LORAL SPACE & COMMUNICATIONS LTD
FORM 10-K (Annual Report)
Filed 3/31/1999 For Period Ending 12/31/1998
Address 600 THIRD AVE C/O LORAL SPACECOM CORP NEW YORK, New York 10016 Telephone 212-697-1105 CIK 0001006269 Industry Electronic Instr. & Controls Sector Technology Fiscal Year 12/31 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-14180 LORAL SPACE & COMMUNICATIONS LTD. C/O LORAL SPACECOM CORPORATION 600 THIRD AVENUE NEW YORK, NEW YORK 10016 TELEPHONE: (212) 697-1105
JURISDICTION OF INCORPORATION: BERMUDA
IRS IDENTIFICATION NUMBER: 13-3867424
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
The registrant 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 and has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in the registrant's 1999 definitive proxy statement.
At March 5, 1999, 243,900,376 common shares were outstanding, and the aggregate market value of such shares (based upon the closing price on the New York Stock Exchange) held by non-affiliates of the registrant was approximately $4.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1999 definitive proxy statement are incorporated by reference into Part III.
The financial statements required by Rule 3.09 of Regulation S-X of the registrant's significant investee, Globalstar, L.P., are incorporated by reference herein from the Annual Report on Form 10-K filed by Globalstar Telecommunications Limited and Globalstar, L.P. PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. (together with its subsidiaries, "Loral" or the "Company") is one of the world's leading satellite communications companies, with substantial activities in satellite manufacturing and satellite-based communications services. Loral is developing the building blocks necessary to create a seamless, global networking capability for the information age. In 1998, Loral advanced its strategy significantly by acquiring Orion Network Systems, Inc., increasing its ownership in Globalstar, L.P. ("Globalstar"), forming the Loral Global Alliance, including the formation of Europe*Star Limited ("Europe*Star"), and organizing and integrating its businesses to form four distinct operating segments. Loral has increased its satellite fleet to seven satellites in orbit (including three owned by Satelites Mexicanos, S.A. de C.V. ("SatMex"), Loral's 49% owned affiliate). Loral will expand the geographic coverage and capacity of its fixed satellite services by launching three additional satellites in 1999. Loral's four operating segments are:
Satellite Manufacturing and Technology. Designing and manufacturing satellites and other space systems and developing satellite technology for a broad variety of customers and applications through Space Systems/Loral, Inc. ("SS/L").
Fixed Satellite Services. Leasing transponder capacity and providing value added services to customers for a wide variety of applications, including the distribution of broadcast programming, news gathering, business television, distance learning and direct-to-home ("DTH") services. The Company's fixed satellite service ("FSS") assets, managed by Loral Skynet and marketed under the Loral Global Alliance banner, consist of seven high-power geosynchronous ("GEO") satellites - three Loral Skynet Telstar satellites and one satellite of Loral Orion, Inc. ("Orion"), as well as three SatMex satellites. The two satellites expected to be launched by the recently formed Europe*Star joint venture with Alcatel, in which Loral owns a 47% interest, also will be part of the Loral Global Alliance and form a component of the Company's FSS business segment.
Data Services. Business in development, providing managed communications networks and Internet and intranet services through Loral Orion and delivering high-speed broadband data communications through CyberStar, L.P. ("CyberStar"), using transponder capacity on the Telstar and Loral Orion fleets. Loral is the managing general partner and owns approximately 82% of CyberStar.
Global Mobile Telephony. Providing worldwide wireless mobile telephony and narrow-band data communications through a constellation of low-earth orbiting ("LEO") satellites (the "Globalstar(]) System") operated by Globalstar, which is expected to commence service in September 1999. Loral is the managing general partner and owns approximately 43% of Globalstar.
Each of Loral's business segments has a well-defined mission designed to create global networks and exploit the increasing demand for immediate up-to-date information. Loral's strategy is to capitalize on its innovative capabilities, market position and advanced technologies to offer value-added satellite-based services as part of the evolving worldwide communications networks and, where appropriate, to form strategic alliances with major telecommunications service providers and equipment manufacturers to enhance and expand its satellite-based service opportunities. Loral believes that demand for satellite-based communications services will continue to grow due to accelerating demand for high speed data services, growing demand for Internet and intranet services, especially outside the United States, increased size and scope of television programming distribution, worldwide deregulation of telecommunications markets and continuing technological advancement.
In addition, Loral is pursuing additional satellite-based service opportunities throughout the world. Loral is a partner in SkyBridge Limited Partnership ("SkyBridge"), a partnership led by Alcatel, that is building a LEO satellite system for the delivery of broadband data and multimedia services worldwide; and Loral, together with partners, will act as the Globalstar service provider in Canada, Mexico and Brazil.
2 The following table presents a brief description of the orbital locations that the Company and certain of its affiliates are authorized to use. All satellite systems are subject to international frequency coordination requirements and must obtain appropriate authority to provide service in a given territory.
FIXED SATELLITE SERVICES
SATELLITE LOCATION FREQUENCY COVERAGE IN SERVICE ------Loral Skynet Telstar 4 89(o) W.L. C-band, Ku-band North America F Telstar 5 97(o) W.L. C-band, Ku-band North America F Telstar 6 93(o) W.L. C-band, Ku-band North America F Telstar 7 129(o) W.L. C-band, Ku-band North America Telstar 8 77(o) W.L. C-band, Ku-band North America Telstar 9 69(o) W.L. C-band, Ku-band North America Loral Orion Orion 1 37.5(o) W.L. Ku-band Europe, SE Canada, U.S. East of F the Rockies and parts of Mexico Orion 2(1) 12(o) W.L. Ku-band Eastern U.S., SE Canada, Europe, CIS, Middle East, North Africa and Latin America, S. Africa Orion 3 139(o) E.L. C-band, Ku-band China, Japan, Korea, India, Hawaii, Southeast Asia, Australia, New Zealand, Eastern Russia and Oceania Orion A 47(o) W.L. Ku/Ka-band Americas, Europe and Africa Orion B(1) 135(o) W.L. Ku-band North America, Hawaii, Puerto Rico, U.S. Virgin Islands Orion C 144(o) E.L. C-band and Ku-band China, Japan, Korea, India, Hawaii, Southeast Asia, Australia, New Zealand, Eastern Russia and Oceania SatMex Solidaridad 1 109.2(o) W.L. C-band, Ku-band Mexico and portions of Latin F America Solidaridad 2 113.0(o) W.L. C-band, Ku-band Mexico and portions of Latin F America SatMex 5 116.8(o) W.L. C-band, Ku-band Americas F Morelos II(2) 120(o) W.L. C-band, Ku-band North America (inclined orbit) Europe*Star 45(o)E.L. Ku-band Europe, SE Asia, Middle East, South Africa and India 43(o) E.L. Ku-band Europe, SE Asia, Middle East, S. Africa and India 47.5(o) Ku-band Europe, SE Asia, Middle East, S. E.L. Africa and India
DATA SERVICES
SATELLITE LOCATION FREQUENCY/TRANSPONDERS COVERAGE IN SERVICE ------CyberStar CyberStar 115(o) W.L. Ka-band (spot beams) North America CyberStar 93(o) W.L. Ka-band (spot beams) North and South America(3) CyberStar 105.5(o) E.L. Ka-band (spot beams) Asia-Pacific Loral Orion Orion Ka 89(o) W.L. Ka-band Americas Orion Ka 81(o) W.L. Ka-band Americas Orion Ka 78(o) E.L. Ka-band Russia, India, China, Europe, Africa, CIS, Australia, Asia Orion Ka 126.5(o) E.L. Ka-band Asia, Russia, Australia, Oceania
GLOBAL MOBILE TELEPHONY
SATELLITE LOCATION FREQUENCY COVERAGE IN SERVICE ------Globalstar Globalstar 52 satellites, LEO 1610 - 1621.35MHz, Global 2483.5 - 2500MHz, (16 satellites feeder links in launched) C-band
(1) These satellites are conditionally licensed by the Federal Communications Commission ("FCC"), subject to an appropriate showing of Loral's financial capability to construct, launch and operate the satellites.
(2) Currently operating in inclined orbit beyond its designed life. This satellite is authorized to utilize the 120(o) W.L. orbital slot pursuant to a grant of special temporary authority by the FCC which expires on April 16, 1999. The Company anticipates that prior to that date, the FCC will extend the grant of special temporary authority for a period not to exceed 180 days. Subject to such continued regulatory approval, Morelos II can be expected to continue to generate modest revenues for approximately three years. (3) The FCC license does not describe a particular coverage area.
3 In addition to the orbital slots listed in the table above, Loral has International Telecommunication Union ("ITU") filings at 3.5(o)E.L., 8(o) E.L., 10(o)E.L., 11(o)E.L., 30(o)E.L., 81(o)E.L., 105.5(o)E.L., 135(o)E.L., 58(o)W.L., 95(o)W.L., 115(o)W.L. and 135(o)W.L. for use of the V-band frequency. Loral Skynet also has ITU filings at 98(o)E.L., 122(o)E.L., 130(o) E.L., 167.45(o)E.L. and 175(o)W.L. for use of the C- and Ku-band frequencies. R/L DBS Company, L.L.C., a joint venture in which Loral owns a 50% interest, has 11 odd numbered DBS channels 1-21 at 61.5(o)W.L.
Loral has applications pending at 77(o)W.L. for use of the Extended C/Ku-band frequencies and at 135(o)W.L., 115(o)W.L., 95(o)W.L. and 58 (o)W.L. for use of the V-band frequency. Loral Orion has applications pending at 126(o)E.L. for use of the Ku/Extended Ku/C and Extended C-band frequencies and at 139(o)E.L., 15(o)W.L. and 67(o)W.L. for use of the Ka-band frequency. Globalstar also has applications pending for an 80 satellite LEO system using the V-band frequency and for a second generation Globalstar system comprised of 64 LEO satellites and four GEO satellites (at 80(o)W.L., 10(o)E.L., 100(o)E.L. and 170(o)E.L.) using the 2 GHz frequency.
In March 1999, the Brazilian telecommunications authority announced that Loral Skynet do Brasil, which had submitted a bid of $18 million, had won Brazil's auction for its 63(o)W.L. orbital slot.
SATELLITE MANUFACTURING AND TECHNOLOGY
SS/L is a worldwide leader in the design, manufacture and integration of satellites and space systems. SS/L draws on its 40-year history, during which satellites manufactured by SS/L have achieved more than 650 years of cumulative on-orbit experience. SS/L also provides Loral with visibility into emerging and new satellite-based technologies and applications. SS/L manufactures satellites that provide telecommunications, weather forecasting and direct broadcast services. SS/L is the leading supplier of satellites to Intelsat, an international consortium of 135 member nations which is currently the world's largest operator of commercial communications satellites. Other significant customers include News Corp./EchoStar, TCI, ChinaSat, Globalstar, Loral Skynet, Loral Orion and CD Radio.
As one of the premier providers of satellites and other space systems, SS/L competes principally on the basis of technical excellence, a long record of reliable performance, competitive pricing and on-orbit delivery packages. The Company believes that SS/L's advanced manufacturing and testing facilities and long-term customer relationships have enabled SS/L to compete effectively in the commercial space systems marketplace.
SS/L has a history of technical innovation that includes the first three-axis stabilized satellites, bipropellant propulsion systems for commercial satellites that permit significant increases in the satellites' payload and extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries with a life span of 10 years or more, the use of advanced composites to significantly enhance satellite performance at lighter weights and the first communications satellite with more than ten kilowatts of power. SS/L also created the first multi-mission geostationary satellite and was one of the first U.S. companies to acquire space technology from Russia's space industry, obtaining exclusive rights outside the former Eastern bloc to an electric propulsion subsystem that is five times more efficient than bipropellant propulsion systems.
SS/L's capabilities in satellite bus technologies are extensive. For example, it uses lightweight/high-strength composite materials for its structural components. SS/L was also the first satellite manufacturer to employ heat pipes to control heat transfer in commercial satellites, thereby providing a more benign temperature environment and increased reliability. Nickel hydrogen batteries, when combined with SS/L's patented thermal management system, are among the most efficient space batteries ever produced. A new technology currently being developed by SS/L could result in the doubling of the efficiency of the batteries within the next three years. A new telemetry and command system employing serial interfaces was introduced in 1997.
Active research and development projects are underway for both communications and payload equipment and supporting bus elements. SS/L has commenced development of the 20.20(TM), the first commercial satellite capable of providing 20 kilowatts of power, which will significantly increase capacity and service quality.
4 Highlights of the payload program include the development of active microwave components, which are among the lightest and most compact in the industry, and high power state-of-the-art multiplexers and antennae that can be customized for various customer requirements. Investments in state-of-the-art computer-aided design and modeling tools have enabled SS/L to eliminate expensive and time-consuming prototyping of most equipment, further reducing production time.
SS/L, Alcatel Space Industries and Finmeccanica S.p.A. have agreed generally to operate as a team on satellite programs worldwide. SS/L believes that this strategic alliance has enhanced its technological and manufacturing capabilities and marketing resources and affords it improved access to international government and commercial customers.
SS/L's major contracts fall into two categories: firm fixed-price contracts and cost-plus-award-fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Risk of loss due to increased cost, therefore, is borne by SS/L. The majority of SS/L's contracts are fixed-price contracts. Under such contracts, SS/L may receive progress payments, or it may receive milestone payments upon the occurrence of certain program achievements. Under a cost-plus-award-fee contract, the contractor recovers its actual allowable costs incurred and receives a fee consisting of a base amount that is fixed at the inception of the contract (the base amount may be zero) and an award amount that is based on the customer's subjective evaluation of the contractor's performance based on criteria stated in the contract.
Many of SS/L's contracts and subcontracts may be terminated at will by the customer or the prime contractor. In the event of a termination at will, SS/L is normally entitled to recover the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for profit or an adjustment for loss, depending on whether completion of performance would have resulted in a profit or loss. No assurance can be given that these terminations will not occur in the future.
