UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
Commission file number 1-14180
Loral Space & Communications Inc.
888 Seventh Avenue
New York, New York 10106
Telephone: (212) 697-1105
Jurisdiction of incorporation: Delaware
IRS identification number: 87-0748324
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company) |
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 ¨
Indicate by check mark
whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Act).
Yes ¨ No þ
As of July 31, 2014, 21,414,212 shares of the registrant’s voting common stock and 9,505,673 shares of the registrant’s non-voting common stock were outstanding.
LORAL SPACE & COMMUNICATIONS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2014
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FINANCIAL INFORMATION
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 74,125 | $ | 5,926 | ||||
Notes receivable | 33,667 | 67,333 | ||||||
Income taxes receivable | 12,869 | 13,234 | ||||||
Deferred tax assets | — | 3,784 | ||||||
Other current assets | 998 | 568 | ||||||
Total current assets | 121,659 | 90,845 | ||||||
Long-term receivables | — | 33,667 | ||||||
Investments in affiliates | 175,532 | 116,820 | ||||||
Long-term deferred tax assets | 74,791 | 83,708 | ||||||
Other assets | 71 | 2,700 | ||||||
Total assets | $ | 372,053 | $ | 327,740 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accrued employment costs | $ | 1,570 | $ | 960 | ||||
Other current liabilities | 13,871 | 8,750 | ||||||
Total current liabilities | 15,441 | 9,710 | ||||||
Pension and other postretirement liabilities | 15,446 | 17,003 | ||||||
Long-term liabilities | 93,875 | 93,117 | ||||||
Total liabilities | 124,762 | 119,830 | ||||||
Commitments and contingencies | ||||||||
Shareholders' Equity: | ||||||||
Preferred stock, 0.01 par value; 10,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Common Stock: | ||||||||
Voting common stock, 0.01 par value; 50,000,000 shares authorized, 21,568,706 issued | 216 | 216 | ||||||
Non-voting common stock, 0.01 par value; 20,000,000 shares authorized 9,505,673 issued and outstanding | 95 | 95 | ||||||
Paid-in capital | 1,015,812 | 1,015,656 | ||||||
Treasury stock (at cost), 154,494 shares of voting common stock | (9,592 | ) | (9,592 | ) | ||||
Accumulated deficit | (739,373 | ) | (777,549 | ) | ||||
Accumulated other comprehensive loss | (19,867 | ) | (20,916 | ) | ||||
Total shareholders' equity | 247,291 | 207,910 | ||||||
Total liabilities and shareholders' equity | $ | 372,053 | $ | 327,740 |
See notes to condensed consolidated financial statements
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LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
General and administrative expenses | $ | (1,336 | ) | $ | (3,361 | ) | $ | (2,676 | ) | $ | (7,107 | ) | ||||
Operating loss | (1,336 | ) | (3,361 | ) | (2,676 | ) | (7,107 | ) | ||||||||
Interest and investment income | 110 | 343 | 401 | 632 | ||||||||||||
Interest expense | (4 | ) | (5 | ) | (7 | ) | (8 | ) | ||||||||
Other expense | (651 | ) | (341 | ) | (1,576 | ) | (371 | ) | ||||||||
Loss from continuing operations before income taxes and equity in net income (loss) of affiliates | (1,881 | ) | (3,364 | ) | (3,858 | ) | (6,854 | ) | ||||||||
Income tax provision | (9,480 | ) | (2,170 | ) | (20,152 | ) | (4,985 | ) | ||||||||
Loss from continuing operations before equity in net income (loss) of affiliates | (11,361 | ) | (5,534 | ) | (24,010 | ) | (11,839 | ) | ||||||||
Equity in net income (loss) of affiliates | 64,363 | 132 | 62,194 | (7,149 | ) | |||||||||||
Income (loss) from continuing operations | 53,002 | (5,402 | ) | 38,184 | (18,988 | ) | ||||||||||
Loss from discontinued operations, net of tax | (1 | ) | (2,488 | ) | (8 | ) | (2,365 | ) | ||||||||
Net income (loss) | 53,001 | (7,890 | ) | 38,176 | (21,353 | ) | ||||||||||
Other comprehensive income, net of tax | 286 | 491 | 1,049 | 1,863 | ||||||||||||
Comprehensive income (loss) | $ | 53,287 | $ | (7,399 | ) | $ | 39,225 | $ | (19,490 | ) | ||||||
Net income (loss) per share: | ||||||||||||||||
Basic | ||||||||||||||||
Income (loss) from continuing operations | $ | 1.71 | $ | (0.18 | ) | $ | 1.23 | $ | (0.62 | ) | ||||||
Loss from discontinued operations, net of tax | — | (0.08 | ) | — | (0.08 | ) | ||||||||||
Net income (loss) | $ | 1.71 | $ | (0.26 | ) | $ | 1.23 | $ | (0.70 | ) | ||||||
Diluted | ||||||||||||||||
Income (loss) from continuing operations | $ | 1.67 | $ | (0.18 | ) | $ | 1.19 | $ | (0.62 | ) | ||||||
Loss from discontinued operations, net of tax | — | (0.08 | ) | — | (0.08 | ) | ||||||||||
Net income (loss) | $ | 1.67 | $ | (0.26 | ) | $ | 1.19 | $ | (0.70 | ) | ||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 30,920 | 30,793 | 30,920 | 30,781 | ||||||||||||
Diluted | 31,004 | 30,793 | 31,004 | 30,781 |
See notes to condensed consolidated financial statements
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LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Common Stock | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||
Voting | Non-Voting | Voting | Other | |||||||||||||||||||||||||||||||||||||
Shares | Shares | Paid-In | Accumulated | Comprehensive | Shareholders' | |||||||||||||||||||||||||||||||||||
Issued | Amount | Issued | Amount | Capital | Shares | Amount | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||
Balance, January 1, 2013 | 21,417 | $ | 214 | 9,506 | $ | 95 | $ | 1,027,266 | 154 | $ | (9,592 | ) | $ | (794,128 | ) | $ | (37,394 | ) | $ | 186,461 | ||||||||||||||||||||
Net income | 16,579 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 16,478 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income | 33,057 | |||||||||||||||||||||||||||||||||||||||
Exercise of restricted stock units | 175 | 2 | (2 | ) | — | |||||||||||||||||||||||||||||||||||
Equitable adjustment to restricted stock units for dividends and distributions | 120 | 1 | (1 | ) | — | |||||||||||||||||||||||||||||||||||
Shares surrendered to fund withholding taxes | (143 | ) | (1 | ) | (8,896 | ) | (8,897 | ) | ||||||||||||||||||||||||||||||||
Adjustment to tax benefit associated with stock-based compensation | (3,128 | ) | (3,128 | ) | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | 417 | 417 | ||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2013 | 21,569 | $ | 216 | 9,506 | $ | 95 | $ | 1,015,656 | 154 | $ | (9,592 | ) | $ | (777,549 | ) | $ | (20,916 | ) | $ | 207,910 | ||||||||||||||||||||
Net income | 38,176 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 1,049 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income | 39,225 | |||||||||||||||||||||||||||||||||||||||
Adjustment to tax benefit associated with stock-based compensation | 156 | 156 | ||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2014 | 21,569 | $ | 216 | 9,506 | $ | 95 | $ | 1,015,812 | 154 | $ | (9,592 | ) | $ | (739,373 | ) | $ | (19,867 | ) | $ | 247,291 |
See notes to condensed consolidated financial statements
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LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 38,176 | $ | (21,353 | ) | |||
Loss from discontinued operations, net of tax | 8 | 2,365 | ||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Non-cash operating items (Note 2) | (42,587 | ) | 21,871 | |||||
Changes in operating assets and liabilities: | ||||||||
Other current assets and other assets | (430 | ) | 1,605 | |||||
Accrued expenses and other current liabilities | 136 | (6,767 | ) | |||||
Income taxes receivable and payable | 1,137 | (12,964 | ) | |||||
Pension and other postretirement liabilities | (1,556 | ) | (945 | ) | ||||
Long-term liabilities | (454 | ) | 59 | |||||
Net cash used in operating activities – continuing operations | (5,570 | ) | (16,129 | ) | ||||
Net cash provided by (used in) operating activities – discontinued operations | 846 | (39,025 | ) | |||||
Net cash used in operating activities | (4,724 | ) | (55,154 | ) | ||||
Investing activities: | ||||||||
Tax indemnification recovery from affiliate | 5,438 | — | ||||||
Proceeds from sale of investments, net | — | 1,150 | ||||||
Capital expenditures | (4 | ) | (10 | ) | ||||
Net cash provided by investing activities – continuing operations | 5,434 | 1,140 | ||||||
Receipt of principal, Land Note - discontinued operations | 67,333 | — | ||||||
Net cash provided by investing activities | 72,767 | 1,140 | ||||||
Financing activities: | ||||||||
Funding of withholding taxes for stock-based compensation | — | (8,897 | ) | |||||
Excess tax benefit associated with stock-based compensation | 156 | 5,910 | ||||||
Net cash provided by (used in) financing activities – continuing operations | 156 | (2,987 | ) | |||||
Net cash provided by financing activities – discontinued operations | — | — | ||||||
Net cash provided by (used in) financing activities | 156 | (2,987 | ) | |||||
Increase (decrease) in cash and cash equivalents | 68,199 | (57,001 | ) | |||||
Cash and cash equivalents — beginning of period | 5,926 | 87,370 | ||||||
Cash and cash equivalents — end of period | $ | 74,125 | $ | 30,369 |
See notes to condensed consolidated financial statements
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Principal Business
Loral Space & Communications Inc., together with its subsidiaries (“Loral,” the “Company,” “we,” “our” and “us”) is a leading satellite communications company engaged, through our ownership interests in affiliates, in satellite-based communications services.
Description of Business
Loral has one operating segment consisting of satellite-based communications services. Loral participates in satellite services operations through its ownership interest in Telesat Holdings Inc. (“Telesat Holdco”) which owns Telesat Canada (“Telesat”), a global satellite services operator. Telesat owns and leases a satellite fleet that operates in geosynchronous earth orbit approximately 22,000 miles above the equator. In this orbit, satellites remain in a fixed position relative to points on the earth’s surface and provide reliable, high-bandwidth services anywhere in their coverage areas, serving as the backbone for many forms of telecommunications.
Loral holds a 62.8% economic interest and a 32.7% voting interest in Telesat Holdco (see Note 5). We use the equity method of accounting for our ownership interest in Telesat Holdco.
Loral, a Delaware corporation, was formed on June 24, 2005, to succeed to the business conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal bankruptcy laws on November 21, 2005 (the “Effective Date”) pursuant to the terms of the fourth amended joint plan of reorganization, as modified.
Sale of SS/L
On November 2, 2012, Loral completed the sale (the “Sale”) of its wholly-owned subsidiary, Space Systems/Loral, LLC (formerly known as Space Systems/Loral, Inc. (“SS/L”)), to MDA Communications Holdings, Inc. (“MDA Holdings”), a subsidiary of MacDonald, Dettwiler and Associates Ltd. (“MDA”). Pursuant to the purchase agreement (the “Purchase Agreement”), dated as of June 26, 2012, as amended on October 30, 2012 and March 28, 2013, by and among Loral, SS/L, MDA and MDA Holdings, Loral received total cash payments of $967.9 million plus, for the sale of certain real estate used in connection with SS/L’s business, a three-year promissory note in the principal amount of $101 million (the “Land Note”). Transaction costs related to the Sale were $35.2 million. Subsequent to the closing of the Sale and pursuant to the Purchase Agreement, Loral, in December 2012, paid MDA $6.5 million as a result of the resolution of a contingency.
Under the terms of the Purchase Agreement, Loral has retained control and assumed the defense of the lawsuit (the “ViaSat Suit”) brought in 2012 by ViaSat, Inc. (“ViaSat”) against SS/L and is obligated to indemnify SS/L for certain damages in that lawsuit, after a final non-appealable judgment has been entered. In April 2014, the jury in the trial of the ViaSat Suit found that SS/L was liable for patent infringement and breach of contract and awarded ViaSat damages against SS/L of $283 million. Under the terms of the Purchase Agreement, following a change of control of Loral, the indemnification liability of Loral for damages in the ViaSat Suit is subject to a $200 million cap. See Note 14 for more information regarding the ViaSat Suit. In addition, Loral is obligated to indemnify SS/L from liabilities with respect to certain pre-closing taxes.
The Land Note, originally issued at closing, provided for interest at the rate of 1% per annum with amortization in three equal annual installments on each March 31, commencing March 31, 2013. The Land Note was amended as described below and is backed by a letter of guarantee from Royal Bank of Canada.
On March 28, 2013, Loral and MDA amended the Purchase Agreement to modify SS/L’s capped cost sharing obligations related to Loral’s indemnification of litigation costs and litigation damages in the ViaSat Suit and also amended the Land Note to defer to March 31, 2014 the due date of the principal payment from MDA to Loral of $33.7 million due originally on March 31, 2013 with an increase in the interest rate applicable to this tranche of the Land Note from 1.0% to 1.5% effective as of April 1, 2013. Loral received the principal payment of $67.3 million from MDA on March 31, 2014 under the amended Land Note.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) and, in our opinion, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results of operations, financial position and cash flows as of the balance sheet dates presented and for the periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules. We believe that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
The December 31, 2013 balance sheet has been derived from the audited consolidated financial statements at that date. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our latest Annual Report on Form 10-K filed with the SEC.
Investments in Affiliates
Ownership interests in Telesat and XTAR, LLC (“XTAR”) are accounted for using the equity method of accounting. Income and losses of affiliates are recorded based on our beneficial interest. Our equity in net income or loss also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat and XTAR, on satellites we constructed for them while we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets. Equity in losses of affiliates is not recognized after the carrying value of an investment, including advances and loans, has been reduced to zero, unless guarantees or other funding obligations exist. The Company monitors its equity method investments for factors indicating other-than-temporary impairment. An impairment loss would be recognized when there has been a loss in value of the affiliate that is other-than-temporary.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amount of income (loss) reported for the period. Actual results could differ from estimates.
Significant estimates also included the allowances for doubtful accounts, the realization of deferred tax assets, uncertain tax positions, the fair value of liabilities indemnified and our pension liabilities.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and receivables. Our cash and cash equivalents are maintained with high-credit-quality financial institutions. The Land Note is guaranteed by Royal Bank of Canada. As a result, management believes that its potential credit risks are minimal.
