
partial summary judgment in September 2008. In February 2009, the District Court granted
defendant’s motion and denied plaintiffs’ cross motion. In March 2009, plaintiffs filed a notice of
appeal with respect to the District Court’s decision. Pursuant to stipulations entered into in
February, May, July, August and October 2010 among the parties and the plaintiffs in the previously
disclosed Christ case, the appeal, which had been consolidated with the Christ case, was withdrawn,
provided however, that plaintiffs could reinstate the appeal on or before November 19, 2010. In
November 2010, plaintiffs did reinstate the appeal, and, in April 2011, the Second Circuit affirmed
the decision of the District Court. Plaintiffs did not appeal the decision to the United States
Supreme Court within the applicable time period for filing such an appeal and, therefore, the
Beleson case has been concluded and Loral will not incur any liability as a result thereof.
Other and Routine Litigation
We are subject to various other legal proceedings and claims, either asserted or unasserted,
that arise in the ordinary course of business. Although the outcome of these legal proceedings and
claims cannot be predicted with certainty, we do not believe that any of these other existing legal
matters will have a material adverse effect on our consolidated financial position or our results
of operations.
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