Total revenues for the Company's satellite manufacturing and technology segment, including intercompany and affiliate sales, were $1.4 billion for each of the years ended December 31, 1998 and 1997 and $1.0 billion for the nine months ended December 31, 1996. The segment's intercompany and affiliate sales were $889 million in 1998, $620 million in 1997 and $281 million in 1996. The Company's satellite manufacturing and technology segment had EBITDA of $107 million, $100 million and $77 million for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively. Total assets for the segment were $1.7 billion, $1.5 billion and $1.1 billion as of December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998 and 1997, funded backlog for the segment was $1.5 billion and $1.4 billion, respectively, including intercompany backlog of $111 million in 1998 and $188 million in 1997. Approximately 70% of the 1998 external funded backlog is expected to be realized in 1999. Sales to Globalstar represented in excess of 40% of the Company's consolidated revenues in 1998. In addition, sales to two other customers represented in excess of 10% of the Company's consolidated revenues in 1998. For the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996, the satellite manufacturing and technology segment expended $35 million, $24 million and $16 million for research and development projects, respectively.
5 FIXED SATELLITE SERVICES
Following its acquisition of the Skynet business from AT&T in March 1997, Loral has rapidly established itself through a series of subsequent acquisitions and joint venture transactions, as one of the world's leading providers of fixed satellite services using GEO satellites, which orbit the Earth at fixed positions approximately 22,000 miles above the Equator. GEO satellites provide reliable, high bandwidth services anywhere in their coverage areas and therefore serve as the backbone for many forms of telecommunications. In the United States and other developed countries, customers lease transponder capacity primarily for distribution of network and cable television programming, for DTH video transmission and for live video feeds from breaking news and sporting events. In the developing world, a substantial portion of such capacity is dedicated to long-distance telephone service as well as television services. GEO satellites are increasingly used throughout the world for international Internet communications, high-speed data services for businesses through very small aperture terminals ("VSAT") networks, and for distance learning and educational television.
Loral Global Alliance
Through the Loral Global Alliance, Loral offers its customers an integrated portfolio of satellite capacity that provides "one stop shopping" for local, regional and global GEO satellite services. The alliance members, consisting of Loral Skynet, Loral Orion, SatMex and Europe*Star, currently have seven satellites in orbit with a total of 144 C-band and 192 Ku-band 36-MHz transponder-equivalents. Loral Skynet and Loral Orion expect to launch three additional satellites in the next six months, which, together with the alliance members' existing satellites, will provide a total of 178 C-band and 309 Ku-band 36-MHz transponder-equivalents, and will have a footprint covering almost all of the world's population.
The Loral Global Alliance provides for cross-selling arrangements among the alliance members' respective sales forces and for cooperative marketing and promotional activities. The Company believes that such arrangements will enable the members of the alliance to compete more effectively in sales of communications satellite services worldwide. In addition, the alliance offers in-orbit backup capabilities for its members in regions where members' fleets have overlapping coverage.
Loral Skynet
Loral Skynet's core business is providing satellite capacity to support distribution of U.S. television network programming. The ABC and Fox television networks are its major customers. All ABC and Fox stations have their antennae pointed at Loral Skynet's satellites, creating a configuration known as a "neighborhood" that is attractive to other users requiring similar distribution channels. Other Loral Skynet customers include HBO, Disney, Time Warner and third-party resellers, such as sports syndicators and distance learning providers.
Loral Skynet currently has three high power GEO satellites in operation. Telstar 4 was placed in service in November 1995 and has 24 C-band and 24 Ku-band transponders. Telstar 4 provides coverage over the continental United States, Hawaii, Puerto Rico and the U.S. Virgin Islands. Telstar 5, with 24 C-band and 28 Ku-band transponders, was built by SS/L and was placed into service on July 1, 1997. Telstar 5 provides coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin America. Telstar 4 and Telstar 5 are currently operating at or near full utilization.
Telstar 6, built by SS/L, was launched in February 1999 and commenced commercial operations in March 1999. Telstar 6 is a broadcast video and data communications satellite with 24 C-band and 28 Ku-band transponders. It provides coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin America.
Loral Skynet plans to construct, launch and operate three additional high power C- and Ku-band satellites. Telstar 7, with 24 C-band and 24 Ku-band transponders, which is being built by SS/L is scheduled for launch in the second quarter of 1999. In addition, Loral Skynet plans to launch Telstar 8 in 2000 and Telstar 9 in 2001. The addition of Telstar 6 and these three satellites will substantially increase Loral Skynet's
6 capacity within the United States and will further extend its coverage of Canada and portions of Latin America, subject to obtaining landing rights from regulatory authorities in those regions.
Loral Skynet has entered into a strategic alliance with EchoStar Communications Corporation ("EchoStar") that leverages Loral Skynet's assets and EchoStar's capabilities to create two interdependent businesses that will share revenues equally: (i) Skynet Direct, a Loral Skynet-managed value-added transmission and distribution service marketed to niche market programmers, such as ethnic and international channels, business television and distance learning and (ii) Sky Vista, an EchoStar-managed 26-channel DTH service offered to subscribers in the continental United States and subscribers in Alaska, Hawaii and U.S. territories and commonwealths in the Caribbean, where EchoStar's basic DTH service is not available.
Loral Orion
On March 20, 1998, Loral acquired Orion Network Systems, Inc., a rapidly growing provider of satellite-based communications services. Loral Orion currently owns one GEO satellite and is constructing two additional GEO satellites that are expected to be launched in the second and third quarters of 1999. Loral Orion's leasing business currently provides satellite capacity for video distribution, satellite news gathering and other satellite services primarily to broadcasters, news organizations and telecommunications service providers. During the fourth quarter of 1998, Loral completed its integration plan for Loral Orion and transferred management of Loral Orion's satellite capacity leasing and satellite operations to Loral Skynet, effective January 1, 1999.
Orion 1, a high power satellite with 34 Ku-band transponders, commenced operations in January 1995, and provides coverage to 34 European countries, much of the United States and parts of Canada, Mexico and North Africa. Orion 2, which will be a high power satellite with 38 Ku- band transponders, will expand Loral Orion's European coverage and extend coverage to portions of the former Soviet Union, Latin America, the Middle East and South Africa. Orion 2, which is being constructed by SS/L, is scheduled to be launched in the third quarter of 1999. Orion 3, which will be a high power satellite with 33 Ku-band transponders and 10 C-band transponders, with a footprint covering broad areas of the Asia Pacific region, including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand, Eastern Russia and Hawaii, is scheduled to be launched in the second quarter of 1999. Eight Ku-band transponders on Orion 3 have been presold to Dacom Corporation.
SatMex
In December 1997, a joint venture in which Loral holds a 65% economic interest completed the acquisition from the Mexican government of a 75% interest in SatMex. SatMex, which owns and operates three GEO communications satellites, is currently the dominant satellite communications company providing FSS in Mexico, and intends to expand its services to become a leading provider of satellite services throughout Latin America. SatMex provides satellite transmission capacity to broadcasting customers for network and cable television programming, DTH service and on-site transmission of live news reports, sporting events and other video feeds. SatMex also provides satellite transmission capacity to telecommunications service providers for public telephone networks in Mexico and elsewhere and to corporate customers for their private business networks with data, voice and video applications. SatMex has landing rights to provide broadcasting and telecommunications transmission capacity in 14 nations in the Latin American region and the United States. SatMex's broadcasting customers include Televisa, MVS Multivision and Television Azteca, and its telecommunications services customers include Telmex, Bancomer, Pemex, Cemex and the Mexican subsidiaries of Ford and DaimlerChrysler.
SatMex's satellites, Solidaridad 1, Solidaridad 2 and SatMex 5, are in geostationary orbit at 109.2 degrees W.L., 113.0 degrees W.L. and 116.8 degrees W.L., respectively, and have a total of 144 36-MHz transponder-equivalents operating in the C and Ku-band, with an aggregate footprint covering substantially all of the continental United States, the Caribbean as well as all of Latin America, other than certain regions in Brazil. The Company believes that this capacity is one of the largest satellite capacities dedicated primarily to the Latin American region. SatMex holds 20-year concession titles to operate in these three orbital locations, each of
7 which will expire on October 22, 2017. The concession titles are renewable thereafter, subject to certain conditions, for an additional 20-year term without additional payment. In addition, SatMex operates two satellite control centers.
Europe*Star
In December 1998, Loral finalized its strategic partnership with a subsidiary of Alcatel to jointly build and operate Europe*Star, a multiple geostationary satellite system to be marketed as part of the Loral Global Alliance. Europe*Star, in which Loral owns a 47% interest, will provide broadcast and telecommunications services via two high power all Ku-band satellites, one of which is currently under construction. Europe*Star will provide satellite services to Europe, Southeast Asia, the Middle East, South Africa and India.
Total revenues for the fixed satellite services segment, including intercompany and affiliate sales, were $254 million and $83 million for the years ended December 31, 1998 and 1997, respectively. The segment's intercompany and affiliate sales were $5 million in 1998 and $1 million in 1997. The Company's fixed satellite services segment had EBITDA of $171 million and $52 million for the years ended December 31, 1998 and 1997 respectively. Total assets for the segment were $3.4 billion and $1.8 billion as of December 31, 1998 and, 1997, respectively.
As of December 31, 1998 and 1997, funded backlog for the segment was $746 million and $396 million, respectively, including intercompany and affiliate backlog of $140 million in 1998 and $6 million in 1997. Approximately 30% of the 1998 external funded backlog is expected to be realized in 1999.
DATA SERVICES
In order to align all of Loral's resources and activities in the developing data services area, CyberStar's broadband business and Loral Orion's Internet and corporate data networking businesses have been reorganized and in 1999 began reporting to a group vice president. This alignment allows the business units to continue to operate independently while taking advantage of the synergies they share.
Loral Orion provides multinational corporations with managed communications networks designed to carry high-speed data, fax, video teleconferencing, voice and other specialized services. The Loral Orion network delivers high-speed data to customers in emerging markets and remote locations which would otherwise lack the necessary infrastructure to support these services. Loral Orion also offers intranet services and provides high speed Internet access and transmission services to companies outside the United States seeking to avoid "last mile" terrestrial connections and to bypass congested regional Internet network routes. Loral Orion provides its services directly to customer premises using VSATs.
As a result of a transaction completed in December 1998, Loral Orion has access to technology licensed from The Fantastic Corporation that will enable it to provide broadband infrastructure for multicast delivery of multimedia products and services to corporations, content developers, broadcasters, Internet Service Providers ("ISPs") and other enterprises that have time sensitive and complex data requirements. Loral Orion continues to introduce new products that capitalize on the strengths its satellites bring to the global Internet access market. For example, during the fourth quarter of 1998, Loral Orion introduced its WorldCast Business Edition, which supplies high-bandwidth satellite capacity to improve businesses' access to the U.S. Internet backbone from foreign locations. Recently, Loral Orion introduced a new multicast service, called WorldCast Newsfeed, that will enable ISPs to receive news from the Internet using Loral satellites, thereby minimizing terrestrial network costs.
Loral is the managing general partner and principal owner of CyberStar, a high-speed broadband data communications system. CyberStar leverages satellites, terrestrial networks and its sophisticated network operations center to deliver information securely and reliably at speeds of up to 27 Mbps to multiple locations simultaneously, using an Internet protocol multicasting technique. CyberStar offers a variety of low-cost, interactive multimedia communications services in the United States using leased Ku-band transponder capacity on Loral Skynet's Telstar 5 satellite, and plans in the future to expand its service worldwide. CyberStar has received licenses from the FCC for three Ka-band orbital slots. CyberStar's satellite-based
8 services include high-speed Internet access, data broadcasting, broadband interconnection, intranet multicasting, real-time video streaming and other data services. CyberStar intends to market its services worldwide, initially to businesses and private networks and subsequently to consumers through a network of local and regional service providers.
In the fourth quarter of 1998, Cyberstar announced the commercial availability of its broadband satellite-based business communications service. One of its first customers, National Cinema Networks, selected CyberStar to deliver in-theater media to its nationwide cinema network. CyberStar is conducting pilot programs with other enterprise customers in markets such as entertainment, finance, real estate, training, insurance and retail.
Total revenues for the Company's data services segment were $40 million for the year ended December 31, 1998. EBITDA before development costs for the segment was a loss of $13 million in 1998. Total development and start-up costs for Cyberstar were $33 million for each of 1998 and 1997. Total assets for the segment were $153 million and $25 million as of December 31, 1998 and 1997, respectively.
As of December 31, 1998, funded backlog for the segment was $147 million, which was all from external sources. Approximately 35% of 1998 external funded backlog is expected to be realized in 1999.
GLOBAL MOBILE TELEPHONY
Globalstar has begun to launch and is preparing to operate a worldwide, LEO satellite-based digital telecommunications system. As of March 15, 1999, Globalstar has launched 16 of the 52 satellites (including four in-orbit spares) that will complete its full constellation and is scheduled to commence service in September 1999 with at least 32 satellites. Loral is the managing general partner of Globalstar, and owned approximately 43% of Globalstar as of December 31, 1998.
The Globalstar System has been designed to address the substantial and growing demand for telecommunications services worldwide, particularly in developing countries. More than three billion people today live without residential telephone service, many of them in rural areas where the cost of installing wireline service is prohibitively high. Moreover, even where telephone infrastructure is available in developing countries, outdated equipment often leads to unreliable local service and limited international access.
The Globalstar System's worldwide coverage is designed to enable its service providers to extend modern telecommunications services to millions of people who currently lack basic telephone service and to enhance wireless telecommunications in areas underserved or not served by existing or future cellular systems, providing a telecommunications solution in parts of the world where the build-out of terrestrial systems cannot be economically justified.
As of December 31, 1998, each of the elements of the Globalstar System -- space and ground segments, user terminal supply, service provider arrangements, licensing and system integration -- was on schedule to permit Globalstar to commence commercial operations in September 1999 with at least 32 satellites in orbit and to complete its 52-satellite constellation, including four in-orbit spares, by the end of 1999.