Fair Value Measurements
U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. U.S. GAAP also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are described below:
Level 1: Inputs represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in active markets at the measurement date.
Level 2: Inputs represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities, and pricing inputs, other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
Assets and Liabilities Measured at Fair Value
The following table presents our assets and liabilities measured at fair value at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||
Money market funds | $ | 68,421 | $ | — | $ | — | $ | 3,216 | $ | — | $ | — | ||||||||||||
Note receivable: | ||||||||||||||||||||||||
Land Note | $ | — | $ | — | $ | 33,667 | $ | — | $ | — | $ | 101,000 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Indemnifications: | ||||||||||||||||||||||||
Sale of SS/L | $ | — | $ | — | $ | 11,756 | $ | — | $ | — | $ | 10,897 | ||||||||||||
Globalstar do Brasil S.A. | $ | — | $ | — | $ | 1,260 | $ | — | $ | — | $ | 1,320 |
The carrying amount of cash equivalents approximates fair value as of each reporting date because of the short maturity of those instruments. The carrying amount of the Land Note approximates fair value as of each reporting date because the stated interest rate is consistent with current market rates. The fair value of indemnifications related to the sale of SS/L was originally estimated using Monte Carlo simulation based on the potential probability weighted cash flows that would be a guarantor’s responsibility in an arm’s length transaction. The increase in the liability from December 31, 2013 to June 30, 2014 represents receipt of the final payment from SS/L for its share of litigation costs related to the ViaSat Suit, partially offset by litigation costs paid. The fair value of indemnifications related to Globalstar do Brasil S.A. (“GdB”) was originally estimated using expected value analysis. The fair value of indemnification liabilities are not remeasured on a recurring basis. The Company does not have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair value as of June 30, 2014.
We review the carrying values of our equity method investments when events and circumstances warrant and consider all available evidence in evaluating when declines in fair value are other than temporary. The fair values of our investments are determined based on valuation techniques using the best information available and may include quoted market prices, market comparables and discounted cash flow projections. An impairment charge is recorded when the carrying amount of the investment exceeds its current fair value and is determined to be other than temporary.
Discontinued Operations
Adjustments to amounts previously reported in discontinued operations that are directly related to the Sale are classified as discontinued operations in the statements of operations for the three and six months ended June 30, 2014 and 2013.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 that creates a new Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies can elect to use either a full or modified retrospective approach when adopting this update which is effective for the Company on January 1, 2017. The Company is currently evaluating the impact of ASU 2014-09 on its consolidated financial statements.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, only those disposals that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the consolidated financial statements. Also, disposal of an equity method investment that meets the definition of a discontinued operation is to be reported in discontinued operations under the new guidance. The guidance, effective for the Company on January 1, 2015, is not expected to have a material impact on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This new standard requires the netting of unrecognized tax benefits (“UTBs”) against available deferred tax assets for losses and other carryforward benefits that would be available to offset the liability for uncertain tax positions rather than presenting the UTB on a gross basis. The guidance, effective for the Company on January 1, 2014, did not have a material effect on our condensed consolidated financial statements as the Company had already adopted this methodology.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830) - Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU No. 2013-05 clarifies that the cumulative translation adjustment should be released into net income only when a reporting entity ceases to have a controlling financial interest in a subsidiary or a business within a foreign entity. Further, for an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. The guidance, effective for the Company on January 1, 2014, did not have a material impact on our condensed consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405) – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. ASU No. 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of: (a) the amount the reporting entity agreed to pay on the basis of its arrangement with its co-obligors, and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance, effective for the Company on January 1, 2014, did not have a material impact on our condensed consolidated financial statements.
Additional Cash Flow Information
The following represents non-cash activities and supplemental information to the condensed consolidated statements of cash flows (in thousands):
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Non-cash operating items: | ||||||||
Equity in net (income) loss of affiliates | $ | (62,194 | ) | $ | 7,149 | |||
Deferred taxes | 19,380 | 11,285 | ||||||
Depreciation and amortization | 21 | 6 | ||||||
Stock-based compensation | — | 417 | ||||||
Amortization of prior service credit and actuarial loss | 206 | 3,014 | ||||||
Net non-cash operating items – continuing operations | $ | (42,587 | ) | $ | 21,871 | |||
Supplemental information: | ||||||||
Interest paid – continuing operations | $ | 7 | $ | 8 | ||||
Tax (refunds) payments, net - continuing operations | $ | (127 | ) | $ | 86 | |||
Tax payments – discontinued operations | $ | — | $ | 35,118 |
10 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
Proportionate | ||||||||||||
Share of | Accumulated | |||||||||||
Telesat Other | Other | |||||||||||
Postretirement | Comprehensive | Comprehensive | ||||||||||
Benefits | Loss | Loss | ||||||||||
Balance at January 1, 2013 | $ | (17,653 | ) | $ | (19,741 | ) | $ | (37,394 | ) | |||
Other comprehensive income before reclassification | 3,102 | 7,996 | 11,098 | |||||||||
Amounts reclassified from accumulated other comprehensive loss | 5,380 | — | 5,380 | |||||||||
Net current-period other comprehensive income | 8,482 | 7,996 | 16,478 | |||||||||
Balance at December 31, 2013 | (9,171 | ) | (11,745 | ) | (20,916 | ) | ||||||
Other comprehensive income before reclassification | — | 920 | 920 | |||||||||
Amounts reclassified from accumulated other comprehensive loss | 129 | — | 129 | |||||||||
Net current-period other comprehensive income | 129 | 920 | 1,049 | |||||||||
Balance at June 30, 2014 | $ | (9,042 | ) | $ | (10,825 | ) | $ | (19,867 | ) |
The components of other comprehensive income and related tax effects are as follows (in thousands):
Three Months Ended June 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Before-Tax | Tax | Net-of-Tax | Before-Tax | Tax (Provision) | Net-of-Tax | |||||||||||||||||||
Amount | Provision | Amount | Amount | Benefit | Amount | |||||||||||||||||||
Amortization of prior service credits and net actuarial loss | $ | 103 | (a) | $ | (38 | ) | $ | 65 | $ | 1,513 | (a) | $ | (578 | ) | $ | 935 | ||||||||
Proportionate share of Telesat Holdco other comprehensive income (loss) | 355 | (134 | ) | 221 | (718 | ) | 274 | (444 | ) | |||||||||||||||
Other comprehensive income (loss) | $ | 458 | $ | (172 | ) | $ | 286 | $ | 795 | $ | (304 | ) | $ | 491 |
Six Months Ended June 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Before-Tax | Tax | Net-of-Tax | Before-Tax | Tax | Net-of-Tax | |||||||||||||||||||
Amount | Provision | Amount | Amount | Provision | Amount | |||||||||||||||||||
Amortization of prior service credits and net actuarial loss | $ | 206 | (a) | $ | (77 | ) | $ | 129 | $ | 3,014 | (a) | $ | (1,151 | ) | $ | 1,863 | ||||||||
Proportionate share of Telesat Holdco other comprehensive income (loss) | 1,481 | (561 | ) | 920 | — | — | — | |||||||||||||||||
Other comprehensive income (loss) | $ | 1,687 | $ | (638 | ) | $ | 1,049 | $ | 3,014 | $ | (1,151 | ) | $ | 1,863 |
(a) Reclassifications are included in general and administrative expenses.
11 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Receivables
The receivables balance related to the Land Note (see Note 1) as of June 30, 2014 and December 31, 2013 is presented below (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Land Note receivable | $ | 33,667 | $ | 101,000 | ||||
Less: current portion | (33,667 | ) | (67,333 | ) | ||||
Long-term receivable | $ | — | $ | 33,667 |
The principal amount under the Land Note of $33.7 million as of June 30, 2014 is scheduled to be received on March 31, 2015. Interest on this principal amount is one percent per annum and is payable quarterly.
5. Investments in Affiliates
Investments in affiliates consist of (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Telesat Holdings Inc. | $ | 122,141 | $ | 60,157 | ||||
XTAR, LLC | 53,391 | 56,663 | ||||||
$ | 175,532 | $ | 116,820 |
Equity in net income (loss) of affiliates consists of (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Telesat Holdings Inc. | $ | 66,150 | $ | 718 | $ | 65,466 | $ | — | ||||||||
XTAR, LLC | (1,787 | ) | (1,736 | ) | (3,272 | ) | (3,499 | ) | ||||||||
Other | — | 1,150 | — | (3,650 | ) | |||||||||||
$ | 64,363 | $ | 132 | $ | 62,194 | $ | (7,149 | ) |
Telesat
As of December 31, 2013 and June 30, 2014, we held a 62.8% economic interest and a 32.7% voting interest in Telesat. We use the equity method of accounting for our majority economic interest in Telesat because we own 32.7% of the voting stock and do not exercise control by other means to satisfy the U.S. GAAP requirement for treatment as a consolidated subsidiary. We have also concluded that Telesat is not a variable interest entity for which we are the primary beneficiary. Loral’s equity in net income or loss of Telesat is based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. Our proportionate share of Telesat’s net income or loss is based on our economic interest as our holdings consist of common stock and non-voting participating preferred shares that have all the rights of common stock with respect to dividends, return of capital and surplus distributions, but have no voting rights.
Our statements of operations and comprehensive income (loss) for each of the three and six month periods ended June 30, 2014 included equity in net income of affiliates of $1.8 million and other comprehensive loss of $1.1 million that should have been recognized in prior periods. These adjustments, which related to our investment in Telesat, consisted primarily of foreign exchange gains and losses. The Company has not revised previously reported amounts based on its belief that the effect of such adjustments is not material to the financial statements taken as a whole.
12 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The ability of Telesat to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants in Telesat’s debt and shareholder agreements. Under Telesat’s credit agreement and the indenture for Telesat’s 6% senior notes, dividends or certain other restricted payments may be paid only if there is a sufficient capacity under a restricted payment basket, which is based on a formula of cumulative consolidated EBITDA less 1.4 times cumulative consolidated interest expense. Under the 6% senior note indenture and credit agreement, Telesat is generally permitted to pay consulting fees to Loral in cash. Our general and administrative expenses are net of income related to consulting fees of $1.25 million for each of the three month periods ended June 30, 2014 and 2013 and $2.5 million for each of the six month periods ended June 30, 2014 and 2013. For the six months ended June 30, 2014 and 2013, Loral received payments in cash from Telesat, net of withholding taxes, of $2.4 million and $3.8 million, respectively, for consulting fees and interest. The payments received by Loral from Telesat for the six months ended June 30, 2013 included redemption of $1.3 million of notes receivable. These amounts were not allowed to be paid in cash previously because Telesat did not meet the leverage ratio required for cash payment under the indenture for its 12.5% senior subordinated notes due November 1, 2017. These notes were redeemed in May 2013.
The contribution of Loral Skynet, a wholly owned subsidiary of Loral prior to its contribution to Telesat in 2007, was recorded by Loral at the historical book value of our retained interest combined with the gain recognized on the contribution. However, the contribution was recorded by Telesat at fair value. Accordingly, the amortization of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities is proportionately eliminated in determining our share of the net income or losses of Telesat. Our equity in net income or loss of Telesat also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat, on satellites we constructed for Telesat while we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets.
In connection with the acquisition of our ownership interest in Telesat in 2007, Loral retained the benefit of tax recoveries related to transferred assets and indemnified Telesat (“Telesat Indemnification”) for certain liabilities including Loral Skynet’s tax liabilities arising prior to January 1, 2007. During the six months ended June 30, 2014, Loral and Telesat settled several of the Telesat Indemnification tax disputes (see Note 15) resulting in a net tax recovery of $5.4 million which was received from Telesat in April 2014. Our investment in Telesat was reduced by $5.0 million as a result of this recovery.
The following table presents summary financial data for Telesat in accordance with U.S. GAAP, for the three and six months ended June 30, 2014 and 2013 and as of June 30, 2014 and December 31, 2013 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Statement of Operations Data: | ||||||||||||||||
Revenues | $ | 205,790 | $ | 210,038 | $ | 426,389 | $ | 427,506 | ||||||||
Operating expenses | (39,245 | ) | (44,174 | ) | (79,575 | ) | (94,332 | ) | ||||||||
Depreciation, amortization and stock-based compensation | (58,277 | ) | (62,845 | ) | (116,758 | ) | (120,663 | ) | ||||||||
Loss on disposition of long lived asset | (3 | ) | (2,010 | ) | (62 | ) | (1,542 | ) | ||||||||
Operating income | 108,265 | 101,009 | 229,994 | 210,969 | ||||||||||||
Interest expense | (47,501 | ) | (51,077 | ) | (95,016 | ) | (110,772 | ) | ||||||||
Expense of refinancing | — | — | — | (19,961 | ) | |||||||||||
Foreign exchange gain (loss) | 92,665 | (98,389 | ) | (9,084 | ) | (168,729 | ) | |||||||||
(Loss) gain on financial instruments | (30,979 | ) | 59,755 | 16,371 | 96,608 | |||||||||||
Other income | 1,427 | 10,453 | 2,166 | 10,833 | ||||||||||||
Income tax provision | (18,007 | ) | (19,151 | ) | (39,156 | ) | (26,993 | ) | ||||||||
Net income (loss) | $ | 105,870 | $ | 2,600 | $ | 105,275 | $ | (8,045 | ) |
13 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Balance Sheet Data: | ||||||||
Current assets | $ | 461,688 | $ | 366,814 | ||||
Total assets | 4,926,469 | 4,929,838 | ||||||
Current liabilities | 308,239 | 360,744 | ||||||
Long-term debt, including current portion | 3,179,547 | 3,215,831 | ||||||
Total liabilities | 4,166,313 | 4,280,902 | ||||||
Shareholders’ equity | 760,156 | 648,936 |
Telesat had capital expenditures of $33.5 million and $40.1 million for the six months ended June 30, 2014 and 2013, respectively.
XTAR
We own 56% of XTAR, a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of Spain. We account for our ownership interest in XTAR under the equity method of accounting because we do not control certain of its significant operating decisions.
XTAR owns and operates an X-band satellite, XTAR-EUR, located at 29° E.L., which is designed to provide X-band communications services exclusively to United States, Spanish and allied government users throughout the satellite’s coverage area, including Europe, the Middle East and Asia. XTAR also leases 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L., owned by Hisdesat. These transponders, designated as XTAR-LANT, provide capacity to XTAR for additional X-band services and greater coverage and flexibility.