Space Segment. On March 15, 1999, Globalstar successfully launched four satellites aboard a Soyuz launch vehicle from the Baikonur Cosmodrome in Kazakhstan, bringing the total satellites in orbit to 16. This launch followed Globalstar's successful launch on February 8, 1999 of four satellites from the Baikonur Cosmodrome following the execution of a Technology Safeguard Agreement among the governments of Russia, Kazakhstan and the United States. Globalstar had previously launched its first group of four satellites on February 14, 1998 and its second group of four satellites on April 24, 1998. The first 12 Globalstar satellites have reached their final orbital positions and are currently being used to test basic system functionality, including the system's inter-satellite hand-off capabilities, and the latest four satellites are expected to reach their final orbital positions and begin operations testing in April 1999. As of March 15, 1999, in addition to the 16 satellites in orbit, Globalstar had eight completed satellites on hand and 28 more in final integration and test. In September 1998, a malfunction of a Zenit 2 rocket resulted in the loss of 12 Globalstar satellites shortly after lift-off from the Baikonur Cosmodrome and resulted in a delay in the program schedule. The cost
9 of the launch vehicle and the lost satellites was substantially insured. As a result of the launch failure, Globalstar implemented its contingency plan, which provides for a flexible launch strategy that enables it to select among a number of launch service suppliers in order to improve its ability to commence service as planned. Globalstar has reserved six Soyuz launches of four satellites each (two of which have already occurred as of March 15, 1999) six Delta 2 launches of four satellites each, an Ariane launch of up to six satellites and two Zenit launches, all in 1999, with options for additional launches in 2000. Production is proceeding for the remaining satellites to meet scheduled launch dates.
Ground Segment. Globalstar's primary satellite operations control center and back-up facility, which performed well in support of the Globalstar launches, are fully-operational and are currently performing command and control functions for the in-orbit satellites. Qualcomm has completed 38 gateways, of which eight are already installed in Texas, France, Italy, Canada, Argentina, China, South Africa and South Korea. The initial gateways helped monitor the launch and orbital placement of Globalstar's first 16 satellites. Qualcomm has released an upgraded, commercial version of its gateway operating software, which is now undergoing testing and evaluation. Globalstar expects these eight gateways to be fully operational by the commencement of commercial service, and expects an additional eight gateways to be installed and operational by the end of 1999. These 16 gateways will cover 61 countries that account for approximately 58% of Globalstar's business plan.
User Terminals. Ericsson, Qualcomm and Telital are manufacturing approximately 300,000 handheld and fixed user terminals under contracts totalling $353 million from Globalstar and its service providers. The first generation handheld Globalstar phones are expected to weigh about 12 ounces and be available in attractive designs with dimensions (excluding antenna) of approximately 6.25" x 2" x 1.75". Globalstar users will be able to access terrestrial wireless systems, where available, through dual and tri-mode portable and mobile user terminals. Qualcomm will offer a tri-mode handset that can access Globalstar, AMPS (the U.S. analog cellular standard) and digital cellular phones using code division multiple access technology. Ericsson's and Telital's Globalstar/GSM dual mode phones will feature the GSM interface familiar to wireless customers in Europe and many other areas of the world.
Service Providers. Globalstar and its partners have been seeking alliances with service providers throughout the world and have entered into a number of agreements in specific territories. Globalstar believes that these relationships with in-country service providers will facilitate the granting of local regulatory approvals -- particularly where its service provider and the licensing authority are one and the same -- as well as provide local marketing and technical expertise. Globalstar's local service providers have already obtained some or all of the regulatory approvals they will need to provide service in 32 nations, including China, the United States, Canada, Russia, Brazil, Indonesia, Saudi Arabia and Ukraine. Due to general economic conditions in Asia, Hyundai has withdrawn as a Globalstar service provider. Globalstar has found a replacement in Finland and has identified a replacement in India, but has been prevented from signing a new service provider agreement for India by litigation brought by Hyundai's former in-country partner. The injunction prohibiting such an agreement is currently on appeal. If Globalstar cannot proceed in a timely manner to engage an adequate replacement service provider for India, Globalstar will not be able to offer service in that country, and its results of operations could be adversely affected.
In July 1998, as a result of a transaction in which Loral purchased Globalstar partnership interests from certain other Globalstar partners, $210.0 million was placed in escrow by such Globalstar partners for the purchase of Globalstar gateways and handsets.
Licensing. In January 1995, the FCC granted authority for the construction, launch and operation of the Globalstar System and assigned spectrum for its user links. Later that year, the 1995 World Radiocommunication Conference allocated feeder link spectrum on an international basis for mobile satellite service systems such as Globalstar, and in November 1996, the FCC authorized Globalstar's feeder links. In September 1997, Globalstar applied to the FCC for authorization to launch and operate satellite systems at 2 GHz and 40 GHz. If these applications are granted (as to which there can be no assurance), Globalstar would be in a position to expand its capacity substantially.
10 System Integration. Globalstar is using its in-orbit satellites and installed gateways to perform extensive tests of system functionality to ensure reliable, high quality service, including simulations of high-traffic conditions. In tests, the Globalstar System has delivered voice quality comparable to terrestrial CDMA and landline phones. Multiple satellite coverage and soft hand-offs of calls have occurred without dropped calls, and the second generation gateway software is providing both immediate handset connectivity and a seamless interface with the public telephone networks. To date, none of the Globalstar satellites has experienced a failure or significant anomaly.
Expenditures and Commitments. Through December 31, 1998, Globalstar incurred costs of approximately $2.7 billion for the design and construction of the space and ground segments. Costs incurred during 1998 were approximately $871 million. Qualcomm is in the process of completing its revision to cost estimates for its portion of the ground segment. Due to additional scope and cost growth and based on preliminary information, Globalstar expects the increase from Qualcomm to be less than 3% of the total project cost. The Qualcomm estimate is still subject to further review by Globalstar. As of December 31, 1998, and including the effect of the preliminary Qualcomm estimate, Globalstar's budgeted expenditures were $3.17 billion for the design, construction and deployment of the Globalstar System to commence commercial service and $340 million for budgeted financing costs. In addition to expenditures for operating costs and debt service, Globalstar anticipates further expenditures on system software for the improvement of system functionality and the addition of new features beyond those planned for the commencement of commercial service. Globalstar expects to achieve positive cash flow in the third quarter of 2000. Substantial additional financing will be required if there are delays in the commencement of commercial service and, in any event, after the commencement of commercial service and before positive cash flow is achieved. Although Globalstar believes it will be able to obtain these additional funds, there can be no assurance that such funds will be available on favorable terms or on a timely basis, if at all.
Globalstar has agreed, subject to its partners' approval, to purchase from SS/L 12 additional spare satellites for which the cost and payment terms have not as yet been negotiated. It is anticipated that approximately $100 million will be expended for these spare satellites by commencement of commercial service. In addition, in order to accelerate the deployment of gateways around the world, Globalstar has agreed to help finance approximately $80 million of the cost of up to 32 of the initial 38 gateways. The contracts for the 38 gateways aggregate approximately $345 million. Ericsson, Qualcomm and Telital are in the process of manufacturing approximately 300,000 handheld and fixed user terminals under contracts totaling $353 million from Globalstar and its service providers. Globalstar has agreed to finance approximately $151 million of the cost of handheld and fixed user terminals. Globalstar expects to recoup such costs upon the acceptance by the service providers of the gateways and user terminals.
In January 1999, GTL, a general partner of Globalstar, completed a private offering of $350 million of convertible preferred stock (of which Loral purchased $150 million face amount to maintain its ownership percentage). GTL in turn used the net proceeds from its offering to purchase convertible preferred partnership interests of Globalstar. Globalstar in turn will use the proceeds for the construction and deployment of its system.
As of January 31, 1999, Globalstar has raised or received commitments for approximately $3.3 billion. Globalstar intends to raise the remaining funds required, of approximately $600 million, prior to the initiation of commercial service from a combination of sources, including: high yield debt issuance (which may include an equity component), bank financing, equity issuance, financial support from the Globalstar partners, projected service provider payments and anticipated payments from the sale of gateways and Globalstar subscriber terminals.
The Company's global mobile telephony segment had development and start-up costs of $145 million, $87 million and $45 million for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996, respectively. Total assets for the segment were $2.7 billion, $2.1 billion and $943 million as of December 31, 1998, 1997 and 1996, respectively.
11 PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position. It holds 134 patents in the United States and 253 patents abroad and has applications for 77 patents pending in the United States and 201 patents pending abroad. SS/L patents include those relating to communications, station keeping, power control systems, antennae, filters and oscillators, phase arrays and thermal control as well as assembly and inspections technology. The SS/L patents that are currently in force expire between 1999 and 2017.
In connection with the Globalstar System, Globalstar's design and development efforts have yielded 16 patents issued and 30 patents pending in the United States, as well as 17 patents issued and 100 patents pending internationally for various aspects of communications satellite system design and implementation of CDMA technology relating to the Globalstar System. Qualcomm has obtained 189 issued patents and 463 patents pending in the United States applicable to Qualcomm's implementation of CDMA. The issued patents cover, among other things, Globalstar's process of combining signals received from multiple satellites to improve the signal received and minimize call fading.
In addition, CyberStar, Loral Orion and Loral SpaceCom Corporation have 16, three and two patents pending in the United States, respectively. Each of CyberStar and Loral Orion also has one patent pending abroad.
There can be no assurance that any of the pending patent applications by the Company or Globalstar will be issued. Moreover, because the U.S. patent application process is confidential, there can be no assurance that third parties, including competitors, do not have patents pending that could result in issued patents which the Company or Globalstar would infringe. In such an event, the Company or Globalstar could be required to redesign its system or satellite, as the case may be, or pay royalties to obtain a license, which could increase cost or delay implementation of the system or construction of the satellite, as the case may be.
FOREIGN OPERATIONS
Sales to foreign customers, primarily in Europe and Asia, represented 16% and 30% of the Company's consolidated revenues for the years ended December 31, 1998 and 1997, respectively. As of December 31, 1998, 1997 and 1996, the Company had substantially all of its long- lived assets located in the United States with the exception of the in-orbit satellites. See "Certain Factors that May Affect Future Results -- There are risks in conducting business internationally" for a discussion of the risks related to operating internationally.
EMPLOYEES
As of December 31, 1998, the Company had approximately 3,900 full-time employees (including approximately 465 employees of Globalstar and SatMex), some of whom are subject to collective bargaining agreements.
12 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of the Company. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions, including, but not limited to, the factors summarized below.
LAUNCH FAILURES HAVE DELAYED SOME OF OUR OPERATIONS IN THE PAST, AND MAY DO SO AGAIN IN THE FUTURE.
Satellite launches are risky. About 15% of launch attempts end in failure. We ordinarily insure against launch failures, but at considerable cost. The cost and the availability of insurance vary depending on market conditions and the launch vehicle used. Our insurance typically does not cover business interruption, and so both launch failures and in-orbit satellite failures result in uninsured losses. Replacement of a lost satellite typically requires up to 18 months from the time a contract is executed until the launch date of the replacement satellite.
Loral Orion. Orion 3 is currently scheduled to be launched on the second flight of a Delta 3 rocket in April 1999. A Delta 3 rocket failed in August 1998 on its maiden flight. Although the manufacturer has assured us that the cause of that failure has been identified and corrected, we can't be certain that the second flight will succeed.
Loral Skynet. Loral Skynet's Telstar 7 is currently scheduled to be launched on the maiden flight of an Atlas IIIA. We can't be certain that the maiden flight will succeed.
Globalstar. As of March 15, 1999, Globalstar needs to launch 16 more satellites aboard four launch vehicles before commercial operations can begin. Although Globalstar has contracted for the necessary launch vehicles and developed contingency plans, launch failures could delay Globalstar's start of commercial operations. In September 1998, a malfunction of a Zenit 2 rocket resulted in the loss of 12 Globalstar satellites shortly after lift-off from Kazakhstan and resulted in a delay in Globalstar's program schedule.
GOVERNMENT POLICIES AND REGULATIONS MAY LIMIT OR DELAY LAUNCHES AND/OR INCREASE LAUNCH- RELATED COSTS.
We depend on third parties, in the United States and abroad, to launch our satellites. Foreign launches have been politically sensitive because of the relationship between launch technology and missile technology. U.S. government policy has limited, and is likely in the future to limit, launches from the former Soviet Union and China. For example, the most recent Globalstar launch from Kazakhstan was delayed when the U.S. government stopped granting case-by-case approval of launches from that location pending an intergovernmental agreement covering technology security matters. Changes in governmental policies, political leadership or legislation in the United States, Russia, Kazakhstan or China could adversely affect our ability to launch from these countries or materially increase the costs of doing so.
AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE.
Random failure of satellite components may result in damage to or loss of a satellite before the end of its expected life. Satellites are carefully built and tested and have certain redundant systems in case of failure. However, in-orbit failure may result from various causes including:
- component failure;
- loss of power or fuel;
- inability to control positioning of the satellite;
- solar and other astronomical events; and
- space debris.
13 Repair of satellites in space is not feasible. Many factors affect the useful lives of our satellites. These factors include:
- the quality of construction;
- gradual degradation of solar panels; and
- the durability of components.
Although some failures may be covered in part by insurance, they may result in uninsured losses as well. For example, when Skynet experienced the total loss of two satellites in 1994 and 1997 while under AT&T's ownership, it suffered a substantial drop in its profits.
Our geosynchronous satellites generally have an expected life of between 15 to 20 years. Some of the satellites we currently have in-orbit have experienced operational problems:
- In November 1995, a component on Orion 1 malfunctioned, resulting in a two-hour service interruption. Full service was restored using a back-up component. If the back-up component fails, Orion 1 would lose a significant amount of usable capacity.
- SatMex's Solidaridad 1 satellite has experienced problems and mechanical difficulties that could shorten its operational life.
GLOBALSTAR SATELLITES HAVE A SHORTER DESIGN LIFE AND GLOBALSTAR MAY NOT BE ABLE TO REPLACE ITS SATELLITES AT THE END OF THEIR USEFUL LIVES.
Globalstar's satellites have a minimum life-span of seven and a half years. Globalstar plans to use funds from operations and, possibly, proceeds from additional financings, to deploy a second generation of satellites to replace its first generation satellite constellation. However, enough money might not be available when needed, leaving Globalstar without a second-generation constellation.
SPACE SYSTEMS/LORAL MAY FORFEIT PAYMENTS FROM CUSTOMERS DUE TO SATELLITE FAILURES OR LOSSES AFTER LAUNCH, AND THESE LOSSES MAY BE UNINSURED.
Some of SS/L's satellite manufacturing contracts provide that some of the total price is payable as "incentive" payments earned throughout the life of the satellite. While insurance against loss of these payments has been available in the past, the cost and availability of such insurance are subject to wide fluctuations. In addition, SS/L is sometimes prohibited from insuring orbital incentive payments. Some of SS/L's contracts call for in-orbit delivery, transferring the launch risk to SS/L. SS/L generally insures against that exposure.