We regularly evaluate our investment in XTAR to determine whether there has been a decline in fair value that is other-than-temporary. We performed an impairment test for our investment in XTAR as of June 30, 2014, using XTAR’s most recent forecast, and concluded that our investment in XTAR was not impaired.
XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders requires payments by XTAR of $25 million in 2014, with increases thereafter to a maximum of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2022. Under this lease agreement, Hisdesat may also be entitled under certain circumstances to a share of the revenues generated on the XTAR-LANT transponders. In March 2009, XTAR entered into an agreement with Hisdesat pursuant to which the past due balance on XTAR-LANT transponders of $32.3 million as of December 31, 2008, together with a deferral of $6.7 million in payments due in 2009, will be payable to Hisdesat over 12 years through annual payments of $5 million (the “Catch Up Payments”). XTAR has a right to prepay, at any time, all unpaid Catch Up Payments discounted at 9%. Cumulative amounts paid to Hisdesat for Catch-Up Payments through June 30, 2014 were $26.7 million. XTAR has also agreed that XTAR’s excess cash balance (as defined) will be applied towards making limited payments on future lease obligations, as well as payments of other amounts owed to Hisdesat, Telesat and Loral for services provided by them to XTAR (see Note 15). The ability of XTAR to pay dividends and management fees in cash to Loral is governed by XTAR’s operating agreement.
The following table presents summary financial data for XTAR for the three and six months ended June 30, 2014 and 2013 and as of June 30, 2014 and December 31, 2013 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Statement of Operations Data: | ||||||||||||||||
Revenues | $ | 7,675 | $ | 8,325 | $ | 15,721 | $ | 16,450 | ||||||||
Operating expenses | (8,006 | ) | (8,493 | ) | (15,813 | ) | (16,862 | ) | ||||||||
Depreciation and amortization | (2,314 | ) | (2,310 | ) | (4,629 | ) | (4,620 | ) | ||||||||
Operating loss | (2,645 | ) | (2,478 | ) | (4,721 | ) | (5,032 | ) | ||||||||
Net loss | (3,302 | ) | (3,210 | ) | (6,064 | ) | (6,469 | ) |
14 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Balance Sheet Data: | ||||||||
Current assets | $ | 6,329 | $ | 6,970 | ||||
Total assets | 59,475 | 64,745 | ||||||
Current liabilities | 25,030 | 22,443 | ||||||
Total liabilities | 57,666 | 56,872 | ||||||
Members’ equity | 1,809 | 7,873 |
Other
In connection with the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their respective interests in GdB, the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for certain GdB pre-closing liabilities, primarily related to Brazilian taxes. As a result of an April 2013 adverse court decision in Brazil relating to a potential tax liability, an adverse outcome for which was previously believed to be remote, Loral recorded a loss contingency of $4.8 million in the first quarter of 2013. A payment of $3.7 million related to this loss contingency was made in the second quarter of 2013, and, in the third quarter of 2013, this loss was adjusted to $3.7 million, primarily due to a favorable court decision.
As of June 30, 2014 and December 31, 2013, the Company held various indirect ownership interests in two foreign companies that currently serve as exclusive service providers for Globalstar service in Mexico and Russia. The Company accounts for these ownership interests using the equity method of accounting. Loral has written-off its investments in these companies, and, because we have no future funding requirements relating to these investments, there is no requirement for us to provide for our allocated share of these companies’ net losses.
6. Other Current Liabilities
Other current liabilities consists of (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Pension and other postretirement liabilities | $ | 129 | $ | 128 | ||||
Indemnification liabilities (see Note 2) | 2,229 | 6,138 | ||||||
Income taxes payable | 632 | — | ||||||
Deferred tax liability | 8,874 | — | ||||||
Other | 2,007 | 2,484 | ||||||
$ | 13,871 | $ | 8,750 |
7. Income Taxes
The following summarizes our income tax provision on the loss from continuing operations (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Total current income tax benefit (provision) | $ | 496 | $ | 7,138 | $ | (772 | ) | $ | 6,300 | |||||||
Total deferred income tax provision | (9,976 | ) | (9,308 | ) | (19,380 | ) | (11,285 | ) | ||||||||
Income tax provision | $ | (9,480 | ) | $ | (2,170 | ) | $ | (20,152 | ) | $ | (4,985 | ) |
At June 30, 2014, income taxes receivable on our condensed consolidated balance sheet included $12.8 million from the carryback of our tax loss from 2013 against taxes previously paid for 2012. We expect to receive this tax refund in 2014.
15 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Subsequent to the Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, which currently has a nominal tax basis, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
The following summarizes amounts for uncertain tax positions (“UTPs”) included in our income tax provision (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Current benefit (provision) for UTPs | $ | 714 | $ | (224 | ) | $ | 395 | $ | (671 | ) | ||||||
Deferred (provision) benefit for UTPs | (103 | ) | 102 | (2 | ) | 241 | ||||||||||
Tax benefit (provision) for UTPs | $ | 611 | $ | (122 | ) | $ | 393 | $ | (430 | ) |
As of June 30, 2014, we had unrecognized tax benefits relating to UTPs of $79 million. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify SS/L for certain taxes related to periods prior to the closing of the transaction. The Company recognizes potential accrued interest and penalties related to UTPs in income tax expense on a quarterly basis. As of June 30, 2014, we have accrued approximately $5.2 million and $8.6 million for the payment of potential tax-related interest and penalties, respectively.
With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2007. Earlier years related to certain foreign jurisdictions remain subject to examination. Various federal, state and foreign income tax returns are currently under examination. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve months, the statute of limitations for assessment of additional tax will expire with regard to certain UTPs related to our federal income tax return filed for 2010 and state income tax returns filed for 2007 and 2009 potentially resulting in a $2.8 million reduction to our unrecognized tax benefits.
The following summarizes the changes to our liabilities for UTPs included in long-term liabilities in the condensed consolidated balance sheets (in thousands):
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Liabilities for UTPs: | ||||||||
Opening balance — January 1 | $ | 79,688 | $ | 80,732 | ||||
Current (benefit) provision for: | ||||||||
Unrecognized tax benefits | (902 | ) | 625 | |||||
Potential additional interest | 1,178 | 1,016 | ||||||
Potential penalty adjustment | (425 | ) | 37 | |||||
Statute expirations | (246 | ) | (1,007 | ) | ||||
Ending balance | $ | 79,293 | $ | 81,403 |
As of June 30, 2014, if our positions are sustained by the taxing authorities, the Company’s income tax provision from continuing operations would be reduced by approximately $36.5 million. Other than as described above, there were no significant changes to our uncertain tax positions during the six months ended June 30, 2014 and 2013, and we do not anticipate any other significant changes to our unrecognized tax benefits during the next twelve months.
16 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Long Term Liabilities
Long term liabilities consists of (in thousands):
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Indemnification liabilities (see Note 2) | $ | 10,787 | $ | 6,079 | ||||
Deferred tax liability | 3,489 | 4,907 | ||||||
Liabilities for uncertain tax positions | 79,293 | 79,688 | ||||||
Other | 306 | 2,443 | ||||||
$ | 93,875 | $ | 93,117 |
9. Shareholders’ Equity
Treasury Stock
In November 2011, our Board of Directors authorized the purchase of up to 800,000 shares of our voting common stock. These purchases may be made from time to time in the open market or private transactions, as conditions may warrant. We intend to hold repurchased shares of our voting common stock in treasury. We account for the treasury shares using the cost method. During 2011 and 2012, Loral repurchased 154,494 shares of its voting common stock at an average price of $62.04 per share for an aggregate amount of $9.6 million under the November 2011 share purchase program.
10. Stock-Based Compensation
Stock Plans
The Loral amended and restated 2005 stock incentive plan (the “Stock Incentive Plan”) allows for the grant of several forms of stock-based compensation awards including stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other stock-based awards (collectively, the “Awards”). The total number of shares of voting common stock reserved and available for issuance under the Stock Incentive Plan is 1,403,746 shares of which 1,319,533 were available for future grant at June 30, 2014. This number of shares of voting common stock available for issuance would be reduced if restricted stock units are settled in voting common stock. In addition, shares of common stock that are issuable under awards that expire, are forfeited or canceled, or withheld in payment of the exercise price or taxes relating to an Award, will again be available for Awards under the Stock Incentive Plan.
In June 2009, the Company introduced a performance based long-term incentive compensation program consisting of SS/L phantom stock appreciation rights (“SS/L Phantom SARs”). Because SS/L common stock was not freely tradable on the open market and thus did not have a readily ascertainable market value, SS/L equity value under the program was derived from an income-based calculation. Each SS/L Phantom SAR provided the recipient with the right to receive an amount equal to the increase in SS/L’s notional stock price over the base price multiplied by the number of SS/L Phantom SARs vested on the applicable vesting date, subject to adjustment. The SS/L notional stock price was frozen as of December 31, 2011 in connection with the Sale. SS/L Phantom SARs were paid out in cash on each vesting date.
As of June 30, 2014, there were no SS/L Phantom SARs remaining. During each of the six month periods ended June 30, 2014 and 2013, cash payments of $0.5 million were made related to SS/L Phantom SARs.
Total stock-based compensation included in loss from continuing operations was nil and $0.2 million for the three months ended June 30, 2014 and 2013, respectively, and nil and $0.5 million for the six months ended June 30, 2014 and 2013, respectively.
17 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Earnings Per Share
Telesat has awarded employee stock options, which, if exercised, would result in dilution of Loral’s ownership interest in Telesat to approximately 61.9%. The following table presents the dilutive impact of Telesat stock options on Loral’s reported income from continuing operations for the purpose of computing diluted earnings per share (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Income from continuing operations — basic | $ | 53,002 | $ | (5,402 | ) | $ | 38,184 | $ | (18,988 | ) | ||||||
Less: Adjustment for dilutive effect of Telesat stock options | (1,299 | ) | — | (1,291 | ) | — | ||||||||||
Income from continuing operations — diluted | $ | 51,703 | $ | (5,402 | ) | $ | 36,893 | $ | (18,988 | ) |
Telesat stock options are excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2013, as the effect would be antidulitive.
Basic income per share is computed based upon the weighted average number of shares of voting and non-voting common stock outstanding. The following is the computation of common shares outstanding for diluted earnings per share (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Common and potential common shares outstanding for diluted earnings per share: | ||||||||||||||||
Weighted average common shares outstanding | 30,920 | 30,793 | 30,920 | 30,781 | ||||||||||||
Unconverted restricted stock units | 84 | — | 84 | — | ||||||||||||
Common shares outstanding for diluted earnings per share | 31,004 | 30,793 | 31,004 | 30,781 |
For the three and six months ended June 30, 2013, the following unvested restricted stock units are excluded from the calculation of diluted loss per share as the effect would have been antidilutive (in thousands):
Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 | |||||||
Unconverted restricted stock units | 84 | 172 |
18 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Pensions and Other Employee Benefit Plans
The following tables provide the components of net periodic cost included in general and administrative expenses for our qualified and supplemental retirement plans (the “Pension Benefits”) and health care and life insurance benefits for retired employees and dependents (the “Other Benefits”) for the three and six months ended June 30, 2014 and 2013 (in thousands):
Pension Benefits Three Months Ended June 30, | Other Benefits Three Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost | $ | 41 | $ | 9 | $ | — | $ | 2 | ||||||||
Interest cost | 468 | 458 | 18 | 10 | ||||||||||||
Expected return on plan assets | (473 | ) | (402 | ) | — | — | ||||||||||
Amortization of net actuarial loss | 93 | 1,515 | 7 | 4 | ||||||||||||
Amortization of prior service credits | — | — | 3 | (6 | ) | |||||||||||
Net periodic cost | $ | 129 | $ | 1,580 | $ | 28 | $ | 10 |
Pension Benefits Six Months Ended June 30, | Other Benefits Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost | $ | 82 | $ | 156 | $ | 1 | $ | 4 | ||||||||
Interest cost | 937 | 921 | 35 | 20 | ||||||||||||
Expected return on plan assets | (947 | ) | (829 | ) | — | — | ||||||||||
Amortization of net actuarial loss | 186 | 3,018 | 15 | 8 | ||||||||||||
Amortization of prior service credits | — | — | 5 | (12 | ) | |||||||||||
Net periodic cost | $ | 258 | $ | 3,266 | $ | 56 | $ | 20 |
Amortization of net actuarial loss related to Pension Benefits for the three and six months ended June 30, 2013 includes accelerated amortization as a result of the termination of our supplemental executive retirement plan. Final lump sum payments under this plan were made in December 2013.
13. Financial Instruments, Derivative Instruments and Hedging
Financial Instruments
The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The carrying amount of the Land Note approximates fair value because the stated interest rate is consistent with current market rates.
Foreign Currency
We are subject to the risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate exposure, we attempt to denominate all contracts in U.S. dollars. Where appropriate, derivatives are used to minimize the risk of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative purposes.
Derivatives and Hedging Transactions
There were no derivative instruments as of June 30, 2014 and December 31, 2013.
19 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Commitments and Contingencies
Financial Matters
In the fourth quarter of 2012, we sold our former subsidiary, SS/L, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement, we are obligated to indemnify MDA from (1) liabilities with respect to certain pre-closing taxes; and (2) certain litigation costs and litigation damages relating to the ViaSat Suit, subject to a $200 million cap in the event of a change of control of Loral. The amounts of certain indemnification claims relating to pre-closing taxes have not yet been determined. Where appropriate, we intend vigorously to contest the underlying tax assessment, but there can be no assurance that we will be successful. Although no assurance can be provided, we do not believe that these tax-related matters will have a material adverse effect on our financial position or results of operations. For a discussion of the ViaSat Suit, see Legal Proceedings, below. See Note 2 for the amount of liabilities recorded related to indemnification obligations.
In connection with the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their respective interests in GdB, the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for certain GdB pre-closing liabilities, primarily related to Brazilian taxes. As a result of an April 2013 adverse court decision in Brazil relating to a potential tax liability, an adverse outcome for which was previously believed to be remote, Loral recorded a loss contingency of $4.8 million in the first quarter of 2013. A payment of $3.7 million related to this loss contingency was made in the second quarter of 2013, and, in the third quarter of 2013, this loss was adjusted to $3.7 million, primarily due to a favorable court decision. Our condensed consolidated balance sheets include liabilities of $1.3 million as of June 30, 2014 and December 31, 2013 for indemnification liabilities relating to the sale of GdB.
See Note 15— 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 and Telesat.
Legal Proceedings
ViaSat
In 2012, ViaSat sued SS/L and Loral in the United States District Court for the Southern District of California alleging various patent infringement and breach of contract claims. In April 2014, the jury in the trial of the ViaSat Suit returned a verdict against SS/L. The jury found that SS/L directly infringed the patents asserted by ViaSat in the case in connection with the manufacture of a satellite by SS/L for a customer other than ViaSat and also that SS/L breached certain agreements with ViaSat. Damages of $283 million were awarded against SS/L. The jury also found that Loral was not liable for either patent infringement or breach of contract. SS/L elected not to pursue its patent infringement counterclaim against ViaSat at the trial.
Under the terms of the Purchase Agreement, Loral has retained control and assumed the defense of the ViaSat Suit (the “Assumption of the Defense”) and is obligated to indemnify SS/L for certain damages arising out of the ViaSat Suit, after a final non-appealable judgment has been entered. The damages subject to indemnification include amounts awarded in such final and non-appealable order and costs to SS/L resulting from any injunction that may be granted such as remediation and modification costs with respect to satellites being constructed, subject to SS/L’s duty to use reasonable best efforts to mitigate to the fullest extent practicable the amount of any such damages. Under the terms of the Purchase Agreement, following a change of control of Loral, the indemnification liability of Loral for damages, including for costs arising from any possible injunction, in the ViaSat Suit is subject to a $200 million cap.
In June 2014, Loral, SS/L and ViaSat filed post-trial motions in the ViaSat Suit. A hearing on the post-trial motions is scheduled for August 7, 2014.
Loral and SS/L filed several joint post-trial motions seeking entry of a judgment by the trial court as a matter of law that the patents asserted by ViaSat in the ViaSat Suit are invalid. SS/L filed several post-trial motions seeking a judgment by the trial court as a matter of law that the jury’s damages award should be vacated in its totality or at the very least reduced and that SS/L did not infringe the asserted patents or breach any contracts with ViaSat. SS/L also filed a motion seeking a new trial.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
ViaSat filed post-trial motions against SS/L seeking: an injunction to prevent the manufacture and sale by SS/L of additional satellites that are identical to or no more than colorably different from Hughes’ Jupiter-1 satellite found by the jury to infringe ViaSat’s patents and to enjoin the continued use and/or disclosure by SS/L of ViaSat’s contractually protected technologies; an award of pre- and post-judgment interest against SS/L, with pre-judgment interest asserted by ViaSat to be $41.1 million; and judgment by the trial court as a matter of law that SS/L infringed one of ViaSat’s patents through its manufacture and sale of satellites to a customer where the jury did not find infringement. Loral, by virtue of the Assumption of the Defense, intends vigorously to oppose the post-trial motions filed by ViaSat. ViaSat did not file any post-trial motions with respect to the jury’s finding that Loral was not liable for either patent infringement or breach of contract.
In the event that Loral’s and SS/L’s post-trial motions are denied, or if ViaSat’s post-trial motions are granted, and judgment is ultimately entered by the trial court against SS/L, Loral, by virtue of the Assumption of the Defense, intends to appeal the judgment on behalf of SS/L. Loral and SS/L have agreed to share equally the cost of any appeal bond that may be necessary to stay execution of the judgment against SS/L during the appeal. Because the amount of damages, if any, ultimately included in the judgment is not yet known, the cost of any necessary appeal bond cannot be determined at this time. If the court enters judgment against SS/L with no reduction in the damages awarded by the jury and also awards pre-judgment interest as sought by ViaSat, we expect that Loral’s share of the cost of the appeal bond could be up to approximately $400,000 per month during pendency of the appeal.
As a result of the uncertain outcome of the post-trial motions and appeal, if necessary, we have not determined that a loss is probable and have not recorded a liability as of June 30, 2014 related to the jury verdict in the ViaSat Suit. There can be no assurance that any of Loral’s or SS/L’s post-trial motions or appeals will be successful with respect to reversing the verdict, reducing all or a portion of the damages awarded against SS/L or obtaining a new trial. In addition, there can be no assurance that ViaSat will not be successful in obtaining an injunction against SS/L which may result in indemnifiable damages above and beyond the jury’s verdict and which may be material.
We expect that the damage award against SS/L in the ViaSat Suit will not have a significant effect on Loral’s liquidity during the next 12 months. Loral is obligated to indemnify SS/L for damages in the ViaSat Suit only after a final non-appealable judgment has been entered. If all or a portion of the damage award against SS/L is ultimately upheld on appeal, we currently intend to fund our indemnification obligation through one or a combination of the following: cash on hand, proceeds from a strategic transaction (if any), a rights offering or other equity financing and debt financing.
In September 2013, ViaSat filed an additional complaint against SS/L in the United States District Court for the Southern District of California alleging, among other things, that SS/L directly infringed, and induced and encouraged infringement of, certain newly issued ViaSat patents not asserted in the 2012 ViaSat Suit in connection with the manufacture of satellites by SS/L for customers other than ViaSat. ViaSat’s additional complaint seeks, among other things, damages (including treble damages) in amounts to be determined at trial and to enjoin SS/L from further infringement of the ViaSat patents. The complaint did not name Loral as a defendant. MDA has asserted that Loral is obligated to defend and indemnify SS/L with respect to the additional litigation under the Purchase Agreement on the same terms and conditions as Loral’s defense and indemnification of SS/L in the 2012 ViaSat Suit. Loral has rejected MDA’s assertion that it is obligated to defend and indemnify SS/L on the basis that the additional lawsuit does not fall within its defense and indemnification obligations under the Purchase Agreement. SS/L is defending the additional lawsuit. The parties have agreed, however, to defer determination of whether Loral is obligated to defend and indemnify SS/L for the additional lawsuit until the earlier of 30 days following judgment or settlement of either of the ViaSat actions and October 25, 2016. There can be no assurance that a dispute will not arise as to whether Loral is obligated to defend and indemnify SS/L for the additional ViaSat lawsuit or if such a dispute were to arise that Loral would prevail. If a dispute arose and MDA prevailed, Loral’s indemnification liability for damages in the additional lawsuit would arise only after entry of a final non-appealable judgment and, following a change of control of Loral, would be subject to the $200 million cap referred to above, such that Loral’s total indemnification liability following a change of control for both the 2012 ViaSat Suit and the additional lawsuit could not exceed $200 million.
Other Litigation
Other than the litigation with ViaSat discussed above, we are not currently subject to any other legal proceedings that, if decided adversely, could have a material adverse effect on our financial position or results of operations. In the future, however, we may become subject to other legal proceedings and claims, either asserted or unasserted, that may arise in the ordinary course of business.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Related Party Transactions
MHR Fund Management LLC
Mark H. Rachesky, managing principal of MHR Fund Management LLC (“MHR”), and Hal Goldstein, a former managing principal of MHR, are members of Loral’s board of directors.
Various funds affiliated with MHR and Dr. Rachesky held, as of June 30, 2014 and December 31, 2013, approximately 38.0% of the outstanding voting common stock and as of June 30, 2014 and December 31, 2013 had a combined ownership of outstanding voting and non-voting common stock of Loral of 57.1%.
Transactions with Affiliates
Telesat
As described in Note 5, we own 62.8% of Telesat and account for our ownership interest under the equity method of accounting.
In connection with the acquisition of our ownership interest in Telesat (which we refer to as the Telesat transaction), Loral and certain of its subsidiaries, our Canadian co-owner, PSP and one of its subsidiaries, Telesat Holdco and certain of its subsidiaries, including Telesat, and MHR entered into a Shareholders Agreement (the “Shareholders Agreement”). The Shareholders Agreement provides for, among other things, the manner in which the affairs of Telesat Holdco and its subsidiaries will be conducted and the relationships among the parties thereto and future shareholders of Telesat Holdco. The Shareholders Agreement also contains an agreement by Loral not to engage in a competing satellite communications business and agreements by the parties to the Shareholders Agreement not to solicit employees of Telesat Holdco or any of its subsidiaries. Additionally, the Shareholders Agreement details the matters requiring the approval of the shareholders of Telesat Holdco (including veto rights for Loral over certain extraordinary actions) and provides for preemptive rights for certain shareholders upon the issuance of certain capital shares of Telesat Holdco. The Shareholders Agreement also (i) restricts the ability of holders of certain shares of Telesat Holdco to transfer such shares unless certain conditions are met or approval of the transfer is granted by the directors of Telesat Holdco, (ii) provides for a right of first offer to certain Telesat Holdco shareholders if a holder of equity shares of Telesat Holdco wishes to sell any such shares to a third party and (iii) provides for, in certain circumstances, tag-along rights in favor of shareholders that are not affiliated with Loral if Loral sells equity shares and drag-along rights in favor of Loral in case Loral or its affiliate enters into an agreement to sell all of its Telesat Holdco equity securities. In addition, the Shareholders Agreement provides for either PSP or Loral to initiate the process of conducting an initial public offering of the equity shares of Telesat Holdco. There can be no assurance as to whether, when or on what terms an initial public offering of Telesat Holdco equity may occur.
Under the Shareholders Agreement, in the event that, except in certain limited circumstances, either (i) ownership or control, directly or indirectly, by Dr. Rachesky of Loral’s voting stock falls below certain levels other than in connection with certain specified circumstances, including an acquisition by a Strategic Competitor (as defined in the Shareholders Agreement) or (ii) there is a change in the composition of a majority of the members of the Loral Board of Directors over a consecutive two-year period without the approval of the incumbent directors, Loral will lose its veto rights relating to certain extraordinary actions by Telesat Holdco and its subsidiaries. In addition, after either of these events, PSP will have certain rights to enable it to exit from its investment in Telesat Holdco, including a right to cause Telesat Holdco to conduct an initial public offering in which PSP’s shares would be the first shares offered or, if no such offering has occurred within one year due to a lack of cooperation from Loral or Telesat Holdco, to cause the sale of Telesat Holdco and to drag along the other shareholders in such sale, subject to Loral’s right to call PSP’s shares at fair market value.
The Shareholders Agreement provides for a board of directors of each of Telesat Holdco and certain of its subsidiaries, including Telesat, consisting of ten directors, three nominated by Loral, three nominated by PSP and four independent directors to be selected by a nominating committee comprised of one PSP nominee, one nominee of Loral and one of the independent directors then in office. Each party to the Shareholders Agreement is obligated to vote all of its Telesat Holdco shares for the election of the directors nominated by the nominating committee. Pursuant to action by the board of directors taken on October 31, 2007, Dr. Rachesky, who is non-executive Chairman of the Board of Directors of Loral, was appointed non-executive Chairman of the Board of Directors of Telesat Holdco and certain of its subsidiaries, including Telesat. In addition, Michael B. Targoff, Loral’s Vice Chairman, serves on the board of directors of Telesat Holdco and certain of its subsidiaries, including Telesat.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 31, 2007, Loral and Telesat entered into a consulting services agreement (the “Consulting Agreement”). Pursuant to the terms of the Consulting Agreement, Loral provides to Telesat certain non-exclusive consulting services in relation to the business of Loral Skynet which was transferred to Telesat as part of the Telesat transaction as well as with respect to certain aspects of the satellite communications business of Telesat. The Consulting Agreement has a term of seven years with an automatic renewal for an additional seven year term if Loral is not then in material default under the Shareholders Agreement. Upon expiration of the initial term in October 2014, we expect the Consulting Agreement to be automatically renewed for the additional seven year term. In exchange for Loral’s services under the Consulting Agreement, Telesat pays Loral an annual fee of $5.0 million, payable quarterly in arrears on the last day of March, June, September and December of each year during the term of the Consulting Agreement. If the terms of Telesat’s bank or bridge facilities or certain other debt obligations prevent Telesat from paying such fees in cash, Telesat may issue junior subordinated promissory notes to Loral in the amount of such payment, with interest on such promissory notes payable at the rate of 7% per annum, compounded quarterly, from the date of issue of such promissory note to the date of payment thereof. Our general and administrative expenses are net of income related to the Consulting Agreement of $1.25 million for each of the three month periods ended June 30, 2014 and 2013 and $2.5 million for each of the six month periods ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, Loral received payments in cash from Telesat, net of withholding taxes, of $2.4 million and $3.8 million, respectively, for consulting fees and interest. The payments received by Loral from Telesat for the six months ended June 30, 2013 included redemption of $1.3 million of notes receivable. These amounts were not allowed to be paid in cash previously because Telesat did not meet the leverage ratio required for cash payment under the indenture for its 12.5% senior subordinated notes due November 1, 2017. These notes were redeemed in May 2013. We had no notes receivable from Telesat as of June 30, 2014 and December 31, 2013 related to the Consulting Agreement.
The Telesat Indemnification includes certain tax disputes currently under review in various jurisdictions including Brazil. The Brazilian tax authorities challenged Loral Skynet’s historical characterization of its revenue generated in Brazil for the years 2003 to 2006. Telesat received and challenged, on Loral Skynet’s behalf, tax assessments from Brazil totaling approximately $7 million. The Company believes that Loral Skynet’s filing position will ultimately be sustained requiring no payment under the Telesat Indemnification. In addition, the tax authority in Hong Kong had previously challenged Loral Skynet’s and Telesat’s offshore claim for exempt income for the years 1999 to 2009, issuing assessments which required Loral Skynet to deposit approximately $6.5 million of taxes in 2006 and 2007 in order to retain its right to appeal. During the first quarter of 2014, Loral’s portion of this tax liability in Hong Kong and various other claims under the Telesat Indemnification were settled for approximately $1.1 million resulting in a tax recovery of $5.4 million which was received from Telesat in April 2014. As of June 30, 2014 and December 31, 2013, we had recognized a net receivable from Telesat of nil and $0.5 million, respectively, representing our estimate of the probable outcome of all tax matters under the Telesat Indemnification. The receivable as of December 31, 2013 was included in the condensed consolidated balance sheet as other assets of $2.6 million and long-term liabilities of $2.1 million. There can be no assurance that future claims under the Telesat Indemnification will be ultimately settled for the net amount recorded as of June 30, 2014.
Loral, along with Telesat Holdco, Telesat, PSP and 4440480 Canada Inc., an indirect wholly-owned subsidiary of Loral (the “Special Purchaser”), entered into grant agreements (the “Grant Agreements”) with certain executives of Telesat (each, a “Participant” and collectively, the “Participants”). Each of the Participants was, at the time, an executive of Telesat.