SS/L records as revenue the present value of incentive payments as the costs associated with these incentive payments are incurred. SS/L generally receives the present value of these incentive payments if there is a launch failure or a failure is caused by customer error. However, SS/L forfeits these payments if the loss is caused by satellite failure or as a result of its own error. For example, in 1998, a satellite built by SS/L experienced problems with two of its antennae. SS/L currently estimates that this degradation could result in the loss of about 25% of the incentive payments under that contract. Further warranty claims by the customer may also be possible.
WE ARE A HOLDING COMPANY WITH SUBSTANTIAL DEBT AND COMMITMENTS AT OUR OPERATING LEVELS.
We and our subsidiaries and operating affiliates have a significant amount of outstanding debt and commitments, including:
- As of December 31, 1998, our outstanding consolidated debt, including the current portion, was $1.6 billion, all of which represents obligations of our subsidiaries to their creditors. In addition, we issued $350 million of senior notes in January 1999.
- As of December 31, 1998, our unconsolidated affiliates, SatMex and Globalstar, had outstanding debt, including the current portion, of $2.0 billion, and Globalstar had vendor financing of $371 million.
- We have a $115 million secured standby bank credit facility, which was undrawn as of December 31, 1998, supporting a guarantee of a $115 million term loan.
14 - SS/L has guaranteed $11.7 million under Globalstar's $250 million credit facility. In addition, we have a contingent liability of up to $56 million to Lockheed Martin Corporation pursuant to its guarantee of the Globalstar credit facility.
- We have agreed to maintain certain assets in a trust to collateralize a $129.9 million obligation of Servicios Corporativos Satelitales, S.A. de C.V., in which we have a 65% interest. This obligation has a seven year term and bears interest at 6.03%
The ability of our subsidiaries and affiliates to pay dividends to us or otherwise support our obligations is limited by the terms of their debt instruments. We intend to use our available cash to help pay for the growth and operation of our businesses. If any of our subsidiaries or affiliates finds itself faced with an imminent payment default, we might be faced with a choice between making additional equity investments in a troubled company or accepting the loss of some or all of our equity investment.
IF OUR BUSINESS PLAN DOES NOT SUCCEED, OUR OPERATIONS MIGHT NOT GENERATE ENOUGH CASH TO PAY OUR OBLIGATIONS.
For the year ended December 31, 1998, we had a deficiency of earnings to cover fixed charges of $140 million, before taking into account the $350 million of notes we issued in January 1999. Our core businesses are capital intensive and need substantial investment before returns on investment can be realized. We are subject to substantial financial risks from possible delays or reductions in revenue, unforeseen capital needs or unforseen expenses. Our ability to meet our obligations and execute our business plan could depend upon our ability and that of our operating subsidiaries and affiliates, to raise cash in the capital markets. We can't be certain that this source of cash would be available in the future on favorable terms, if at all.
Our ability to satisfy our obligations will depend upon our future financial performance which is subject to:
- the successful execution of our business plans and those of our affiliates;
- general economic conditions; and
- financial, business, regulatory and other factors, including international conditions.
These factors are to some extent beyond our control.
WE CURRENTLY DEPEND HEAVILY ON SS/L FOR A LARGE PORTION OF REVENUE AND OPERATING INCOME.
Currently, SS/L generates a significant part of our revenue and operating income. SS/L, in turn, has historically derived a large part of its revenues from a few customers. As a result, its revenues and operating results would be hurt if completed or canceled contracts are not promptly replaced with new orders.
SS/L's accounting for long-term contracts sometimes requires adjustments to profit and loss based on revised estimates during the performance of the contract. These adjustments may have a material effect on our results of operations in the period they are made. The estimates giving rise to these risks, which are inherent in long-term, fixed-price contracts, include the forecasting of costs and schedules, contract revenues related to contract performance, including revenues from orbital incentives, and the potential for component obsolescence due to procurements long ahead of assembly.
GLOBALSTAR IS A DEVELOPMENT STAGE COMPANY THAT HAS NOT BEGUN COMMERCIAL OPERATIONS.
Until the Globalstar System is fully deployed and tested, we can't be certain that it will perform as designed. Even if the system operates as it should, we can't be certain that the market will develop as we anticipate. The Globalstar system is still being deployed, and cannot begin commercial operations until:
- at least 32 satellites are working in orbit;
- the necessary ground equipment and user terminals are in place; and
- the service provider is fully licensed in each country to be served.
The cost of building the Globalstar System has been revised upward from its original estimates, and further increases are possible.
Barring unexpected adverse developments, Globalstar will need approximately $600 million more capital before it can begin commercial service in September 1999 as planned. As of December 31, 1998, and including the effect of a preliminary revision to Qualcomm's cost estimate, Globalstar's budgeted expenditures were $3.17 billion for the design, construction and deployment of the Globalstar System to commence 15 commercial service and $340 million for budgeted financing costs. More money will be needed if Globalstar experiences delays in beginning commercial service, and in any event, after the commencement of commercial service and before positive cash flow is achieved. Although Globalstar believes it will be able to obtain the money it needs, we cannot be certain that it will be available on favorable terms or on a timely basis, if at all.
Globalstar depends on independent service providers to supply the ground equipment and user terminals and market Globalstar service in each country where they plan to operate. We don't know whether these service providers will be successful. We expect that Globalstar service providers will operate in more than 100 countries, many of which have developing economies. Globalstar's strategy of focusing on areas which lack basic telephone service exposes it to the risk that customers in these economies will not be able to afford the service.
THERE ARE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Some of our business is conducted outside the United States, which imposes more risks. We could be harmed financially and operationally by changes in foreign regulations and telecommunications standards, tariffs or taxes and other trade barriers. Customers in developing countries could have difficulty in obtaining the U.S. dollars they owe us, including as a result of exchange controls. Additionally, exchange rate fluctuations may adversely affect the ability of our customers to pay us in U.S. dollars. Moreover, if we ever need to pursue legal remedies against our foreign business partners or customers, we may have to sue them abroad, where it could be hard for us to enforce our rights.
WE ARE SUBJECT TO EXPORT CONTROLS, WHICH MAY RESULT IN DELAYS, UNFORSEEN ADDITIONAL COSTS AND UNCERTAINTIES TO SELL IN CERTAIN MARKETS.
Like other exporters of space-related products and services, SS/L needs licenses from the U.S. government whenever it sells a satellite to a foreign customer or launches a satellite abroad. Satellite export licensing has lately been politically controversial, resulting in delays of some approvals, and creating uncertainties about the continuing ability of U.S. satellite manufacturers to sell in certain markets.
On December 23, 1998, the Office of Defense Trade Controls of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. According to the agency, the purpose of the temporary suspension is to permit it to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) as to the export of missile equipment or technology. This suspension has delayed SS/L's performance of its contractual obligations. If our customer terminates the ChinaSat-8 contract because of this delay, SS/L will have to refund advances it has received from ChinaSat. These advances totaled $124 million as of December 31, 1998. In addition, SS/L may incur penalties of up to $12 million upon such termination. SS/L believes that it would cost about $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. We cannot guarantee that SS/L would find a replacement customer.
The U.S. government recently announced that it will not grant an export license to Hughes Space & Communications, Inc. for a telecommunications satellite it is building for Asia Pacific Mobile Telecommunications. We do not know what this denial may mean for future applications of export licenses to Chinese customers or the resolution of the ChinaSat-8 suspension. If the U.S. government continues to deny export licenses for satellites sold to the Chinese or other markets, SS/L's business could be hurt.
SS/L IS THE TARGET OF A GRAND JURY INVESTIGATION; CONGRESS HAS HELD RELATED HEARINGS.
SS/L could be accused of criminal violations of the export control laws arising out of the participation of its employees in a committee formed to review the findings of the Chinese regarding the 1996 crash of a Long March rocket in China. Whether or not SS/L is indicted or convicted, SS/L will remain subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds that SS/L has violated the Arms Export Control Act. Further, the State Department can suspend export privileges whenever it determines that grounds for debarment exist and that suspension "is reasonably necessary to
16 protect world peace or the security or foreign policy of the United States." If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it:
- would be subject to a fine of $1 million per violation;
- could be debarred from certain export privileges; and
- could be debarred from participation in government contracts.
Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, a debarment would have a material adverse effect on SS/L's business, which in turn would affect us.
A committee of the U.S. House of Representatives, chaired by Representative Cox, is investigating U.S. satellite export policy toward China. The committee recently issued a report which has been declassified in part. The other portions of the report, which could be issued shortly, could contain negative comments about SS/L's compliance with the export control laws.
Further, we can't assure you that future licenses for satellites will be granted in the same manner and time frame, if at all, as in the past after the State Department takes over the licensing from the Commerce Department in March 1999.
WE SHARE CONTROL OF OUR AFFILIATES WITH THIRD PARTIES.
Third parties have significant ownership, voting and other rights in many of our subsidiaries and affiliates. As a result, we do not always have full control over management of these entities and the rights of these third parties and fiduciary duties under applicable law could result in these entities taking actions not in our best interests or in refraining to take actions that we deem advisable. To the extent that these entities are or become customers of SS/L, these conflicts could become acute. For example:
- Although we are the managing general partner and largest equity owner of Globalstar, our control is limited by the supermajority rights of Globalstar's limited partners.
- Primary operational control of SatMex is vested in Mexican nationals, as required by Mexican law, subject to certain supermajority rights which we retain.
- The Europe*Star joint venture, initiated by Alcatel, is under its control, subject to our supermajority rights.
- Future joint ventures between Alcatel and us within the Loral Global Alliance will be controlled by the initiating party, subject to supermajority rights in favor of the non-initiating party.
- Alcatel is an investor in CyberStar, and has supermajority rights in it.
THERE ARE POTENTIAL CONFLICTING COMMERCIAL INTERESTS AMONG OUR SUBSIDIARIES AND AFFILIATES.
Loral Skynet, SatMex, Loral Orion and Europe*Star have adopted a marketing policy that provides for collaboration and cross-selling of capacity among the Loral Global Alliance members. If, however, the members of the Loral Global Alliance do not collaborate but rather compete in areas of overlapping capacity, conflicting commercial interests among our subsidiaries and affiliates may arise. Both Loral Skynet and Loral Orion own or are building satellites whose coverage areas overlap with those of SatMex and Europe*Star. If Loral Skynet and Loral Orion do not collaborate with SatMex and Europe*Star, or vice versa, under the Loral Global Alliance, Loral Skynet and Loral Orion might compete directly with Europe*Star and SatMex for customers.
Partners and affiliates of Globalstar, including companies affiliated with us, will be among Globalstar's service providers and may, therefore, have conflicts with Globalstar and/or us over service provider agreements.
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in more than 100 jurisdictions, including the Federal Communications Commission, the International Telecommunications Union and the European Union. As a result, some
17 of the activities which are important to our strategy are beyond our control. The following are some strategically important activities which are regulated by various government authorities:
- the expansion of Loral Skynet's operations beyond the domestic U.S. market;
- the proposed launch and operation of Orion 2 and Orion 3;
- the international service offered by Loral Orion;
- the manufacture and export of satellites;
- the launch of Globalstar satellites; and
- the expansion of SatMex's Latin American business.
Regulatory authorities in the various jurisdictions in which we operate can modify, withdraw or impose charges or conditions upon the licenses which we need, and so increase our cost of doing business. The regulatory process also requires that we negotiate with third parties operating or intending to operate satellites at or near orbital locations where we place our satellites so that the frequencies of the satellites do not interfere. Because we cannot guarantee the results of negotiations with third parties, "frequency coordination" is an additional source of uncertainty. We cannot guarantee successful frequency coordination for our satellites. In particular, we have learned that Eutelsat, which may claim a priority filing with the International Telecommunications Union, has recently placed a satellite that is beyond its useful life at 12.5 degrees W.L., near the 12 degrees W.L. orbital location intended for Orion 2. If Eutelsat launches a replacement satellite into the 12.5 degrees W.L. orbital location, it would interfere with the Orion 2 satellite at 12 degrees W.L. We have entered into discussions with Eutelsat to resolve the issues relating to this orbital location; however, we cannot guarantee a successful resolution.
Failure to successfully coordinate our satellites' frequencies or to resolve other required regulatory approvals could have a material adverse effect on our financial condition and on our results of operations.
SS/L COMPETES WITH LARGE MANUFACTURERS THAT HAVE SIGNIFICANT RESOURCES.
In the manufacture of our satellites, we compete with very large well-capitalized companies, including several of the world's largest corporations, such as Hughes Space & Communications, Inc., a subsidiary of General Motors Corporation, and Lockheed Martin Corporation. These companies have considerable financial resources which they may use to gain advantages in marketing and in technological innovation. SS/L's success will depend on its ability to innovate on a cost-effective and timely basis.
WE COMPETE WITH A NUMBER OF SERVICE PROVIDERS FOR MARKET SHARE AND CUSTOMERS; TECHNOLOGICAL DEVELOPMENTS FROM COMPETITORS OR OTHERS MAY REDUCE DEMAND FOR SATELLITE-BASED SERVICES.
When Globalstar enters the satellite-based mobile phone business, it will face intense competition for customers from various companies, and in particular, Iridium LLC, ICO Global and providers of land-based mobile phone services. We cannot assure you that Globalstar will attract enough subscribers either to compete effectively or to implement its current business plan.
We face competition in the provision of fixed satellite services from companies such as PanAmSat Corporation, GE Americom, SES Astra and quasi-governmental organizations such as Intelsat. Because this market is mature, competition may cause downward price pressures, which may adversely affect our profits.
We, through Loral Orion and our affiliate CyberStar, also face competition in the provision of high-speed data communications, such as Internet applications, from providers of land-based data communications services, such as cable operators and traditional telephone service providers. In addition, Loral Orion and CyberStar may face competition in the future from Teledesic Corporation's proposed system and Hughes' Spaceway system. We cannot assure you that Loral Orion or CyberStar will attract enough customers either to compete effectively or to implement their business plans.
As land-based telecommunications services expand, demand for some satellite-based services may be reduced. New technology could render satellite-based services less competitive by satisfying consumer demand in other ways or through the use of incompatible standards.
We also compete for local regulatory approval in places in which both we and a competitor may want to operate. We also compete for scarce frequency assignments and fixed orbital positions.