The Grant Agreements confirm grants of Telesat Holdco stock options (including tandem SAR rights) to the Participants and provide for certain rights, obligations and restrictions related to such stock options, which include, among other things: (w) the possible obligation of the Special Purchaser to purchase the shares in the place of Telesat Holdco should Telesat Holdco be prohibited by applicable law or under the terms of any credit agreement applicable to Telesat Holdco from purchasing such shares, or otherwise default on such purchase obligation, pursuant to the terms of the Grant Agreements; and (x) the obligation of the Special Purchaser to purchase shares upon exercise by Telesat Holdco of its call right under Telesat Holdco's Management Stock Incentive Plan in the event of a Participant’s termination of employment; and, in the case of certain executives, (y) the right of each such Participant to require the Special Purchaser or Loral to purchase a portion of the shares in Telesat Holdco owned by him in the event of exercise after termination of employment to cover taxes that are greater than the minimum withholding amount; and (z) the right of each such Participant to require Telesat Holdco to cause the Special Purchaser or Loral to purchase a portion of the shares in Telesat Holdco owned by him, or that are issuable to him under Telesat Holdco's Management Stock Incentive Plan at the relevant time, in the event that more than 90% of Loral's common stock is acquired by an unaffiliated third party that does not also purchase all of PSP's and its affiliates' interest in Telesat Holdco.
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LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Grant Agreements further provide that, in the event the Special Purchaser is required to purchase shares, such shares, together with the obligation to pay for such shares, shall be transferred to a subsidiary of the Special Purchaser, which subsidiary shall be wound up into Telesat Holdco, with Telesat Holdco agreeing to the acquisition of such subsidiary by Telesat Holdco from the Special Purchaser for nominal consideration and with the purchase price for the shares being paid by Telesat Holdco within ten (10) business days after completion of the winding-up of such subsidiary into Telesat Holdco.
ViaSat/Telesat
In connection with an agreement entered into between SS/L and ViaSat for the construction by SS/L for ViaSat of a high capacity broadband satellite called ViaSat-1, on January 11, 2008, we entered into certain agreements, pursuant to which we invested in the Canadian coverage portion of the ViaSat-1 satellite. Until his resignation in February 2012, Michael B. Targoff served, and another Loral director currently serves, as a member of the ViaSat Board of Directors.
On April 11, 2011, Loral assigned to Telesat and Telesat assumed from Loral all of Loral’s rights and obligations with respect to the ViaSat-1 satellite payload providing coverage into Canada and all related agreements. Loral also assigned to Telesat and Telesat assumed Loral’s 15-year contract with Xplornet Communications, Inc. (“Xplornet”) (formerly known as Barrett Xplore Inc.) for delivery of high throughput satellite Ka-band capacity and gateway services for broadband services in Canada. In connection with the assignments, Loral is entitled to receive one-half of any net revenue earned by Telesat in connection with the leasing of certain supplemental capacity on the payload to its customers during the first four years after the commencement of service using the supplemental capacity. Under this arrangement, we earned approximately $0.3 million for each of the three month periods ended June 30, 2014 and 2013, and $0.5 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively. We had a receivable from Telesat of $0.3 million as of June 30, 2014 and December 31, 2013 related to this arrangement.
Other
As described in Note 5, we own 56% of XTAR, a joint venture between Loral and Hisdesat and account for our investment in XTAR under the equity method of accounting. SS/L constructed XTAR’s satellite, which was successfully launched in February 2005. XTAR and Loral have entered into a management agreement whereby Loral provides general and specific services of a technical, financial and administrative nature to XTAR. For the services provided by Loral, XTAR, until December 31, 2013, was charged a quarterly management fee equal to 3.7% of XTAR’s quarterly gross revenues. Amounts due to Loral primarily due to the management agreement as of June 30, 2014 and December 31, 2013 were $6.8 million and $6.9 million, respectively. Beginning in 2008, Loral and XTAR agreed to defer amounts owed to Loral under this agreement, and XTAR has agreed that its excess cash balance (as defined), will be applied at least quarterly towards repayment of receivables owed to Loral, as well as to Hisdesat and Telesat. No cash was received under this agreement for the six months ended June 30, 2014 and 2013, and we had a full allowance against these receivables as of June 30, 2014 and 2013. Loral and Hisdesat have agreed to waive future management fees for an indefinite period starting January 1, 2014.
Consulting Agreement
On December 14, 2012, Loral entered into a consulting agreement with Michael B. Targoff, Vice Chairman of the Company and former Chief Executive Officer and President. Pursuant to this agreement, Mr. Targoff is engaged as a part-time consultant to the Board to assist the Board with respect to the oversight of strategic matters relating to Telesat and XTAR and the ViaSat Suit. Under the agreement, Mr. Targoff receives consulting fees of $120,000 per month before deduction of certain expenses of $17,000 per month for which he reimburses the Company. For the three and six months ended June 30, 2014 and 2013, Mr. Targoff earned $360,000 (before his expense reimbursement to Loral of $51,000) and $720,000 (before his expense reimbursement to Loral of $102,000), respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements (the “financial statements”) included in Item 1 and our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.
INDEX
Topic | Location | |||
Overview | Page 26 | |||
Consolidated Operating Results | Page 28 | |||
Liquidity and Capital Resources: | ||||
Loral | Page 34 | |||
Telesat | Page 37 | |||
Contractual Obligations | Page 39 | |||
Statement of Cash Flows | Page 40 | |||
Affiliate Matters | Page 41 | |||
Commitments and Contingencies | Page 41 | |||
Other Matters | Page 41 |
Loral Space & Communications Inc., a Delaware corporation, together with its subsidiaries (“Loral,” the “Company,” “we,” “our,” and “us”) is a leading satellite communications company engaged, through our ownership interests in affiliates, in satellite-based communications services.
Disclosure Regarding Forward-Looking Statements
Except for the historical information contained in the following discussion and analysis, the matters discussed below are not historical facts, but are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we or our representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts. These forward-looking statements can be identified by the use of words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should,” “anticipates,” “estimates,” “project,” “intend” or “outlook” or other variations of these words. These statements, including without limitation, those relating to Telesat, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or quantify. Actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond our control. For a detailed discussion of these and other factors and conditions, please refer to the Commitments and Contingencies section below and to our other periodic reports filed with the Securities and Exchange Commission (“SEC”). We operate in an industry sector in which the value of securities may be volatile and may be influenced by economic and other factors beyond our control. We undertake no obligation to update any forward-looking statements.
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Business
Loral has one operating segment consisting of satellite based communications services. Loral participates in satellite services operations through its ownership interest in Telesat Holdings Inc. (“Telesat Holdco”) which owns Telesat Canada (“Telesat”), a leading global fixed satellite services operator, with facilities around the world. Telesat provides its satellite and communication services from a fleet of satellites that occupy Canadian and other orbital locations.
Loral holds a 62.8% economic interest and a 32.7% voting interest in Telesat Holdco, the world’s fourth largest satellite operator with approximately $4.4 billion of backlog as of June 30, 2014.
At June 30, 2014, Telesat provided satellite services to customers from its fleet of 14 in-orbit satellites. In addition, Telesat owns the Canadian payload on the ViaSat-1 satellite and has another satellite, Telstar 12 VANTAGE, under construction.
The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once the investment in a satellite is made, the incremental costs to maintain and operate the satellite are relatively low over the life of the satellite, with the exception of in-orbit insurance. Telesat has been able to generate a large contracted revenue backlog by entering into long-term contracts with some of its customers for all or substantially all of a satellite’s life. Historically, this has resulted in revenue from the satellite services business being fairly predictable.
Telesat’s commitment to providing strong customer service and its focus on innovation and technical expertise has allowed it to successfully build its business to date. Building on its existing contractual revenue backlog, Telesat’s focus is on taking disciplined steps to grow its core business and sell newly launched and existing in-orbit satellite services, and, in a disciplined manner, use the cash flow generated by existing business and contracted expansion satellites to strengthen the business.
Telesat believes its satellite fleet offers a strong combination of existing revenue backlog and a strong foundation upon which it will seek to continue to grow its revenue and cash flows. The growth is expected to come from satellite services using the available capacity on its existing fleet of in-orbit satellites and its Telstar 12 VANTAGE satellite, which is expected to be launched in late 2015.
Telesat believes that it is well-positioned to serve its customers and the markets in which it participates. Telesat actively pursues opportunities to develop new satellites, particularly in conjunction with current or prospective customers who will commit to long term service agreements prior to the time the satellite construction contract is signed. Although Telesat regularly pursues opportunities to develop new satellites, it does not procure additional or replacement satellites until it believes there is a demonstrated need and a sound business plan for such satellite capacity.
Telesat anticipates that the relatively fixed cost nature of its business, combined with increasing demand for satellite services, will produce growth in operating income and cash flow.
For the remainder of 2014, Telesat will remain focused on: increasing utilization on its existing satellites; the construction of Telstar 12 VANTAGE; identifying and pursuing opportunities to expand its satellite fleet; and maintaining cost and operating discipline.
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations. For the six months ended June 30, 2014, approximately 50% of Telesat’s revenues and a substantial portion of its expenses, indebtedness and capital expenditures were denominated in U.S. dollars. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated debt financing. As of June 30, 2014, Telesat’s U.S. dollar denominated debt totaled $2.6 billion. As of June 30, 2014, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s net income by approximately $127 million. This analysis assumes all other variables, in particular interest rates, remain constant.
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Sale of SS/L
On November 2, 2012, Loral completed the sale (the “Sale”) of its wholly-owned subsidiary, Space Systems/Loral, LLC (formerly known as Space Systems/Loral, Inc. (“SS/L”)), to MDA Communications Holdings, Inc. (“MDA Holdings”), a subsidiary of MacDonald, Dettwiler and Associates Ltd. (“MDA”). Pursuant to the purchase agreement (the “Purchase Agreement”), dated as of June 26, 2012, as amended on October 30, 2012, by and among Loral, SS/L, MDA and MDA Holdings, in a series of transactions, Loral received total cash payments of $967.9 million plus, for the sale of certain real estate used in connection with SS/L’s business, a three-year promissory note in the principal amount of $101 million (the “Land Note”). Transaction costs related to the Sale were $35.2 million. Subsequent to the closing of the Sale and pursuant to the Purchase Agreement, Loral, in December 2012, paid MDA $6.5 million as a result of the resolution of a contingency.
Under the terms of the Purchase Agreement, Loral has retained control and assumed the defense of the lawsuit (the “ViaSat Suit”) brought in 2012 by ViaSat, Inc. (“ViaSat”) against SS/L and is obligated to indemnify SS/L for certain damages in that lawsuit, after a final non-appealable judgment has been entered. In April 2014, the jury in the trial of the ViaSat Suit found that SS/L was liable for patent infringement and breach of contract and awarded ViaSat damages against SS/L of $283 million. Under the terms of the Purchase Agreement, following a change of control of Loral, the indemnification liability of Loral for damages in the ViaSat Suit is subject to a $200 million cap. See Liquidity and Capital Resources – Loral – Risks to Cash Flow below for more information regarding the ViaSat Suit. In addition, Loral is obligated to indemnify SS/L from liabilities with respect to certain pre-closing taxes.
The Land Note, originally issued at closing, provided for interest at the rate of 1% per annum with amortization in three equal annual installments on each March 31, commencing March 31, 2013. The Land Note was amended as described below and is backed by a letter of guarantee from Royal Bank of Canada.
On March 28, 2013, Loral and MDA amended the Purchase Agreement to modify SS/L’s capped cost sharing obligations related to Loral’s indemnification of litigation costs and litigation damages in the ViaSat Suit and also amended the Land Note to defer to March 31, 2014 the due date of the principal payment from MDA to Loral of $33.7 million due originally on March 31, 2013 with an increase in the interest rate applicable to this tranche of the Land Note from 1.0% to 1.5% effective as of April 1, 2013. Loral received the principal payment of $67.3 million from MDA on March 31, 2014 under the amended Land Note.
General
Since the Sale, Loral’s principal asset continues to be its majority ownership interest in Telesat. With the goal of maximizing shareholder value, we have been engaged in a process to explore potential strategic transactions involving the possible monetization of Loral’s interest in Telesat. The exact structure of any such transaction has not yet been determined. As currently contemplated, such a transaction would be accomplished through a disposition of Loral itself and would likely require the negotiation of a new shareholders agreement between the potential acquiror of Loral and our Canadian co-owner, Public Sector Pension Investment Board (“PSP”). In connection with this process, we received non-binding indications of interest for the acquisition of Loral, but we, the potential acquiror with the highest bid and PSP have not been able to reach an agreement on the terms of a definitive transaction. The time frame specified by PSP to achieve closure on the framework for the agreement has lapsed; we are, however, continuing to explore ways to achieve a definitive transaction with PSP and the potential acquiror. There can be no assurance as to whether PSP or the potential acquiror will continue to pursue a transaction, or when or on what terms a strategic transaction involving Telesat or Loral may occur, or that any particular economic, tax, structural or other objectives or benefits with respect to any transaction involving Telesat or Loral’s interest therein will be achieved.
Loral may, from time to time, explore and evaluate other possible strategic transactions and alliances which may include joint ventures and strategic relationships as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of these opportunities, additional funds are likely to be required. There can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to obtain the necessary financing for transactions that require additional funds on favorable terms, if at all.
In connection with the acquisition of our ownership interest in Telesat in 2007, Loral has agreed that, subject to certain exceptions described in Telesat’s shareholders agreement, for so long as Loral has an interest in Telesat, it will not compete in the business of leasing, selling or otherwise furnishing fixed satellite service, broadcast satellite service or audio and video broadcast direct to home service using transponder capacity in the C-band, Ku-band and Ka-band (including in each case extended band) frequencies and the business of providing end-to-end data solutions on networks comprised of earth terminals, space segment, and, where appropriate, networking hubs.
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Consolidated Operating Results
See Critical Accounting Matters in our latest Annual Report on Form 10-K filed with the SEC and Note 2 to the financial statements.
Changes in Critical Accounting Policies — There have been no changes in our critical accounting policies during the six months ended June 30, 2014.
Three Months Ended June 30, 2014 Compared With Three Months Ended June 30, 2013
The following compares our consolidated results for the three months ended June 30, 2014 and 2013 as presented in our financial statements:
General and Administrative Expenses
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
General and administrative expenses | $ | 1,336 | $ | 3,361 |
General and administrative expenses decreased by $2.0 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily from a decrease in pension expense of $1.5 million due to accelerated amortization in 2013 as a result of the termination of our supplemental executive retirement plan.
Interest and Investment Income
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Interest and investment income | $ | 110 | $ | 343 |
Interest and investment income for the three months ended June 30, 2014 and 2013 is primarily comprised of interest on the Land Note. The decrease was primarily the result of the $67 million principal payment received on March 31, 2014.
Other Expense
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Other expense | $ | 651 | $ | 341 |
Other expense for the three months ended June 30, 2014 and 2013 was related to strategic initiatives.
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Income Tax Provision
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Income tax provision | $ | 9,480 | $ | 2,170 |
For the three months ended June 30, our income tax provision is summarized as follows: (i) for 2014, we recorded a current tax benefit of $0.5 million (which included a benefit of $0.7 million to reduce our liability for uncertain tax positions (“UTPs”)) and a deferred tax provision of $10.0 million (which included a provision of $0.1 million for UTPs), resulting in a total provision of $9.5 million on a pre-tax loss from continuing operations of $1.9 million and (ii) for 2013, we recorded a current tax benefit of $7.1 million (which included a provision of $0.2 million to increase our liability for UTPs) and a deferred tax provision of $9.3 million (which included a benefit of $0.1 million for UTPs), resulting in a total provision of $2.2 million on a pre-tax loss from continuing operations of $3.4 million.
Our income tax provision for each period is computed by applying an expected effective annual tax rate against the pre-tax loss for the six months ended June 30, 2014 and 2013 (after adjusting for certain tax items that are discrete to each period) less the provision recorded for the three months ended March 31, 2014 and 2013. The projected income tax provision for the full year used in the computation of our expected effective annual tax rate includes tax expense on the projected equity in net income of Telesat, which is included on the condensed consolidated statements of operations below the line for income tax provision. As a result, our statements of operations for the three months ended June 30, 2014 and 2013 include a tax provision rather than a tax benefit on the pretax loss.
At June 30, 2014, income taxes receivable on our condensed consolidated balance sheet included $12.8 million from the carryback of our tax loss from 2013 against taxes previously paid for 2012. We expect to receive this tax refund in 2014.
Subsequent to the Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, which currently has a nominal tax basis, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
Equity in Net Income (Loss) of Affiliates
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Telesat Holdings Inc. | $ | 66,150 | $ | 718 | ||||
XTAR, LLC | (1,787 | ) | (1,736 | ) | ||||
Other | — | 1,150 | ||||||
$ | 64,363 | $ | 132 |
Loral’s equity in net income of Telesat is based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. The amortization of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities acquired by Telesat in 2007 is proportionately eliminated in determining our share of the net income of Telesat. Our equity in net income of Telesat also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat, on satellites we constructed for Telesat while we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets.
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Summary financial information for Telesat in accordance with U.S. GAAP and in Canadian dollars (“CAD”) and U.S. dollars (“$”) for the three months ended June 30, 2014 and 2013 follows (in thousands):
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In Canadian dollars) | (In U.S. dollars) | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||
Revenues | 225,395 | 214,308 | 205,790 | 210,038 | ||||||||||||
Operating expenses | (42,982 | ) | (45,103 | ) | (39,245 | ) | (44,174 | ) | ||||||||
Depreciation, amortization and stock-based compensation | (63,824 | ) | (64,073 | ) | (58,277 | ) | (62,845 | ) | ||||||||
Loss on disposition of long lived assets | (3 | ) | (2,033 | ) | (3 | ) | (2,010 | ) | ||||||||
Operating income | 118,586 | 103,099 | 108,265 | 101,009 | ||||||||||||
Interest expense | (52,023 | ) | (52,162 | ) | (47,501 | ) | (51,077 | ) | ||||||||
Foreign exchange gain (loss) | 101,308 | (100,173 | ) | 92,665 | (98,389 | ) | ||||||||||
(Loss) gain on financial instruments | (33,857 | ) | 60,798 | (30,979 | ) | 59,755 | ||||||||||
Other income | 1,562 | 10,457 | 1,427 | 10,453 | ||||||||||||
Income tax provision | (19,724 | ) | (19,458 | ) | (18,007 | ) | (19,151 | ) | ||||||||
Net income | 115,852 | 2,561 | 105,870 | 2,600 | ||||||||||||
Average exchange rate for translating Canadian dollars to U.S. dollars ( 1 U.S. dollar equals) | 1.0953 | 1.0203 |
Telesat’s revenue decreased by $4 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 due primarily to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue and a decrease in revenue earned on Telesat’s Nimiq 2 satellite as the satellite was returned by Telesat’s customer in the third quarter of 2013. These revenue decreases were partially offset by increased revenue on the Anik G1 satellite which entered commercial service in May 2013. Telesat’s revenue excluding foreign exchange impact would have increased by $4 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Telesat’s operating income increased by $7 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 primarily due to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, losses recorded in 2013 on the disposition of long-lived assets, a decrease in share-based compensation expense related to stock options granted during the second quarter of 2013, lower in-orbit insurance expenses and higher investment tax credits earned on eligible research and development expenses. These increases to operating income were partially offset by the revenue decrease described above and increased depreciation on Telesat’s Anik G1 satellite which entered commercial service in May 2013. Telesat’s operating income excluding foreign exchange impact would have increased by $8 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
The equity in losses of XTAR, LLC (“XTAR”), our 56% owned joint venture, represent our share of XTAR losses incurred in connection with its operations.
During the three months ended June 30, 2013, we recorded a gain of $1.1 million related to the sale of our ownership interests in an affiliate with no carrying value.
Income (Loss) from Discontinued Operations, net of taxes
Adjustments to amounts previously reported in discontinued operations that are directly related to the Sale are classified as discontinued operations in the statements of operations for the three months ended June 30, 2014 and 2013.
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Six Months Ended June 30, 2014 Compared With Six Months Ended June 30, 2013
The following compares our consolidated results for the six months ended June 30, 2014 and 2013 as presented in our financial statements:
General and Administrative Expenses
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
General and administrative expenses | $ | 2,676 | $ | 7,107 |
General and administrative expenses decreased by $4.4 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily from a decrease in pension expense of $3.0 million due to accelerated amortization in 2013 as a result of the termination of our supplemental executive retirement plan, $0.6 million reduction in compensation expense resulting from the restructuring of our corporate office functions and a $0.4 million decrease in expenses related to stock-based compensation.
Interest and Investment Income
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Interest and investment income | $ | 401 | $ | 632 |
Interest and investment income for the six months ended June 30, 2014 and 2013 is primarily comprised of interest on the Land Note. The decrease was primarily the result of the $67 million principal payment received on March 31, 2014.
Other Expense
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Other expense | $ | 1,576 | $ | 371 |
Other expense for the six months ended June 30, 2014 and 2013 was related to strategic initiatives.
Income Tax Provision
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Income tax provision | $ | 20,152 | $ | 4,985 |
For the six months ended June 30, our income tax provision is summarized as follows: (i) for 2014, we recorded a current tax provision of $0.8 million (which included a benefit of $0.4 million to reduce our liability for UTPs) and a deferred tax provision of $19.4 million, resulting in a total provision of $20.2 million on a pre-tax loss from continuing operations of $3.9 million and (ii) for 2013, we recorded a current tax benefit of $6.3 million (which included a provision of $0.7 million to increase our liability for UTPs) and a deferred tax provision of $11.3 million (which included a benefit of $0.2 million for UTPs), resulting in a total provision of $5.0 million on a pre-tax loss from continuing operations of $6.9 million.
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Our income tax provision for each period is computed by applying an expected effective annual tax rate against the pre-tax loss for the six months ended June 30, 2014 and 2013 (after adjusting for certain tax items that are discrete to each period). The projected income tax provision for the full year used in the computation of our expected effective annual tax rate includes tax expense on the projected equity in net income of Telesat, which is included on the condensed consolidated statements of operations below the line for income tax provision. As a result, our statements of operations for the six months ended June 30, 2014 and 2013 include a tax provision rather than a tax benefit on the pretax loss.
At June 30, 2014, income taxes receivable on our condensed consolidated balance sheet included $12.8 million from the carryback of our tax loss from 2013 against taxes previously paid for 2012. We expect to receive this tax refund in 2014.
Subsequent to the Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, which currently has a nominal tax basis, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
Equity in Net Income (Loss) of Affiliates
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Telesat Holdings Inc. | $ | 65,466 | $ | — | ||||
XTAR, LLC | (3,272 | ) | (3,499 | ) | ||||
Other | — | (3,650 | ) | |||||
$ | 62,194 | $ | (7,149 | ) |
The following is a reconciliation of the changes in our investment in Telesat for the six months ended June 30, 2014:
Six Months Ended June 30, 2014 | ||||
(In thousands) | ||||
Opening Balance, January 1, 2014 | $ | 60,157 | ||
Equity in net income of Telesat | 66,092 | |||
Eliminations of affiliate transactions and related amortization | (626 | ) | ||
Settlement of tax indemnification | (4,963 | ) | ||
Proportionate share of Telesat other comprehensive income | 1,481 | |||
Ending balance, June 30, 2014 | $ | 122,141 |
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Summary financial information for Telesat in accordance with U.S. GAAP and in Canadian dollars (“CAD”) and U.S. dollars (“$”) for the six months ended June 30, 2014 and 2013 and as of June 30, 2014 and December 31, 2013 follows (in thousands):
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In Canadian dollars) | (In U.S. dollars) | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||
Revenues | 466,591 | 433,156 | 426,389 | 427,506 | ||||||||||||
Operating expenses | (87,078 | ) | (95,579 | ) | (79,575 | ) | (94,332 | ) | ||||||||
Depreciation, amortization and stock-based compensation | (127,765 | ) | (122,258 | ) | (116,758 | ) | (120,663 | ) | ||||||||
Loss on disposition of long lived assets | (68 | ) | (1,562 | ) | (62 | ) | (1,542 | ) | ||||||||
Operating income | 251,680 | 213,757 | 229,994 | 210,969 | ||||||||||||
Interest expense | (103,974 | ) | (112,236 | ) | (95,016 | ) | (110,772 | ) | ||||||||
Expense of refinancing | — | (20,225 | ) | — | (19,961 | ) | ||||||||||
Foreign exchange losses | (9,941 | ) | (170,959 | ) | (9,084 | ) | (168,729 | ) | ||||||||
Gains on financial instruments | 17,914 | 97,885 | 16,371 | 96,608 | ||||||||||||
Other income | 2,370 | 10,976 | 2,166 | 10,833 | ||||||||||||
Income tax provision | (42,848 | ) | (27,349 | ) | (39,156 | ) | (26,993 | ) | ||||||||
Net income (loss) | 115,201 | (8,151 | ) | 105,275 | (8,045 | ) | ||||||||||
Average exchange rate for translating Canadian dollars to U.S. dollars ( 1 U.S. dollar equals) | 1.0946 | 1.0135 |
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In Canadian dollars) | (In U.S. dollars) | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||
Current assets | 492,667 | 389,666 | 461,688 | 366,814 | ||||||||||||
Total assets | 5,257,035 | 5,236,967 | 4,926,469 | 4,929,838 | ||||||||||||
Current liabilities | 328,922 | 383,218 | 308,239 | 360,744 | ||||||||||||
Long-term debt, including current portion | 3,392,895 | 3,416,177 | 3,179,547 | 3,215,831 | ||||||||||||
Total liabilities | 4,445,873 | 4,547,602 | 4,166,313 | 4,280,902 | ||||||||||||
Shareholders’ equity | 811,162 | 689,365 | 760,156 | 648,936 | ||||||||||||
Period end exchange rate for translating Canadian dollars to U.S. dollars (1 U.S. dollar equals) | 1.0671 | 1.0623 |
Telesat’s revenue decreased by $1 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due primarily to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue, a decrease in revenue earned on Telesat’s Nimiq 2 satellite as the satellite was returned by Telesat’s customer in the third quarter of 2013 and lower equipment sales. These revenue decreases were partially offset by increased short-term services provided to another satellite operator, increased revenue on the Anik G1 satellite which entered commercial service in May 2013 and revenue from new consulting contracts. Telesat’s revenue excluding foreign exchange impact would have increased by $16 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.
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Telesat’s operating income increased by $19 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily due to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, lower cost of sales as a result of lower equipment sales, losses recorded in 2013 on the disposition of long-lived assets, lower in-orbit insurance expenses, higher investment tax credits earned on eligible research and development expenses and lower amortization of intangible assets. These increases to operating income were partially offset by increased depreciation on Telesat’s Anik G1 satellite which entered commercial service in May 2013 and the revenue decrease described above. Telesat’s operating income excluding foreign exchange impact would have increased by $23 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.
On March 28, 2013, Telesat announced the redemption of the outstanding 12.5% senior subordinated notes which took place on May 1, 2013. As a result, an expense of refinancing of $20 million was recorded for the six months ended June 30, 2013, representing the unamortized deferred financing costs and the redemption premium associated with the 12.5% senior subordinated notes.
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies other than Canadian dollars. Telesat’s main currency exposures as of June 30, 2014 lie in its U.S. dollar denominated cash and cash equivalents, accounts receivable, accounts payable and debt financing. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated debt financing. As of June 30, 2014, Telesat’s U.S. dollar denominated debt totaled $2.6 billion. As of June 30, 2014, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s net income by approximately $127 million. This analysis assumes all other variables, in particular interest rates, remain constant.
The equity in losses of XTAR, our 56% owned joint venture, represent our share of XTAR losses incurred in connection with its operations.
We regularly evaluate our investment in XTAR to determine whether there has been a decline in fair value that is other-than-temporary. We performed an impairment test for our investment in XTAR as of June 30, 2014, using XTAR’s most recent forecast, and concluded that our investment in XTAR was not impaired.
In connection with the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their respective interests in Globalstar do Brasil S.A. (“GdB”), the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for certain GdB pre-closing liabilities, primarily related to Brazilian taxes. As a result of an April 2013 adverse court decision in Brazil relating to a potential tax liability, an adverse outcome for which was previously believed to be remote, Loral recorded a loss contingency of $4.8 million in the first quarter of 2013. A payment of $3.7 million related to this loss contingency was made in the second quarter of 2013, and, in the third quarter of 2013, this loss was adjusted to $3.7 million, primarily due to a favorable court decision.