18 THE YEAR 2000 PROBLEM.
Many computer systems and software programs may not function properly in the year 2000 and beyond because of a once common programming standard which used two digits instead of four digits to signify a year. These computer systems and software programs read the year 1999 as "99" and not "1999". Because of this, the year 2000 may appear as the year 1900, which could result in system failures or disruptions. This problem is often referred to as the "Year 2000" issue.
If we are unable to fix a material Year 2000 problem, we could experience an interruption or failure of our business operations. Likewise, if our suppliers are unable to fix a material Year 2000 problem, a resulting interruption or failure of their business could hurt us.
WE RELY ON KEY PERSONNEL.
We need highly qualified personnel. Except for Mr. Bernard L. Schwartz, our Chairman and Chief Executive Officer, none of our officers has an employment contract nor do we maintain "key man" life insurance. The departure of any of our key executives could have an adverse effect on our business.
THERE ARE RISKS REGARDING FORWARD-LOOKING STATEMENTS.
Some statements or information contained in this document are not historical facts but are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995). They can be identified by the use of forward-looking words such as "believes", "expects", "plans", "may", "will", "should", or "anticipates" or their negatives or other variations of these words or other comparable words, or by discussions of strategy that involve risks and uncertainties. Some of the factors which may cause future results and performance to differ from what we may imply here are:
- the space environment, where our satellites operate, is a harsh environment;
- governments may change regulations or institute new rules, which could have an impact on our operations;
- we need to be able to have access to scarce rockets to launch our satellites;
- Globalstar is a development-stage company that may continue to lose money, have negative cash flow, require additional money and suffer delays in meeting its targets;
- we depend on SS/L for operating income;
- there is severe competition in our business; and
- our subsidiaries and affiliates owe significant amounts of money.
We warn you that forward-looking statements are only predictions. Actual events or results may differ materially as a result of risks that we face, including those presented above. These are representative of factors that could affect the outcome of the forward-looking statements.
ITEM 2. PROPERTIES
The Company leases approximately 47,000 square feet for its corporate offices in New York. The Company's subsidiaries also maintain office space, manufacturing and telemetry, tracking and control facilities primarily in the United States. Management believes that the facilities are sufficient for its current operations.
Satellite Manufacturing and Technology
SS/L's research, production and testing facilities are carried on in SS/L-owned facilities covering approximately 562,000 square feet on 84 acres in Palo Alto, California. In addition, SS/L leases approximately 780,000 square feet of space from various third parties.
Fixed Satellite Services
Loral Skynet owns two telemetry, tracking and control stations covering approximately 39,000 square feet on 220 acres in Hawley, Pennsylvania and Three Peaks, California and leases approximately 51,000 square feet of office space.
19 Data Services
Loral Orion owns seven acres of land in Mt. Jackson, Virginia and leases approximately 78,000 square feet for office space and its operations center.
CyberStar leases approximately 44,000 square feet for office space and its network operations center.
ITEM 3. LEGAL PROCEEDINGS
Export Control Matters. Various agencies and departments of the U.S. government regulate Loral's ability to pursue business outside the United States. Exports of space-related products, services and technical information require U.S. government licenses. There can be no assurance that Loral or SS/L will be able to obtain necessary licenses or approvals, and the inability to do so, or the failure to comply with the terms thereof when granted, could have a material adverse effect on their respective businesses.
On February 15, 1996, a Chinese Long March rocket carrying an Intelsat satellite built by SS/L crashed seconds after launch. Thereafter, at the request of insurance companies concerned about underwriting future Long March launches, the manufacturer of the Long March, China Great Wall Industries Corporation ("CGWIC"), asked SS/L employees and personnel from other interested companies to serve on a committee formed to consider whether studies of the crash made by the Chinese had correctly identified the cause of the failure. In meetings with CGWIC, the committee reviewed CGWIC's launch failure analysis, which consisted of a preliminary explanation for the crash (a failed solder joint) and CGWIC's plan for further studies it planned to make.
In May 1996, an SS/L employee transmitted a copy of the committee's preliminary report to the members of the committee and, contrary to the intentions of SS/L's management, to CGWIC before consulting with the U.S. State Department. Upon becoming apprised of the facts, SS/L immediately informed the State Department, and thereafter submitted a detailed voluntary written disclosure to the State Department that included copies of the written materials provided to CGWIC and descriptions of the committee's meetings with the Chinese and of the events surrounding disclosure of the preliminary report. For the next 18 months, the Company had no notice of any adverse action being taken or contemplated in connection with the matter.
SS/L is a target of a grand jury investigation being conducted by the U.S. Attorney for the District of Columbia as to whether an unlawful transfer of technology occurred in connection with the committee's work. The Company and several of its employees have received subpoenas from that grand jury. SS/L is not in a position to predict the outcome of this investigation. If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million for each violation, and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a material adverse effect on SS/L's business, which would in turn affect the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Whether or not SS/L is indicted or convicted, SS/L will remain subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds a violation of the Arms Export Control Act that puts SS/L's reliability in question, and it can suspend export privileges whenever it determines that grounds for debarment exist and that such suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was conveyed to the Chinese, and no secret or classified information was discussed with or reported to them. SS/L believes that its employees acted openly and in good faith and that none engaged in intentional misconduct. Accordingly, the Company does not believe that SS/L has committed a criminal violation of the export control laws. The Company does not expect the grand jury investigation or its outcome to result in a material adverse effect upon its business. However, there can be no assurance as to those conclusions.
In May 1997, SS/L applied for an export license for the launch of another SS/L satellite in China, which was granted following the required Presidential waiver in February 1998. The Company believes that the authorizations were properly granted, and does not believe that it or any of its officers acted improperly in obtaining them. The policy of the Bush administration, which has been continued under President Clinton, has been to grant such waivers routinely as being in the national interest; indeed, the Company is unaware of any
20 requested waiver for a Chinese satellite launch ever having been denied. According to press reports, President Bush signed three waivers covering nine Long March launches, and President Clinton has signed eight waivers covering 11 Long March launches. This policy has, until recently, also enjoyed bipartisan Congressional support. On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 program. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions, and believes that a review of the agreement will conclude that its terms comply with the new law. The ODTC, however, has not completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. If such a delay were to continue for an extended period, or if the suspension was not lifted, SS/L's customer could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($124 million as of December 31, 1998) and may incur penalties of up to $12 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance that SS/L will be able to find such a replacement customer.
Several Congressional committees have held hearings on U.S. satellite export policy toward China, alleged influence of campaign contributions (including contributions made by Loral's Chairman and CEO) on the Clinton Administration's export policy toward China, and related matters. One of the House committees investigating these matters, chaired by Representative Cox, recently issued a classified report that is said to be critical of past government and industry technology transfer practices and policies. This report is also said to contain 38 proposals for legislative and executive action to address perceived concerns. It is possible that adoption of some or all of such proposals could have an adverse effect upon the ability of U.S.-based satellite manufacturers such as SS/L, and possibly other U.S. exporters, to market their products abroad in competition with foreign-based manufacturers, and might adversely affect their ability to perform existing contracts. In addition, the portions of the report that have not yet been declassified could contain negative comments about SS/L's compliance with the export control laws.
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral Fairchild"), a subsidiary of Loral Corporation ("Old Loral"), filed suit (the "CCD Lawsuit") against a number of companies including Sony Corporation ("Sony"), Matsushita Electronics Corporation ("Matsushita") and NEC Corp. ("NEC") claiming that such companies had infringed Loral Fairchild's patents for a "charged coupled device" ("CCD"), commonly used as an optical sensor in video cameras and fax machines. Although the CCD patents have expired, Loral Fairchild is seeking reasonable royalties through the expiration date from a number of defendants. On February 22, 1996, a jury in the United States District Court for the Eastern District of New York found unanimously that Sony had infringed the CCD patents. The trial judge, however, in an order dated July 12, 1996, reversed the jury verdict. Loral Fairchild has appealed the court's decision. Loral Fairchild's claims against other defendants remain pending, but if the court's decision is affirmed on appeal, a substantial portion, but not all, of the damage claims against the other defendants would be adversely affected. Matsushita has been granted a declaratory judgment that it has a valid and enforceable license under the CCD patents. In addition, a trial on Matsushita's claim against Loral Fairchild for tortious interference was conducted during July 1996, and a verdict was rendered in favor of Loral Fairchild in September 1997.
Environmental Regulation. Operations at SS/L, Loral Skynet, Loral Orion, CyberStar and Globalstar are subject to regulation by various federal, state and local agencies concerned with environmental control. The Company believes that these facilities are in substantial compliance with all existing federal, state and local environmental regulations. With regard to certain sites, environmental remediation is being performed by prior owners who retained liability for such remediation arising from occurrences during their period of ownership. To date, these prior owners have been fulfilling such obligations and the size and current financial condition of the prior owners make it probable that they will be able to complete their remediation obligations without cost to the Company or Globalstar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21 PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the NYSE under the symbol LOR. The following table presents, the reported high and low sales prices of the Company's common stock as reported on the NYSE:
HIGH LOW ------YEAR ENDED DECEMBER 31, 1998 Quarter ended March 31, 1998...... $30 1/2 $19 Quarter ended June 30, 1998...... 33 15/16 24 1/2 Quarter ended September 30, 1998...... 31 7/8 12 1/8 Quarter ended December 31, 1998...... 20 1/2 10 3/4
YEAR ENDED DECEMBER 31, 1997 Quarter ended March 31, 1997...... $19 1/2 $14 1/8 Quarter ended June 30, 1997...... 17 1/2 13 Quarter ended September 30, 1997...... 21 14 1/16 Quarter ended December 31, 1997...... 24 1/4 19
The Company does not currently anticipate paying any dividends or distributions on its common stock or the Series A Convertible Preferred Stock. As required, Loral is currently paying dividends on its 6% Series C Convertible Redeemable Preferred Stock. The credit facility maintained by the Company's wholly owned subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom") restricts the ability of Loral SpaceCom to transfer cash or pay dividends to its parent (see Note 7, to Loral's consolidated financial statements). Loral Orion's indentures relating to its senior notes and its senior discount notes also contain restrictions on Loral Orion's ability to make dividend payments to its parent. Loral's indenture relating to its 9 1/2% Senior Notes due 2006 issued in January 1999 also imposes limitations on Loral's ability to pay dividends to its shareholders.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 26, 1999, there were approximately 6,960 holders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and should be read in conjunction with, the related financial statements. Historical financial information as of and for the two years ended March 31, 1996, represents the space and communications operations of Old Loral.
22 LORAL SPACE & COMMUNICATIONS LTD. (In thousands except per share data)
YEARS ENDED NINE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31,(1) ------DECEMBER 31, ------1998(1) 1997(1) 1996(1) 1996 1995 ------STATEMENT OF OPERATIONS DATA:
Revenues...... $1,301,702 $1,312,591 Management fee from affiliate...... $ 5,088 $ 5,608 $ 3,169 Operating income (loss)...... (33,780) 13,552 (12,201) 2,587 (33) Equity in net loss of affiliates(2)...... (120,417) (49,037) (4,709) (8,628) (8,988) Net income (loss)...... (138,798) 40,004 8,877 (13,785) (7,873) Preferred dividends and accretion(3)...... (46,425) (26,315) Net income (loss) applicable to common stockholders...... (185,223) 13,689 8,877 (13,785) (7,873) Earnings (loss) per share -- basic and diluted...... (.68) .06 .04 (.08) N/A OTHER DATA: Ratio of earnings to fixed charges...... 1.9x 3.7x Deficiency of earnings to cover fixed charges...... $ 140,438 CASH FLOW DATA: Provided by (used in) operating activities...... $ 4,417 $ (230,248) $ (3,003) $ (1,319) $ (8,439) Used in investing activities...... 473,235 1,022,772 1,962 115,031 92,055 Provided by (used in) equity transactions...... 589,187 (18,097) 602,413 116,362 100,494 Provided by financing transactions...... 199,856 316,912 583,292 Dividends paid per common share.... N/A N/A
DECEMBER 31, MARCH 31, ------1998(1) 1997(1) 1996(1) 1996(1) 1995(1) ------BALANCE SHEET DATA:
Cash and cash equivalents...... $ 546,772 $ 226,547 $1,180,752 $ 12 $ -- Total assets...... 5,229,215 3,010,447 1,699,326 354,396 251,819 Convertible preferreds(3)...... 583,292 Debt...... 1,555,775 435,398 Non-current liabilities...... 236,160 221,211 26,834 Shareholders' equity(4)/Invested equity...... 2,935,721 1,980,520 1,070,069 354,396 251,819
(1) On March 20, 1998, Loral acquired all of the outstanding stock of Loral Orion in exchange for common stock of Loral. The 1998 financial information includes Loral Orion commencing from April 1, 1998. In 1997, Loral increased its ownership in SS/L to 100% and, accordingly, the 1997 financial information includes the results of SS/L. In prior years SS/L was accounted for under the equity method of accounting. On March 14, 1997, Loral acquired Loral Skynet from AT&T; Loral's financial information includes the results of Loral Skynet from that date. Financial information as of and for the two years in the period ended March 31, 1996, represents the space and communications operations of Old Loral. The results of operations for the two years in the period ended March 31, 1996 include allocations and estimates of certain expenses of Loral based upon estimates of actual services performed by Old Loral on behalf of Loral. Interest expense was allocated to Loral based on Old Loral's historical weighted average interest rate applied to the average investment in affiliates.
(2) The Company's principal affiliates are Globalstar, SatMex since November 17, 1997 and Europe*Star since December 1998. Loral also has an investment in SkyBridge which is accounted for under the equity method. Loral sold its interest in K&F Industries, Inc. in 1997.
(3) Convertible preferred equivalent obligations were exchanged for 6% Series C Preferred Stock and were reclassified to shareholders' equity in 1997 upon approval by the Company's shareholders.
(4) As of December 31, 1998, the book value per share of the Series A Preferred Stock and the common stock (which the Company is required to disclose herein in accordance with applicable Bermuda law) was $7.57 and $7.56, respectively. Book value per share represents the quotient obtained by dividing shareholders' equity, reduced by the Series C Preferred Stock redemption value, by the number of outstanding shares of common stock, giving effect to the conversion of the Series A Preferred Stock, plus, in the case of such preferred stock, the $.01 liquidation preference thereof.