Loss from Discontinued Operations, net of tax
Adjustments to amounts previously reported in discontinued operations that are directly related to the Sale are classified as discontinued operations in the statements of operations for the six months ended June 30, 2014 and 2013.
Backlog
Telesat’s backlog as of June 30, 2014 and December 31, 2013 was $4.4 billion and $4.7 billion, respectively.
The decrease in Telesat’s backlog as of June 30, 2014 compared with December 31, 2013 is primarily due to revenues recognized.
Liquidity and Capital Resources
As described above, Loral’s principal asset is a 62.8% economic interest in Telesat. In addition, we have a 56% economic interest in XTAR and a note receivable of $33.7 million related to the Sale. The operations of Telesat and XTAR are not consolidated but are presented using the equity method of accounting.
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Loral has no debt. Telesat has third party debt with financial institutions. XTAR has no external debt other than to its LLC member, Hisdesat, for restructured lease payments on the Spainsat satellite. XTAR makes payments of $5 million per year to pay down the outstanding restructured lease balance. Loral has not provided a guarantee for the debt of Telesat or XTAR.
Cash is maintained at Loral, Telesat and XTAR to support the operating needs of each respective entity. The ability of Telesat to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants relating to its debt and its shareholder agreement. The ability of XTAR to pay dividends and management fees in cash to Loral is governed by its operating agreement.
Cash and Available Credit
At June 30, 2014, Loral had $74.1 million of cash and cash equivalents, a note receivable from MDA for $33.7 million and no debt. The Company’s cash and cash equivalents as of June 30, 2014 increased by $68.2 million from December 31, 2013 due primarily to a $67.3 million principal payment received from MDA under the Land Note related to the Sale and a $5.4 million tax indemnification recovery received from Telesat (see Note 15 to our condensed consolidated financial statements). A discussion of cash changes by activity is set forth in the sections, “Net Cash Used In Operating Activities,” “Net Cash Provided By Investing Activities” and “Net Cash Provided by (Used in) Financing Activities.”
Loral did not have a credit facility as of June 30, 2014 and December 31, 2013.
Cash Management
We have a cash management investment program that seeks a competitive return while maintaining a conservative risk profile. Our cash management investment policy establishes what we believe to be conservative guidelines relating to the investment of surplus cash. The policy allows us to invest in commercial paper, money market funds and other similar short term investments but does not permit us to engage in speculative or leveraged transactions, nor does it permit us to hold or issue financial instruments for trading purposes. The cash management investment policy was designed to preserve capital and safeguard principal, to meet all of our liquidity requirements and to provide a competitive rate of return for similar risk categories of investment. The policy addresses dealer qualifications, lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits, defines a maturity structure, requires all firms to safe keep securities on our behalf, requires certain mandatory reporting activity and discusses review of the portfolio. We operate the cash management investment program under the guidelines of our investment policy and continuously monitor the investments to avoid risks.
We currently invest our cash in several liquid Prime AAA money market funds. The dispersion across funds reduces the exposure of a default at one fund.
Liquidity
We believe that our cash and cash equivalents will be sufficient to fund projected expenditures for the next 12 months. We expect that the damage award against SS/L in the ViaSat Suit will not have a significant effect on Loral’s liquidity during the next 12 months. As described in Note 14 to the financial statements, in the event that Loral’s post-trial motions seeking judgment as a matter of law, or in the alternative, a new trial are denied and judgment is ultimately entered by the trial court, Loral intends to appeal the judgment on behalf of SS/L. Loral is obligated to indemnify SS/L for certain damages in the ViaSat Suit only after a final non-appealable judgment has been entered. If all or a portion of the damage award against SS/L is ultimately upheld on appeal, we currently intend to fund our indemnification obligation through one or a combination of the following: cash on hand, proceeds from a strategic transaction (if any), a rights offering or other equity financing and debt financing.
We expect that our major cash outlays for the next 12 months will include costs related to the continued defense of the ViaSat Suit, including expenses related to the post-trial motions and, if necessary, appeal, employee benefit programs, including a contribution to our qualified pension plan to reduce the unfunded obligation, and general corporate expenses. Offsetting these expenditures are the remaining Land Note receipt, the income sharing arrangement for certain Canadian transponders on the ViaSat-1 satellite and the receipt of income tax refunds.
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Risks to Cash Flow
In the fourth quarter of 2012, we sold our former subsidiary, SS/L, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement, we are obligated to indemnify MDA from (1) liabilities with respect to certain pre-closing taxes; and (2) certain litigation costs and litigation damages relating to the ViaSat Suit, subject to a $200 million cap in the event of a change of control of Loral. The amounts of certain indemnification claims relating to pre-closing taxes have not yet been determined. Where appropriate, we intend vigorously to contest the underlying tax assessment, but there can be no assurance that we will be successful. Although no assurance can be provided, we do not believe that these tax-related matters will have a material adverse effect on our financial position or results of operations.
In 2012, ViaSat sued SS/L and Loral in the United States District Court for the Southern District of California alleging various patent infringement and breach of contract claims. In April 2014, the jury in the trial of the ViaSat Suit returned a verdict against SS/L. The jury found that SS/L directly infringed the patents asserted by ViaSat in the case in connection with the manufacture of a satellite by SS/L for a customer other than ViaSat and also that SS/L breached certain agreements with ViaSat. Damages of $283 million were awarded against SS/L. The jury also found that Loral was not liable for either patent infringement or breach of contract. SS/L elected not to pursue its patent infringement counterclaim against ViaSat at the trial.
Under the terms of the Purchase Agreement, Loral has retained control and assumed the defense of the ViaSat Suit (the “Assumption of the Defense”) and is obligated to indemnify SS/L for certain damages arising out of the ViaSat Suit, after a final non-appealable judgment has been entered. The damages subject to indemnification include amounts awarded in such final and non-appealable order and costs to SS/L resulting from any injunction that may be granted such as remediation and modification costs with respect to satellites being constructed, subject to SS/L’s duty to use reasonable best efforts to mitigate to the fullest extent practicable the amount of any such damages. Under the terms of the Purchase Agreement, following a change of control of Loral, the indemnification liability of Loral for damages, including for costs arising from any possible injunction, in the ViaSat Suit is subject to a $200 million cap.
In June 2014, Loral, SS/L and ViaSat filed post-trial motions in the ViaSat Suit. A hearing on the post-trial motions is scheduled for August 7, 2014.
Loral and SS/L filed several joint post-trial motions seeking entry of a judgment by the trial court as a matter of law that the patents asserted by ViaSat in the ViaSat Suit are invalid. SS/L filed several post-trial motions seeking a judgment by the trial court as a matter of law that the jury’s damages award should be vacated in its totality or at the very least reduced and that SS/L did not infringe the asserted patents or breach any contracts with ViaSat. SS/L also filed a motion seeking a new trial.
ViaSat filed post-trial motions against SS/L seeking: an injunction to prevent the manufacture and sale by SS/L of additional satellites that are identical to or no more than colorably different from Hughes’ Jupiter-1 satellite found by the jury to infringe ViaSat’s patents and to enjoin the continued use and/or disclosure by SS/L of ViaSat’s contractually protected technologies; an award of pre- and post-judgment interest against SS/L, with pre-judgment interest asserted by ViaSat to be $41.1 million; and judgment by the trial court as a matter of law that SS/L infringed one of ViaSat’s patents through its manufacture and sale of satellites to a customer where the jury did not find infringement. Loral, by virtue of the Assumption of the Defense, intends vigorously to oppose the post-trial motions filed by ViaSat. ViaSat did not file any post-trial motions with respect to the jury’s finding that Loral was not liable for either patent infringement or breach of contract.
In the event that Loral’s and SS/L’s post-trial motions are denied, or if ViaSat’s post-trial motions are granted, and judgment is ultimately entered by the trial court against SS/L, Loral, by virtue of the Assumption of the Defense, intends to appeal the judgment on behalf of SS/L. Loral and SS/L have agreed to share equally the cost of any appeal bond that may be necessary to stay execution of the judgment against SS/L during the appeal. Because the amount of damages, if any, ultimately included in the judgment is not yet known, the cost of any necessary appeal bond cannot be determined at this time. If the court enters judgment against SS/L with no reduction in the damages awarded by the jury and also awards pre-judgment interest as sought by ViaSat, we expect that Loral’s share of the cost of the appeal bond could be up to approximately $400,000 per month during pendency of the appeal.
As a result of the uncertain outcome of the post-trial motions and appeal, if necessary, we have not determined that a loss is probable and have not recorded a liability as of June 30, 2014 related to the jury verdict in the ViaSat Suit. There can be no assurance that any of Loral’s or SS/L’s post-trial motions or appeals will be successful with respect to reversing the verdict, reducing all or a portion of the damages awarded against SS/L or obtaining a new trial. In addition, there can be no assurance that ViaSat will not be successful in obtaining an injunction against SS/L which may result in indemnifiable damages above and beyond the jury’s verdict and which may be material.
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In September 2013, ViaSat filed an additional complaint against SS/L in the United States District Court for the Southern District of California alleging, among other things, that SS/L directly infringed, and induced and encouraged infringement of, certain newly issued ViaSat patents not asserted in the 2012 ViaSat Suit in connection with the manufacture of satellites by SS/L for customers other than ViaSat. ViaSat’s additional complaint seeks, among other things, damages (including treble damages) in amounts to be determined at trial and to enjoin SS/L from further infringement of the ViaSat patents. The complaint did not name Loral as a defendant. MDA has asserted that Loral is obligated to defend and indemnify SS/L with respect to the additional litigation under the Purchase Agreement on the same terms and conditions as Loral’s defense and indemnification of SS/L in the 2012 ViaSat Suit. Loral has rejected MDA’s assertion that it is obligated to defend and indemnify SS/L on the basis that the additional lawsuit does not fall within its defense and indemnification obligations under the Purchase Agreement. SS/L is defending the additional lawsuit. The parties have agreed, however, to defer determination of whether Loral is obligated to defend and indemnify SS/L for the additional lawsuit until the earlier of 30 days following judgment or settlement of either of the ViaSat actions and October 25, 2016. There can be no assurance that a dispute will not arise as to whether Loral is obligated to defend and indemnify SS/L for the additional ViaSat lawsuit or if such a dispute were to arise that Loral would prevail. If a dispute arose and MDA prevailed, Loral’s indemnification liability for damages in the additional lawsuit would arise only after entry of a final non-appealable judgment and, following a change of control of Loral, would be subject to the $200 million cap referred to above, such that Loral’s total indemnification liability following a change of control for both the 2012 ViaSat Suit and the additional lawsuit could not exceed $200 million.
Cash and Available Credit
As of June 30, 2014, Telesat had CAD 401 million of cash and short-term investments as well as approximately CAD 140 million of borrowing availability under its revolving credit facility.
Cash Flows from Operating Activities
Cash generated from Telesat’s operating activities for the six months ended June 30, 2014 was CAD 177 million, a CAD 76 million decrease from the same period in the prior year. The decrease was primarily due to higher income taxes paid and the impact of changes in Telesat’s working capital.
Cash Flows used in Investing Activities
Cash used in Telesat’s investing activities for the six months ended June 30, 2014 was CAD 37 million which included CAD 31 million of cash outflows related to the on-going construction of Telstar 12 VANTAGE and CAD 6 million for other property and equipment. Cash used in Telesat’s investing activities for the six months ended June 30, 2013, was CAD 38 million. This consisted primarily of capital expenditures of CAD 34 million for the launch of Anik G1 in April 2013.
Cash Flows used in Financing Activities
Cash used in Telesat’s financing activities for the six months ended June 30, 2014 was CAD 38 million. This was primarily the result of mandatory principal payments made on its senior secured credit facilities, as well as satellite performance incentive payments. Cash used in Telesat’s financing activities for the six months ended June 30, 2013 was CAD 266 million. This was primarily the result of the redemption of Telesat’s 12.5% senior subordinated notes and the associated premiums paid for early redemption, as well as mandatory principal payments made on its senior secured credit facilities and satellite performance incentive payments.
Liquidity
A large portion of Telesat’s annual cash receipts are reasonably predictable because they are primarily derived from an existing backlog of long-term customer contracts and high contract renewal rates. Telesat believes its cash and short-term investments as of June 30, 2014, cash flow from operating activities and drawings on the available lines of credit under its senior secured credit facilities will be adequate to meet Telesat’s expected cash requirements for at least the next 12 months for activities in the normal course of business, including capital requirements and required interest and principal payments on debt.
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The construction of any satellite replacement or expansion program will require significant capital expenditures. Telesat may choose to invest in new satellites to further grow its business. Cash required for current and future satellite construction programs will be funded from some or all of the following: cash and short-term investments, cash flow from operating activities, cash flow from customer prepayments or through borrowings on available lines of credit under Telesat’s revolving credit facility. In addition, Telesat may sell certain satellite assets, and in accordance with the terms and conditions of Telesat’s senior secured credit facilities, reinvest the proceeds in replacement satellites or pay down indebtedness under Telesat’s senior secured credit facilities. Subject to market conditions and subject to compliance with the terms and conditions of its senior secured credit facilities and the financial leverage covenant tests therein, Telesat may also have the ability to obtain additional secured or unsecured financing to fund current or future satellite construction. Telesat’s ability to access these sources of funding, however, is not guaranteed and, therefore, Telesat may not be able to fully fund additional replacement or new satellite construction programs.
Debt
Telesat’s debt as of June 30, 2014 and December 31, 2013 was as follows:
June 30, | December 31, | |||||||||||
Maturity | Currency | 2014 | 2013 | |||||||||
(In CAD thousands) | ||||||||||||
Senior Secured Credit Facilities: | ||||||||||||
Revolving credit facility | March 28, 2017 | CAD or USD equivalent | — | — | ||||||||
Term Loan A | March 28, 2017 | CAD | 450,000 | 475,000 | ||||||||
Term Loan B - U.S. facility | March 28, 2019 | USD | 1,839,604 | 1,840,601 | ||||||||
Term Loan B - Canadian facility | March 28, 2019 | CAD | 138,250 | 138,950 | ||||||||
6.0% Senior notes | May 15, 2017 | USD | 960,390 | 956,070 | ||||||||
3,388,244 | 3,410,621 | |||||||||||
Less: Deferred financing costs, interest rate floors and prepayment options | (62,461 | ) | (68,755 | ) | ||||||||
Total debt under international financial reporting standards | 3,325,783 | 3,341,866 | ||||||||||
U.S. GAAP adjustments | 67,112 | 74,311 | ||||||||||
Total debt under U.S. GAAP | 3,392,895 | 3,416,177 | ||||||||||
Current portion | 71,739 | 71,641 | ||||||||||
Long term portion | 3,321,156 | 3,344,536 |
Senior Secured Credit Facilities
The obligations under the credit agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first priority security interest in the assets of Telesat and the guarantors. The credit agreement contains covenants that restrict the ability of Telesat and certain of its subsidiaries to take specified actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends, entering into sales-leaseback transactions, creating subsidiaries, repaying subordinated debt or amending organizational documents. The credit agreement also requires Telesat to comply with a maximum senior secured leverage ratio and contains customary affirmative covenants and events of default.
Each of the Telesat senior secured credit facilities is subject to mandatory principal repayment requirements. The maturity date for each of the Telesat senior secured credit facilities will be accelerated if Telesat’s existing 6.0% senior notes due in 2017 or certain refinancing thereof are not repurchased, redeemed, refinanced or deferred before the date that is 91 days prior to the maturity date of such notes.
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6.0% Senior Notes due May 15, 2017
The senior notes, in the amount of $900 million, bear interest at an annual rate of 6.0% and are due May 15, 2017. They include covenants or terms that restrict Telesat’s ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel its satellite insurance, (vi) effect mergers with another entity, and (vii) redeem the senior notes without penalty between May 15, 2014 and May 15, 2016, in each case subject to exceptions provided in the senior notes indenture.
As of June 30, 2014, Telesat was in compliance with the financial covenants of its senior secured credit facilities and the indenture governing its 6.0% senior notes.
Debt Service Cost
An estimate of interest expense is based upon assumptions of foreign exchange rates, LIBOR and Bankers Acceptance rates and the applicable margins of Telesat’s senior secured credit facilities and senior notes. Telesat’s interest expense for the year ending December 31, 2014 is expected to be approximately CAD 190 million.
Derivatives
Telesat uses interest rate and currency derivatives to manage its exposure to changes in interest rates and foreign exchange rates.
In order to manage its currency risk, Telesat has cross-currency basis swaps to synthetically convert $1.0 billion of future U.S. dollar denominated payment obligations to CAD 1.2 billion. These swaps mature on October 31, 2014. Any non-cash loss will remain unrealized until this contract is settled.
At June 30, 2014, Telesat had a series of five interest rate swaps to fix interest on CAD 1.5 billion of Canadian dollar denominated debt at a weighted average fixed rate of 2.63% (excluding applicable margins) and one interest rate swap to pay a fixed rate of 1.46% (excluding applicable margins) on CAD 300 million of U.S. dollar denominated debt. These contracts mature between October 31, 2014 and September 30, 2016.
Telesat also has embedded derivatives related to a prepayment option included in Telesat’s senior notes as well as interest rate floors included in its Canadian and U.S. term loan B facilities. The prepayment option on the senior notes will expire on its maturity date of May 15, 2017. The interest rate floors on the Canadian and U.S. term loan B facilities will expire on their maturity date of March 28, 2019.
Capital Expenditures
Telesat has entered into contracts for the construction and launch of the Telstar 12 VANTAGE satellite and other capital expenditures. The outstanding commitments relating to these capital expenditures were approximately CAD 150 million as of June 30, 2014. These expenditures may be funded from some or all of the following: cash and cash equivalents, cash flow from operating activities, cash flow from customer prepayments or through borrowings on available lines of credit under the revolving facility.
There have not been any significant changes to Loral’s contractual obligations as previously disclosed in our latest Annual Report on Form 10-K filed with the SEC.
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Net Cash Used in Operating Activities
Net cash used in operations was $4.7 million for the six months ended June 30, 2014.
Net cash used in operating activities by continuing operations was $5.6 million for the six months ended June 30, 2014, consisting primarily of a $4.4 million cash use attributable to income from continuing operations adjusted for non-cash operating items, a $1.6 million decrease in pension and other post retirement liabilities, a $0.4 million increase in other current assets and other assets and a $0.5 million decrease in long term liabilities, partially offset by a $1.1 million increase in taxes payable (net).
Net cash provided by operating activities from discontinued operations was $0.8 million for the six months ended June 30, 2014 consisting primarily of reimbursement by MDA of its $5.4 million final share of litigation costs related to the ViaSat Suit, partially offset by payment of $4.6 million of indemnified litigation costs related to the ViaSat Suit.
Net cash used in operations was $55.2 million for the six months ended June 30, 2013.
Net cash used in operating activities by continuing operations was $16.1 million for the six months ended June 30, 2013, consisting primarily of an increase in income taxes receivable of $13.0 million, a $6.8 million decrease in accrued expenses and other current liabilities of which $3.7 million relates to payment of a GdB indemnification liability and a $0.9 million decrease in pension and other postretirement liabilities, partially offset by $2.9 million from the loss from continuing operations adjusted for non-cash operating items and a $1.6 million decrease in other current assets and other assets.
Net cash used in operating activities by discontinued operations was $39.0 million for the three months ended June 30, 2013, consisting primarily of income tax payments of $35.1 million relating to the gain on the Sale and payment of $3.0 million of indemnification liabilities related to the Sale.
Net Cash Provided by Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2014 was $72.8 million.
Net cash provided by investing activities from continuing operations for the six months ended June 30, 2014 was $5.4 million consisting primarily of a tax indemnification recovery received from Telesat.
Net cash provided by investing activities from discontinued operations for the six months ended June 30, 2014 was $67.3 million consisting primarily of the receipt of principal under the Land Note.
Net cash provided by investing activities from continuing operations for the six months ended June 30, 2013 was $1.1 million relating to the proceeds from the sale of our ownership interests in an affiliate.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2014 was $0.2 million relating to excess tax benefits associated with stock-based compensation.
Net cash used in financing activities from continuing operations for the six months ended June 30, 2013 was $3.0 million which includes funding of $8.9 million of withholding taxes relating to stock-based compensation, partially offset by $5.9 million of excess tax benefits associated with stock-based compensation.
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Loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity method of accounting (see Note 5 to our condensed consolidated financial statements for further information on affiliate matters).
Our business and operations are subject to a number of significant risks, the most significant of which are summarized in Part II, Item 1A — Risk Factors and also in Note 14 to our condensed consolidated financial statements.
Recent Accounting Pronouncements
There are no accounting pronouncements that have been issued but not yet adopted that we believe will have a significant impact on our financial statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Loral
Foreign Currency
In the normal course of business, we are subject to the risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate exposure, the Company seeks to denominate its contracts in U.S. dollars. If we are unable to enter into a contract in U.S. dollars, we review our foreign exchange exposure and, where appropriate, derivatives are used to minimize the risk of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative purposes.
Interest
During the second quarter of 2014, our excess cash was invested in money market securities; we did not hold any other marketable securities.
Derivatives
As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of entering into contracts only with carefully selected major financial institutions based upon their credit ratings and other factors.
Loral had no derivative instruments as of June 30, 2014 and December 31, 2013.
Telesat
Foreign Exchange Risk
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies other than Canadian dollars. The most significant impact of variations in the exchange rate is on Telesat’s U.S. dollar denominated debt financing. As of June 30, 2014, Telesat’s U.S. dollar denominated debt totaled $2.6 billion. Telesat is also exposed to foreign currency risk on anticipated transactions, such as the costs of satellite construction, launch and acquisition.
Telesat’s main currency exposures as of June 30, 2014 lie in its U.S. dollar denominated cash and cash equivalents, trade and other receivables, trade and other payables, deferred satellite performance incentive payments and debt financing.
For the six months ended June 30, 2014, approximately 50% of Telesat’s revenues and a substantial portion of its expenses, indebtedness and capital expenditures were denominated in U.S. dollars. As a result, the volatility of U.S. currency may expose Telesat to foreign exchange risks.
As of June 30, 2014, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s net income by approximately $127 million. This analysis assumes that all other variables, in particular, interest rates, remain constant.
Interest Rate Risk
Telesat is exposed to interest rate risk on its cash and cash equivalents and its long-term debt, which is primarily variable-rate financing. Changes in the interest rates could impact the amount of interest that Telesat is required to pay.
Derivative Financial Instruments
Telesat uses derivative instruments to manage its exposure to foreign currency and interest rate risk. Telesat’s policy is that it does not use derivative instruments for speculative purposes.
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Telesat uses the following instruments, as required:
• | forward currency contracts to hedge foreign currency risk on anticipated transactions, mainly related to the construction of satellites and interest payments; |
• | cross-currency basis swaps to hedge the foreign currency risk on a portion of its U.S. dollar denominated debt; and |
• | interest rate swaps to hedge the interest rate risk related to debt financing which is primarily variable rate financing. |
Telesat’s derivative financial instruments also include embedded derivatives that are related to prepayment options included on its senior notes, as well as interest rate floors included in its Canadian and U.S. term loan B facilities.
Item 4. Disclosure Controls and Procedures
(a) Disclosure Controls and Procedures. Our president and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2014, have concluded that our disclosure controls and procedures were effective and designed to ensure that information relating to Loral and its consolidated subsidiaries required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission rules and forms.
(b) Internal control over financial reporting. There were no changes in our internal control over financial reporting (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(f) and 15-d-15(f)) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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OTHER INFORMATION
We discuss certain legal proceedings pending against the Company in the notes to the financial statements and refer the reader to that discussion for important information concerning those legal proceedings, including the basis for such actions and relief sought. See Note 14 to the financial statements of this Quarterly Report on Form 10-Q for this discussion.
Our business and operations are subject to a significant number of risks. The most significant of these risks are summarized in, and the reader’s attention is directed to, the sections of our Annual Report on Form 10-K for the year ended December 31, 2013 and Quarterly Report on Form 10-Q for the period ended March 31, 2014 in “Item 1A. Risk Factors.” There are no material changes to those risk factors except as set forth in Note 14 (Commitments and Contingencies) of the financial statements contained in this report, and the reader is specifically directed to that section.
The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, as updated by this report, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The following exhibits are filed as part of this report:
Exhibit 31.1 — Certification of President pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002
Exhibit 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.
Exhibit 32.1 — Certification of President pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002
Exhibit 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
Exhibit 101 — Interactive Data Files
(101.INS) XBRL Instance Document
(101.SCH) XBRL Taxonomy Extension Schema Document
(101.CAL) XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF) XBRL Taxonomy Extension Definition Linkbase Document
(101.LAB) XBRL Taxonomy Extension Label Linkbase Document
(101.PRE) XBRL Taxonomy Extension Presentation Linkbase Document
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Registrant | |
Loral Space & Communications Inc. | |
/s/ John Capogrossi | |
John Capogrossi | |
Vice President, Chief Financial Officer, Treasurer and Controller | |
(Principal Financial Officer) and Registrant’s Authorized Officer |
Date: August 6, 2014
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EXHIBIT INDEX
Exhibit 31.1 — Certification of President pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002
Exhibit 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.
Exhibit 32.1 — Certification of President pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002
Exhibit 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
Exhibit 101 — Interactive Data Files
(101.INS) XBRL Instance Document
(101.SCH) XBRL Taxonomy Extension Schema Document
(101.CAL) XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF) XBRL Taxonomy Extension Definition Linkbase Document
(101.LAB) XBRL Taxonomy Extension Label Linkbase Document
(101.PRE) XBRL Taxonomy Extension Presentation Linkbase Document
46 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Avi Katz, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Loral Space & Communications Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Avi Katz | |
Avi Katz | |
President, General Counsel & Secretary |
August 6, 2014
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Capogrossi, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Loral Space & Communications Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ John Capogrossi | |
John Capogrossi | |
Vice President, Chief Financial Officer, Treasurer and Controller |
August 6, 2014
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Loral Space & Communications Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Avi Katz, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Avi Katz | |
Avi Katz | |
President, General Counsel & Secretary |
August 6, 2014
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Loral Space & Communications Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Capogrossi, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ John Capogrossi | |
John Capogrossi | |
Vice President, Chief Financial Officer, Treasurer and Controller |
August 6, 2014
Investments in Affiliates (Investments in Affiliates) (Details) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2014
|
Dec. 31, 2013
|
---|---|---|
Schedule of Equity Method Investments [Line Items] | ||
Investments in affiliates | $ 175,532 | $ 116,820 |
Telesat Holdings Inc [Member]
|
||
Schedule of Equity Method Investments [Line Items] | ||
Investments in affiliates | 122,141 | 60,157 |
XTAR, LLC [Member]
|
||
Schedule of Equity Method Investments [Line Items] | ||
Investments in affiliates | $ 53,391 | $ 56,663 |
Pensions and Other Employee Benefits Plans (Components of Net Periodic Cost) (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2014
|
Jun. 30, 2013
|
Jun. 30, 2014
|
Jun. 30, 2013
|
|
Pension Benefits [Member]
|
||||
Defined Benefit Plan Disclosure [Line Items] | ||||
Service cost | $ 41 | $ 9 | $ 82 | $ 156 |
Interest cost | 468 | 458 | 937 | 921 |
Expected return on plan assets | (473) | (402) | (947) | (829) |
Amortization of net actuarial loss | 93 | 1,515 | 186 | 3,018 |
Net periodic cost | 129 | 1,580 | 258 | 3,266 |
Other Benefits [Member]
|
||||
Defined Benefit Plan Disclosure [Line Items] | ||||
Service cost | 2 | 1 | 4 | |
Interest cost | 18 | 10 | 35 | 20 |
Amortization of net actuarial loss | 7 | 4 | 15 | 8 |
Amortization of prior service credits | 3 | (6) | 5 | (12) |
Net periodic cost | $ 28 | $ 10 | $ 56 | $ 20 |
Shareholders' Equity (Narrative) (Details) (USD $)
In Thousands, except Share data, unless otherwise specified |
6 Months Ended | ||
---|---|---|---|
Jun. 30, 2014
|
Dec. 31, 2013
|
Jun. 30, 2014
Program Date November 2011 [Member]
|
|
Voting common stock repurchased, authorized shares, maximum | 800,000 | ||
Treasury stock, shares | 154,494 | 154,494 | 154,494 |
Average cost per share | $ 62.04 | ||
Treasury stock | $ 9,592 | $ 9,592 |
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