23 SPACE SYSTEMS/LORAL, INC. (In thousands)
NINE MONTHS YEARS ENDED ENDED MARCH 31, DECEMBER 31, ------1996 1996 1995 ------STATEMENT OF OPERATIONS DATA: Revenues...... $1,017,653 $1,121,619 $ 633,717 Gross profit...... 64,157 34,406 27,785 Net income...... 31,025 12,367 5,554 MARCH 31, DECEMBER 31, ------1996 1996 1995 ------BALANCE SHEET DATA: Cash and cash equivalents...... $ 19,181 $ 126,863 $ 52,222 Total assets...... 1,059,064 908,677 766,475 Long-term debt...... 127,586 65,052 34,040 Shareholders' equity...... 478,893 447,868 435,501
GLOBALSTAR, L.P. (In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994 ------PRE-CAPITAL CUMULATIVE SUBSCRIPTION MARCH 23, 1994 MARCH 23 PERIOD(1) (COMMENCEMENT (COMMENCEMENT ------OF OPERATIONS) TO YEARS ENDED DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO DECEMBER 31, ------DECEMBER 31, MARCH 22, 1998 1998(3) 1997 1996 1995 1994 1994 ------STATEMENT OF OPERATIONS DATA: Revenues...... $ -- $ -- $ -- $ -- $ -- $ -- $ -- Operating loss...... 404,033 146,684 88,071 61,025 80,226 28,027 6,872 Net loss applicable to ordinary partnership interests...... 406,978 151,740 88,788 71,969 68,237 26,244 6,872 Net loss per weighted average ordinary partnership interest outstanding basic and diluted...... 2.69 1.74 1.53 1.50 0.73 Cash distributions per ordinary partnership interest...... OTHER DATA: Deficiency of earnings to cover fixed charges(2)...... 330,475 184,683 81,869 N/A N/A CASH FLOW DATA: Used in operating activities... 206,749 24,958 68,615 51,756 38,368 23,052 Used in investing activities... 2,014,396 684,834 619,538 379,130 280,345 50,549 Provided by partners' capital transactions...... 898,320 14,825 132,990 284,714 318,630 147,161 Provided by (used in) other financing activities...... 1,379,564 287,552 998,137 95,750 (1,875)
DECEMBER 31, ------1998 1997 1996 1995 1994 ------BALANCE SHEET DATA: Cash and cash equivalents...... $ 56,739 $ 464,154 $ 21,180 $ 71,602 $ 73,560 Total assets...... 2,670,025 2,149,053 942,913 505,391 151,271 Vendor financing liability...... 371,170 197,723 130,694 42,219 Debt...... 1,396,175 1,099,531 96,000 Redeemable preferred partnership interests...... 303,089 302,037 Ordinary partners' capital...... 602,401 380,828 315,186 386,838 112,944
(1) Reflects certain costs incurred by Loral and Qualcomm prior to March 23, 1994, which were reimbursed by Globalstar through a capital subscription credit or agreement for repayment in connection with the $275.0 million capital subscription and commencement of Globalstar's operations on March 23, 1994.
(2) The ratio of earnings to fixed charges is not meaningful as Globalstar is in the development stage and, accordingly, has incurred operating losses.
(3) The results of operations for 1998, include a $17.3 million loss from launch failure. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations of Loral Space & Communications Ltd. and subsidiaries ("Loral" or the "Company"), Globalstar, L.P. ("Globalstar") and Satelites Mexicanos, S.A. de C.V. ("SatMex") are forward-looking statements that involve risks and uncertainties, many of which may be beyond the companies' control. The actual results that the companies achieve may differ materially from any forward-looking projections due to such risks and uncertainties.
Loral is one of the world's leading satellite communications companies, with substantial activities in satellite manufacturing and satellite-based communications services. Loral is developing the building blocks necessary to create a seamless, global networking capability for the information age. In 1998, Loral advanced its strategy significantly by acquiring Orion Network Systems, Inc., increasing its ownership in Globalstar, forming the Loral Global Alliance, including the formation of Europe*Star Limited ("Europe*Star"), and organizing and integrating its businesses to form four distinct operating segments. Accordingly, as of February 28, 1999, Loral has increased its satellite fleet to seven satellites in orbit (including three owned by SatMex, Loral's 49% owned affiliate). Loral will expand the geographic coverage and capacity of its fixed satellite services by launching three additional satellites for the Telstar and Loral Orion fleets in 1999. Loral's four operating segments are:
Satellite Manufacturing and Technology. Designing and manufacturing satellites and other space systems and developing satellite technology for a broad variety of customers and applications through Space Systems/Loral, Inc. ("SS/L"),
Fixed Satellite Services. Leasing transponder capacity and providing value added services to customers for a wide variety of applications, including the distribution of broadcast programming, news gathering, business television, distance learning and direct-to-home ("DTH") services. The Company's fixed satellite service ("FSS") assets, managed by Loral Skynet and marketed under the Loral Global Alliance banner, consist of seven high-power geosynchronous ("GEO") satellites as of February 28, 1999 - three Loral Skynet Telstar satellites and one satellite of Loral Orion, Inc. ("Loral Orion"), as well as three SatMex satellites. The two satellites expected to be launched by the recently formed Europe*Star joint venture with Alcatel, in which Loral owns a 47% interest, also will be part of the Loral Global Alliance and form a component of the Company's FSS business segment,
Data Services. Business in development, providing managed communications networks and Internet and intranet services through Loral Orion and delivering high-speed broadband data communications through CyberStar, L.P. ("CyberStar"), using transponder capacity on the Telstar and Loral Orion fleets, and
Global Mobile Telephony. Providing worldwide wireless mobile telephony and narrow-band data communications through a constellation of low-earth orbiting ("LEO") satellites (the "Globalstar System") operated by Globalstar, which is expected to commence service in September 1999. Loral is the managing general partner and owned approximately 43%, 40% and 32% of Globalstar as of December 31, 1998, 1997 and 1996, respectively.
CONSOLIDATED OPERATING RESULTS
In evaluating financial performance, management uses revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") as a measure of a segment's profit or loss. The following discussion of revenues and EBITDA reflects the results of Loral's operating segments for the two years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996. Also, see Note 15 to Loral's consolidated financial statements for additional information on segment results. The remainder of the discussion relates to the consolidated results of Loral, unless otherwise noted.
25 Operating revenues:
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------(IN MILLIONS) Satellite manufacturing and technology(1)...... $1,390.2 $1,442.6 $ 1,017.7 Fixed satellite services(2)...... 254.2 83.0 Data services(3)...... 39.8 Management fee from affiliate...... 5.1 ------Operating segment revenues...... 1,684.2 1,525.6 1,022.8 Less: Affiliate eliminations(4)...... (104.8) (12.9) (1,017.7) Intercompany eliminations(5)...... (277.7) (200.1) ------Operating revenues...... $1,301.7 $1,312.6 $ 5.1 ======
EBITDA(6):
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------(IN MILLIONS) Satellite manufacturing and technology(1)...... $ 107.0 $ 99.7 $ 77.3 Fixed satellite services(2)...... 171.2 51.8 Data services(3)...... (13.3) Corporate expenses(7)...... (31.9) (15.7) (11.2) ------EBITDA for operating segments before development and start-up costs, and intercompany and affiliate eliminations...... 233.0 135.8 66.1 Development and start-up costs(8): Data services(3)...... (33.3) (32.6) Global mobile telephony(9)...... (145.0) (87.1) (45.0) ------Total development and start-up costs...... (178.3) (119.7) (45.0) ------Segment EBITDA...... 54.7 16.1 21.1 Less: Affiliate eliminations(4)...... 70.2 77.2 (32.3) Intercompany eliminations(5)...... (23.7) (17.0) ------EBITDA as reported...... $ 101.2 $ 76.3 $(11.2) ======
(1) Satellite Manufacturing and Technology includes 100% of SS/L's results. In 1996 Loral increased its ownership in SS/L from 32.7% to 51% and used the equity method of accounting. In February 1997, Loral agreed to acquire the remaining 49% of SS/L.
(2) Fixed Satellite Services includes 100% of the following companies since their respective dates of acquisition: Loral Skynet acquired on March 14, 1997; Loral Orion's transponder leasing business acquired on March 20, 1998; SatMex, a 49% equity investee acquired on November 17, 1997; and Europe*Star, a 47% equity investee, since December 1998.
(3) Data services includes 100% of CyberStar and 100% of Loral Orion's data services business since its acquisition on March 20, 1998.
(4) Represents amounts related to unconsolidated affiliates (SatMex, Europe*Star and Globalstar and, in 1996, SS/L). These amounts are eliminated in order to arrive at Loral's consolidated results. Loral's proportionate share of these affiliates is included in equity in net loss from affiliates in Loral's consolidated statements of operations.
(5) Represents the elimination of sales and EBITDA primarily for satellites under construction by SS/L for wholly owned subsidiaries; as well as eliminating sales for the lease of transponder capacity by Data Services from Fixed Satellite Services.
(6) EBITDA (which is equivalent to operating income (loss) before depreciation and amortization) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of Loral's operating results. However, EBITDA should not be construed as an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (7) Represents unallocated corporate expenses incurred in support of the Company's operations.
(8) Represents EBITDA for operations in the development stage (CyberStar and Globalstar).
(9) Includes 100% of Globalstar. Loral owned approximately 43%, 40% and 32% as of December 31, 1998, 1997 and 1996, respectively.
26 1998 COMPARED WITH 1997
Total revenues for Loral's operating segments were $1.7 billion for 1998 versus $1.5 billion in 1997, before intercompany and affiliate eliminations of $383 million in 1998 and $213 million in 1997. The increase in revenues was due primarily to growth in fixed satellite services as a result of including SatMex for the full year, Loral Orion's leasing business for nine months, Loral Skynet's results for a full year in 1998 versus nine and a half months in 1997 and increased utilization of Loral Skynet's Telstar satellites. The growth in fixed satellite services was partially offset by a modest decline in satellite manufacturing revenues which primarily resulted from the debooking of three satellites for Asian customers at the end of 1997. The increase in affiliate eliminations in 1998 reflects the elimination of a full year of SatMex sales. The increase in intercompany eliminations in 1998, primarily reflects increased investment in satellite construction by SS/L for Loral's FSS segment.
EBITDA for operating segments before development and start-up costs, and intercompany and affiliate eliminations, increased in 1998 to $233 million from $136 million in 1997, a year-over-year increase of 72%. This increase arose primarily from the growth in fixed satellite services due to increased utilization of Loral Skynet's Telstar satellites, the inclusion of Loral Skynet's results for a full year in 1998 versus nine and a half months in 1997, including the results of Loral Orion's leasing business subsequent to its acquisition, and including SatMex's results for a full year in 1998 and growth in satellite manufacturing and technology due to increased margins in satellite manufacturing. These increases were partially offset by including the results of Loral Orion's data services business in 1998 and increased corporate expenses, which resulted primarily from costs incurred for the additional resources required to manage the substantial growth in Loral's businesses, along with increased legal and other costs in support of the Company's operations. Total development and start-up costs rose substantially in 1998 to $178 million, a 49% increase over 1997 spending of $120 million. While the investment required for CyberStar remained constant year-over-year at approximately $33 million, costs related to the further development of Globalstar rose to $145 million in 1998 from $87 million in 1997, due to increased activities in anticipation of the commencement of commercial service. Affiliate eliminations decreased in 1998 primarily as a result of eliminating a full year of SatMex's results for 1998 versus one and a half months in 1997, partially offset by the elimination of increased Globalstar costs in 1998 and the elimination of Europe*Star costs in 1998. Intercompany eliminations increased in 1998 primarily from increased investment in satellite construction by SS/L for Loral's FSS segment. As a result of the above, EBITDA as reported increased 33% to $101 million in 1998 from $76 million in 1997.
Depreciation and amortization rose to $135 million in 1998 from $63 million in 1997, and excludes depreciation and amortization of unconsolidated affiliates of $50 million and $7 million for 1998 and 1997, respectively, primarily for SatMex. The increase primarily results from the inclusion of Loral Orion's depreciation, the amortization of cost in excess of Loral Orion's net assets acquired and from the inclusion of Loral Skynet's depreciation and amortization for a full year in 1998, which includes the depreciation of Loral Skynet's Telstar 5 satellite which was placed in service on July 1, 1997.
Interest and investment income increased to $54 million in 1998 from $49 million in 1997. This increase is principally due to including Loral Orion's interest income in 1998, partially offset by lower cash balances available for investment in 1998.
Interest expense of $51 million in 1998, net of capitalized interest of $60 million, reflects interest on borrowings under Loral's credit agreement and other facilities and interest on Loral Orion's debt subsequent to its acquisition. Interest expense of $15 million in 1997, net of capitalized interest of $23 million, reflects interest on SS/L's debt assumed and interest on Loral's outstanding Convertible Preferred Equivalent Obligations ("CPEOs"). On June 5, 1997, the CPEOs were exchanged for Loral 6% Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock").
Loral realized a $35 million gain on the sale of Globalstar Telecommunications Limited ("GTL") common stock, which was mostly offset by the write-off of non-strategic investments in Asia Broadcasting and Communications Network, Ltd. and in Continental Satellite Corporation of $30 million, which were determined to have no future value to Loral. These items resulted in a net gain on investments of $5 million in
27 1998. In 1997, the Company realized a gain on investments of $80 million resulting from the sale of the stock of K&F Industries, Inc. ("K&F"), net of expenses.
For 1998, the Company recorded an income tax benefit of 15.1% on its loss before income taxes, while for 1997, the Company recorded an income tax provision of 27.5% on income before income taxes. The benefit rate for 1998 is lower than the provision rate for 1997 primarily because of the Loral Orion non-deductible amortization of costs in excess of net assets acquired in the current year.
The minority interest benefit in 1998 primarily reflects the reduction of CyberStar's loss attributed to CyberStar's other investor, who owned 17.6% as of December 31, 1998. The minority interest expense in 1997 also reflects the reduction of SS/L's income attributed to other partners' partial ownership in SS/L until Loral acquired the remaining 49% in February 1997, as compared to Loral's full ownership of SS/L in 1998 for the entire year.
The equity in net loss of affiliates was $120 million in 1998 compared to $49 million in 1997. Loral's share of Globalstar's losses was $67 million in 1998 compared to $41 million in 1997. This increase was primarily due to Globalstar's increased development and start-up costs and Loral's increased ownership percentage in Globalstar in 1998 (42.6% as of December 31, 1998 versus 40.1% as of December 31, 1997) and Loral's proportionate share of a charge taken by Globalstar in 1998 as a result of a Zenit launch failure. Loral's share of SatMex's loss was $16 million and $6 million for the year ended December 31, 1998 and the period November 17, 1997 through December 31, 1997, respectively. Also included as equity in net loss of affiliates for 1998 is Loral's share of Europe*Star's loss of $4 million, Loral's share of SkyBridge Limited Partnership's loss, net of the related tax benefit, of $25 million, and Loral's share of losses from other affiliates of $8 million (see Note 6 to Loral's consolidated financial statements).
Preferred distributions of $46 million and $26 million for the years ended December 31, 1998 and 1997, relate to the Series C Preferred Stock. The increase in 1998 reflects a full year of preferred distributions versus a partial year in 1997. The Series C Preferred Stock was issued in June 1997.
As a result of the above, net loss applicable to common stockholders for 1998 was $185 million or $0.68 per diluted share, compared to net income of $14 million or $0.06 per diluted share, for 1997. Diluted weighted average shares were 273.4 million for 1998 and 243.6 million for 1997. This increase was primarily due to the 23 million shares issued to the public and the 18 million shares issued to acquire Orion in 1998.
1997 COMPARED WITH THE NINE MONTHS ENDING 1996
Total revenues for Loral's operating segments for 1997 were $1.5 billion versus $1.0 billion in 1996, before intercompany and affiliate eliminations of $213 million in 1997 and $1.0 billion in 1996. The increase in revenues was primarily due to including the results of satellite manufacturing and technology for a full year in 1997 versus nine months in 1996 and as a result of including the results of Loral Skynet from the date of acquisition in 1997. The decrease in affiliate eliminations primarily reflects the elimination of 100% of SS/L sales in 1996, as SS/L was an equity investee of Loral prior to January 1, 1997. The increase in intercompany eliminations in 1997 was due to the Company's acquisitions of SS/L and Loral Skynet during 1997 and primarily represents the elimination of satellite sales by SS/L to Loral Skynet.
EBITDA for operating segments before development and start-up costs, and intercompany and affiliate eliminations, increased in 1997 to $136 million from $66 million in 1996, a year-over-year increase of 105%. This increase was primarily due to growth in the fixed satellite services segment as a result of the acquisition of Loral Skynet and including satellite manufacturing and technology for a full year in 1997 versus nine months in 1996. Total development and start-up costs rose substantially in 1997 to $120 million, compared with spending of $45 million for the nine months ended December 31, 1996. This increase was due to the formation and start-up of CyberStar in 1997 for which the Company invested $33 million and costs related to the development of Globalstar which increased to $87 million in 1997 from $45 million for the nine months ended December 31, 1996. The increase in affiliate eliminations was due primarily to the acquisition of SS/L in 1997. Intercompany eliminations in 1997 were due to the Company's acquisitions of SS/L and Loral Skynet
28 in 1997 and primarily represent the elimination of intercompany profit on satellite sales by SS/L to Loral Skynet.
Depreciation and amortization increased to $63 million in 1997 from $1 million in 1996 and excludes depreciation and amortization of unconsolidated affiliates of $7 million for 1997, primarily for SatMex, and $23 million for SS/L in 1996. This increase was a result of the acquisitions of SS/L and Skynet in 1997.
Interest and investment income of $49 million for 1997 primarily represents $43 million of interest earned on the investment of available cash during the year and interest on the GTL Convertible Preferred Equivalent Obligations ("GTL CPEOs"). Interest and investment income for the nine months ended December 31, 1996 of $35 million reflects the investment of available cash during the period and interest on the GTL CPEOs.
Interest expense of $15 million, net of capitalized interest of $23 million for 1997, reflects the assumption of SS/L's debt, borrowings under the Credit Agreement (see Note 7 to Loral's consolidated financial statements) and interest on Loral's outstanding CPEOs until June 5, 1997, when the CPEOs were exchanged for Series C Preferred Stock. Interest expense for the nine months ended December 31, 1996 of $6 million reflects interest on the CPEOs for one quarter.
Gain on investments in 1997 of $80 million represents the gain on the sale of K&F stock, net of expenses.
The Company's effective income tax rate for 1997 was 27.5%. 1997's effective rate is lower than the statutory U.S. federal income tax rate because, as a Bermuda company, a portion of the Company's income is not subject to federal taxation.
The minority interest expense in 1997 primarily reflects the reduction of SS/L's income attributed to the other partners partial ownership of SS/L, prior to Loral acquiring the remaining 49% in February 1997, offset by the benefit of the reduction in CyberStar's loss attributable to CyberStar's other investor.
The equity in net loss of affiliates for 1997 of $49 million primarily reflects increased development costs at Globalstar as well as an increased ownership percentage by Loral in Globalstar (40.1% as of December 31, 1997 versus 31.7% as of December 31, 1996), for which the Company's share of such losses was $41 million. In addition, in connection with Loral's investment in SatMex in 1997, Loral recorded its initial share of SatMex's losses of $6 million. The equity in net loss of affiliates for the nine months ended December 31, 1996 of $5 million, reflects the Company's share of Globalstar losses of $18 million offset by the Company's share of SS/L's income of $13 million. In 1997, the Company discontinued using the equity method for its investment in SS/L and fully consolidated SS/L's results of operations.
Preferred dividends in 1997 of $26 million result from the exchange of the Company's CPEOs for Series C Preferred Stock.
As a result of the above, net income applicable to common stockholders for 1997 was $14 million, or $0.06 per diluted share, compared to $9 million, or $0.04 per diluted share, for the nine months ended December 31, 1996. Diluted weighted average shares were 243.6 million for 1997 and 229.4 million for the nine months ended December 31, 1996. This increase was primarily due to the common shares issued to acquire SS/L and additional partnership interests in Globalstar.
RESULTS BY OPERATING SEGMENT
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology subsidiary, before intercompany eliminations were approximately $1.4 billion in both 1998 and 1997. EBITDA in 1998 rose to $107 million from $100 million in 1997. In 1997, in connection with delayed payments by two Asian customers for three satellites, SS/L stopped work, reduced backlog by $291 million, which reduced future sales, and recorded a charge of $23 million. If the current programs for these three satellites are not restarted, the satellites will be sold to other customers. Funded backlog for SS/L as of December 31, 1998 and 1997, was $1.5 billion and $1.4 billion, respectively, including intercompany backlog of $111 million in 1998 and $188 million in 1997. Approximately 70% of the 1998 external funded backlog is expected to be realized in 1999.
29 Revenues recorded under contracts with Globalstar for the years ended December 31, 1998 and 1997 were $599 million and $408 million, respectively. Capital expenditures for 1998 were approximately $40 million and are estimated to remain fairly constant in 1999.
Fixed Satellite Services
Revenues and EBITDA for the fixed satellite services segment more than tripled in 1998 versus 1997. FSS revenue for 1998 (including Loral Skynet, 100% of SatMex for the full year and, nine months of Loral Orion's revenues from leasing) was $254 million versus $83 million last year. EBITDA on the same basis was $171 million in 1998, or 67% of revenues, up from EBITDA of $52 million, or 62% of revenues, in 1997. Funded backlog for the fixed satellite services segment totaled $746 million at the end of 1998, almost double the $396 million in backlog at year-end 1997, including intercompany and affiliate backlog of $140 million in 1998 and $6 million in 1997. Approximately 30% of the 1998 external funded backlog is expected to be realized in 1999. Capital expenditures for 1998 were approximately $639 million, which included $151 million and $67 million for SatMex and Europe*Star, respectively. In 1999, capital expenditures are expected to decrease due to the successful launches of SatMex 5 and Telstar 6 and the expected launches of three additional satellites.
During the fourth quarter, Loral completed its integration plan for Loral Orion and transferred management of Loral Orion's satellite capacity leasing and satellite operations to Loral Skynet, effective January 1, 1999. In addition to increasing the operational efficiency, capacity, flexibility and marketing reach of Loral's FSS services, the realignment permits Loral Orion to focus on and leverage its experience in the global data services market.
Data Services
In order to align all of Loral's resources and activities in the developing data services area, CyberStar's broadband business and Loral Orion's Internet and corporate data networking businesses have been reorganized and in 1999 began reporting to a group vice president. This alignment allows the business units to continue to operate independently while taking advantage of the synergies they share. The reported results for the data services segment include Loral Orion's operations relating to the providing of data services, exclusive of transponder leasing, along with the results of CyberStar.
Revenues for the data services segment in 1998 were approximately $40 million, primarily from Loral Orion's corporate data networking and Internet and intranet services businesses. EBITDA before development costs was a loss of approximately $13 million. Total development and start-up costs for CyberStar were $33 million for 1998 and 1997. As of December 31, 1998, funded backlog for the segment was $147 million, which was all from external sources. Approximately 35% of 1998 external funded backlog is expected to be realized in 1999. Capital expenditures in 1998 were approximately $27 million and are estimated to remain fairly constant in 1999.
In the fourth quarter, CyberStar announced the commercial availability of its broadband satellite-based business communications service. One of its first customers selected CyberStar to deliver in-theater media to its nationwide cinema network. CyberStar is conducting pilot programs with other enterprise customers in markets such as entertainment, finance, real estate, training, insurance and retail.
Global Mobile Telephony
Loral manages and is the largest equity owner of Globalstar, the global mobile telephony segment of Loral. Globalstar is a development stage partnership scheduled to commence commercial service operations in September 1999. Globalstar's development and start-up costs were $145 million in 1998 as compared to $87 million for 1997. The rise in costs relates primarily to increased activities in anticipation of the start of service. Globalstar is expending significant funds for the construction, testing and deployment of the Globalstar System and expects such losses to continue through commencement of revenue generating service operations.
30 ACQUISITIONS AND INVESTMENTS IN AFFILIATES
The Company commenced operations in 1996 with equity holdings in SS/L, Globalstar and K&F. In 1997 and 1998, Loral accelerated its transformation from a company with extensive equity investments, to a major satellite manufacturer and provider of satellite services by making a number of acquisitions and investments that significantly affected its results of operations and financial condition.
SS/L and Skynet
In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies for $374 million in cash and Loral securities. On March 14, 1997, Loral acquired Skynet for $462.1 million in cash. The acquisition of Skynet and the remaining equity interest in SS/L have been accounted for as purchases. Loral's consolidated financial statements for the year ended December 31, 1997 reflect the results of operations of SS/L from January 1, 1997, the elimination of the minority interest of the SS/L equity not owned by Loral during the period and the results of operations of Loral Skynet from March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the equity method of accounting.
Globalstar
In each of 1998 and 1997, GTL effected a two-for-one stock split to shareholders in the form of a 100% stock dividend. Accordingly, all GTL share and per share amounts, have been restated to reflect the stock splits.
In 1997, Loral, the managing partner of Globalstar, increased its ownership in Globalstar by exercising existing warrants and rights to acquire 1,312,696 Globalstar ordinary partnership interests for $34.8 million in cash and by acquiring 2,748,372 Globalstar ordinary partnership interests from other Globalstar partners for $97.5 million in cash, 1,255,684 shares of Loral common stock and a deferred purchase price of $24.8 million, which was paid in January 1999.
On July 6, 1998, Loral purchased 4.2 million Globalstar ordinary partnership interests (corresponding to approximately 16.8 million equivalent shares of GTL common stock) from other Globalstar partners for $420 million in cash (the "Globalstar Purchase"). The service provider partners participating in the transaction deposited one half of their proceeds ($210 million) into escrow accounts to be used for the purchase of Globalstar gateways and user terminals. Loral used $175 million of the net proceeds from its equity offering (see Note 9 to Loral's consolidated financial statements) to finance a portion of the Globalstar Purchase and the remaining balance was provided through the concurrent sale by Loral of 8.4 million shares of GTL common stock owned by Loral to persons or entities advised by or associated with Soros Fund Management LLC ("Soros") for $245 million in cash. The shares of GTL common stock acquired by Soros are restricted for U.S. securities law purposes. With respect to such shares, GTL has agreed to file a shelf registration statement and have such registration statement declared effective within one year from the closing date. As a result of the sale to Soros, Loral recognized a gain of approximately $35 million, which is included in gain on investments in Loral's consolidated statement of operations.
On November 5, 1998, Loral acquired 276,000 additional Globalstar ordinary partnership interests (corresponding to approximately 1.1 million equivalent shares of GTL common stock) from Dacom Corporation and a related subsidiary ("DACOM") in exchange for 717,600 shares of GTL common stock owned by Loral. This has been accounted for as a share-for-share exchange for accounting purposes and accordingly, no gain has been reported. The shares of GTL common stock acquired by DACOM were restricted for U.S. securities law purposes. GTL has filed a shelf registration statement covering the resale of these shares.
As of December 31, 1998, Loral had a 42.6% interest in Globalstar ordinary partnership interests.
31 SatMex
In connection with the privatization by the Mexican Government of its fixed satellite services business, Loral and Principia, S.A. de C.V. ("Principia"), formerly known as Telefonica Autrey, S.A. de C.V., formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Principia equity contribution of $50.9 million and debt originally issued by Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of Holdings. As part of the acquisition Servicios also agreed to issue a $129.9 million seven year Government Obligation ("Government Obligation") bearing interest at 6.03% to the Mexican Government in consideration for the assumption by SatMex of the debt incurred by Servicios in connection with the acquisition. The debt of SatMex and Holdings is non-recourse to Loral and Principia. However, Loral and Principia have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. As of December 31, 1998 Loral and Principia have pledged their respective shares in Holdings in such trust. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Loral has accounted for SatMex using the equity method since November 17, 1997.
Orion
On March 20, 1998, Loral acquired all of the outstanding stock of Orion Network Systems, Inc. in exchange for Loral common stock. Loral issued 18 million shares of its common stock and assumed existing exercisable Orion options and warrants to purchase an aggregate of 1.4 million shares of Loral common stock. The resulting purchase price was $472.5 million. Loral has accounted for the acquisition as a purchase and its consolidated financial statements reflect the results of operations of Loral Orion from April 1, 1998.
Europe*Star
In December 1998, Loral finalized its strategic partnership with a subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary satellite system that will provide broadcast and telecommunications services to Europe, the Middle East, Southeast Asia, India, and South Africa. Alcatel will serve as the primary contractor of the Europe*Star turnkey system. SS/L will provide the satellite bus and test and integrate the satellites. Europe*Star is a member of the Loral Global Alliance of FSS providers which is led by Loral Skynet. Loral invested $49 million in Europe*Star in 1998. In January 1999, Loral invested an additional $17 million in Europe*Star.
TAXATION
Loral, as a Bermuda company, may be subject to U.S. federal, state and local income taxation at regular corporate rates on any income that is effectively connected with the conduct of a U.S. trade or business. When such income is deemed removed from the U.S. business, it is subject to an additional 30% "branch profits" tax. Loral expects that a significant portion of its income will be from non-U.S. sources and will not be effectively connected with a U.S. trade or business; some portion of this income, however, will be subject to taxation by certain foreign countries.
The Company's U.S. subsidiaries are subject to U.S. taxes on their worldwide income. In addition, a 30% U.S. withholding tax will be imposed on dividends and interest paid by such subsidiaries to Loral Space & Communications Ltd.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position and advanced technologies to offer value-added satellite-based services as part of the evolving worldwide communications networks and, where appropriate, to form strategic alliances with major telecommunications service providers and equipment
32 manufacturers to enhance and expand its satellite-based communications service opportunities. In order to pursue such opportunities, Loral may seek funds from strategic partners and other investors, and through incurrence of debt or the issuance of additional equity.
Debt
In January 1999, Loral completed a private offering of senior notes raising $350 million, of which a portion was used to invest in $150 million face amount of GTL's January 1999 $350 million offering of convertible preferred stock, thereby maintaining Loral's proportionate ownership position in Globalstar. The remainder of the funds raised will be used for general corporate purposes, including investments in its other core businesses and to pursue emerging satellite services opportunities worldwide.
On November 14, 1997, the Company's wholly owned subsidiary, Loral SpaceCom Corporation, entered into an $850 million credit facility with a group of banks. The facility consists of a $500 million revolving credit facility, a $275 million term loan and a $75 million letter of credit facility. The facility replaced SS/L's existing credit facility. The facility is secured by the stock of Loral SpaceCom Corporation and SS/L and contains various covenants, including an interest coverage ratio, debt to capitalization ratios and restrictions on cash transfers to its parent. At December 31, 1998, there was $622 million of borrowings outstanding under this agreement and other credit facilities. In addition, Loral had outstanding letters of credit as of December 31, 1998 totaling $99 million.
Loral Orion's outstanding debt as of December 31, 1998, was $933 million, is non-recourse to Loral, and includes certain restrictions on Loral Orion's ability to pay dividends or make loans to Loral.
Equity
On June 29, 1998, Loral sold 23 million shares of its common stock for $27 per share. The net proceeds were $602 million, of which Loral used $175 million to fund the Globalstar Purchase on July 6, 1998 (see Acquisitions and Investments). The remainder of the funds are being used for general corporate purposes, including investing in its other core businesses and to pursue emerging satellite service opportunities worldwide.
Cash and Restricted Cash
As of December 31, 1998, Loral had $547 million of cash and cash equivalents. Loral intends to utilize its existing capital base and access to the capital markets to construct and operate additional satellites, make additional investments in Globalstar and Globalstar service provider opportunities, invest in its other core businesses, and to pursue emerging satellite service opportunities worldwide.
As of December 31, 1998, Orion had $73 million of restricted cash, which will be used for interest payments on Orion's senior notes.
Loral Skynet
Loral Skynet currently has three high-power satellites in orbit. Loral intends to expand Loral Skynet's business to become a worldwide satellite service provider through the construction of additional satellites. As of February 28, 1999, Loral Skynet has three satellites under construction by SS/L, one of which is expected to be launched in 1999.
Loral Orion
Loral Orion currently has one satellite in orbit, one completed satellite which is at the launch site (Orion 3) and is scheduled to be launched in April 1999 and one satellite under construction (Orion 2) which is expected to be launched in 1999. The cost of Orion 3 is fully funded. Loral intends to fund approximately $60 million of the construction cost of Orion 2. All other costs related to Orion 2 are fully funded.
33 SatMex
SatMex currently has three satellites in orbit (SatMex 5, Solidaridad I and Solidaridad II) and one satellite in inclined orbit (Morelos II). Loral and Principia have committed to make an equity investment in SatMex of up to $35 million prior to March 31, 1999. As of December 31, 1998, SatMex had total outstanding debt of $644 million, for which the related covenants restrict the ability of SatMex to pay dividends to Loral.
Globalstar
The Company plans to begin a regional roll-out of commercial service in the third quarter of 1999 with a minimum of eight gateways in operation. By the end of 1999, Globalstar expects to have a total of at least 16 gateways in operation. All of the 38 gateways on order have been manufactured and are ready for installation.
On March 15, 1999, Globalstar successfully launched four satellites aboard a Soyuz launch vehicle from the Baikonur Cosmodrome in Kazakhstan, bringing the total satellites in orbit to 16. This launch followed Globalstar's successful launch on February 8, 1999 of four satellites from the Baikonur Cosmodrome following the execution of a Technology Safeguard Agreement among the governments of Russia, Kazakhstan and the United States. Globalstar had previously launched its first group of four satellites on February 14, 1998, and its second group of four satellites on April 24, 1998. On September 9, 1998, a malfunction of a Zenit 2 rocket, launched from the Baikonur Cosmodrome, resulted in the loss of 12 Globalstar satellites. The launch vehicle and the satellites were substantially insured. For the remainder of 1999, Globalstar's current launch plan includes nine additional launches of four satellites each, using a mix of Delta and Soyuz rockets. According to the plan, Globalstar will deploy an operational constellation of a minimum of 32 satellites in September 1999 and a total of 52 satellites (including four in-orbit spares) by the end of 1999.
Through December 31, 1998, Globalstar incurred costs of approximately $2.7 billion for the design and construction of the space and ground segments. Costs incurred during 1998 were approximately $871 million. Qualcomm is in the process of completing its revision to cost estimates for its portion of the ground segment. Due to additional scope and cost growth and based on preliminary information, Globalstar expects the increase from Qualcomm to be less than 3% of the total project cost. The Qualcomm estimate is still subject to further review by Globalstar. As of December 31, 1998, and including the effect of the preliminary Qualcomm estimate, Globalstar's budgeted expenditures were $3.17 billion for the design, construction and deployment of the Globalstar System to commence commercial service and $340 million for budgeted financing costs. In addition to expenditures for operating costs and debt service, Globalstar anticipates further expenditures on system software for the improvement of system functionality and the addition of new features beyond those planned for the commencement of commercial service. Globalstar expects to achieve positive cash flow in the third quarter of 2000. Substantial additional financing will be required if there are delays in the commencement of commercial service and, in any event, after the commencement of commercial service and before positive cash flow is achieved. Although Globalstar believes it will be able to obtain these additional funds, there can be no assurance that such funds will be available on favorable terms or on a timely basis, if at all.
Globalstar has agreed, subject to its partners' approval, to purchase from SS/L 12 additional spare satellites for which the cost and payment terms have not as yet been negotiated. It is anticipated that approximately $100 million will be expended for these spare satellites by commencement of commercial service. In addition, in order to accelerate the deployment of gateways around the world, Globalstar has agreed to help finance approximately $80 million of the cost of up to 32 of the initial 38 gateways. The contracts for the 38 gateways aggregate approximately $345 million. Ericsson, Qualcomm and Telital are in the process of manufacturing approximately 300,000 handheld and fixed user terminals under contracts totaling $353 million from Globalstar and its service providers. Globalstar has agreed to finance approximately $151 million of the cost of handheld and fixed user terminals. Globalstar expects to recoup such costs upon acceptance by the service providers of the gateways and user terminals.
SS/L provides Globalstar with approximately $330 million of billings deferred as follows -- $224 million of vendor financing (of which $163 million was provided as of December 31, 1998) and $106 million of orbital incentives. SS/L's subcontractors have assumed a portion of the vendor financing commitments totaling
34 approximately $116 million (of which $96 million was provided as of December 31, 1998) which will be paid on similar terms. The $224 million of vendor financing consists of three tranches -- $110 million, $90 million and $24 million. Only the $90 million tranche is interest bearing and bears interest at the 30-day LIBOR rate plus 3% per annum. Globalstar will repay the $110 million and $24 million tranches as follows: 50% will be paid over five years in equal monthly installments following the launch and acceptance of 24 or more satellites (the "Preliminary Constellation") and the remaining 50% will be paid over five years in equal monthly installments following the launch and acceptance of 48 or more satellites (the "Full Constellation"). Payment of the $90 million interest bearing vendor financing will be due beginning March 31, 1999. Interest and principal will be repaid in 20 equal quarterly installments over the next five years. Approximately $47 million of the orbital incentives will be paid at both the Preliminary Constellation Date and Full Constellation Date with the remainder being paid with the delivery of the remaining satellites.
On January 21, 1999, GTL sold $350 million of 8% Convertible Redeemable Preferred Stock due 2011 (the "Preferred Stock"). The Preferred Stock will be convertible into shares of GTL common stock at a conversion price of $23.2563 per share. Loral purchased $150 million face amount of the $350 million Preferred Stock offered, to maintain its ownership percentage. GTL used the proceeds to purchase convertible preferred partnership interests in Globalstar, and Globalstar will use the funds for the construction and deployment of the Globalstar System.
As of January 31, 1999, Globalstar has raised or received commitments for approximately $3.3 billion. Globalstar intends to raise the remaining funds required, of approximately $600 million, prior to the initiation of commercial service from a combination of sources, including: high yield debt issuance (which may include an equity component), bank financing, equity issuance, financial support from the Globalstar partners, projected service provider payments and anticipated payments from the sale of gateways and Globalstar subscriber terminals.
COMMITMENTS AND CONTINGENCIES
In connection with the merger agreement dated January 7, 1996 between Loral Corporation and Lockheed Martin Corporation ("Lockheed Martin"), Lockheed Martin assumed approximately $206 million of the guarantee under the Globalstar credit agreement. The balance of $44 million of the guarantee was assumed by various Globalstar partners, including $11.7 million by SS/L. Loral has agreed to indemnify Lockheed Martin for its liability, if any, in excess of $150 million under its guarantee of the Globalstar credit agreement. Globalstar is currently financed without recourse to Loral other than the indemnification described above. Loral has also guaranteed a $115 million term loan.
In 1997, two satellites built by SS/L experienced solar array circuit failures. One customer asserted that, in light of the failures and uncertainty as to future failure, it has not accepted the satellite. Loral believes that this customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. SS/L settled the other customer's claims in 1997. The statement of operations for 1997 includes the impact of these events. In 1998, another SS/L-built satellite experienced degradation in the performance of two of its Ku-band antennae, which SS/L currently estimates could result in the loss of approximately 25% of the applicable orbital incentives, although further warranty claims could be made. Loral's 1998 consolidated financial statements include the effect of this item. Management believes that these matters will not have a material adverse effect on the financial condition or results of operations of Loral.
SS/L is a target of a grand jury investigation being conducted by the office of the U.S. Attorney for the District of Columbia with respect to possible violations of export control laws that may have occurred in connection with the participation of SS/L employees on a committee formed in the wake of the 1996 crash of a Long March rocket in China and whose purpose was to consider whether studies of the crash made by the Chinese had correctly identified the cause of the failure. The Company is not in a position to predict the direction or outcome of the investigation. If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million per violation and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a
35 material adverse effect on SS/L's business, which is important to the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Whether or not SS/L is indicted or convicted, SS/L will remain subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds a violation of the Arms Export Control Act that puts SS/L's reliability in question, and it can suspend export privileges whenever it determines that grounds for debarment exist and that such suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was conveyed to the Chinese, and no secret or classified information was discussed with or reported to them. SS/L believes that its employees acted openly and in good faith and that none engaged in intentional misconduct. Accordingly, the Company does not believe that SS/L has committed a criminal violation of the export control laws. The Company does not expect the grand jury investigation or its outcome to result in a material adverse effect upon its business. However, there can be no assurance as to these conclusions.
Several Congressional committees have held hearings on U.S. satellite export policy toward China, alleged influence of campaign contributions
(including contributions made by Loral's Chairman and Chief Executive Officer) on the Clinton Administration's export policy toward China and related matters. One of the House committees investigating these matters, chaired by Representative Cox, recently issued a classified report that is said to be critical of past government and industry technology transfer practices and policies. This report is also said to contain 38 proposals for legislative and executive action to address perceived concerns. It is possible that adoption of some or all of such proposals could have an adverse effect upon the ability of U.S.-based satellite manufacturers, such as SS/L, and possibly other U.S. exporters, to market their products abroad in competition with foreign-based manufacturers, and might adversely affect their ability to perform existing contracts. In addition, the portions of the report that have not yet been declassified could contain negative comments about SS/L's compliance with the export control laws.
On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions, and believes that a review of the agreement will show that its terms comply with the new law. The ODTC, however, has not yet completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. If such a delay were to continue for an extended period, or if the suspension was not lifted, SS/L's customer could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($124 million as of December 31, 1998) and may incur penalties of up to $12 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance that SS/L will be able to find such a replacement customer.
NET CASH PROVIDED BY/USED IN OPERATING ACTIVITIES
Net cash provided by operating activities for the year ended December 31, 1998 was $4 million, primarily due to funds generated by earnings before depreciation and amortization, taxes, gain on investments, minority interest and equity in net loss of affiliates of $104 million and increases in customer advances of $54 million, and long-term liabilities of $52 million, offset primarily by increases in inventories of $91 million, contracts in process of $6 million and long-term receivables of $133 million. Net cash used in operating activities for 1997, was $230 million, primarily due to increases in satellite contracts in process of $34 million, inventories of $24 million, launch vehicle deposits of $108 million, and long-term receivables of $79 million, and a decrease in customer advances of $58 million, offset by funds generated from earnings before depreciation and amortization, taxes, gain on investments, minority interest and equity in net loss of affiliates of $110 million.
36 NET CASH USED IN INVESTING ACTIVITIES
During 1998, net cash used in investing activities was $473 million primarily as a result of $489 million of capital expenditures mainly for the construction of satellites, the $175 million net cost of acquiring additional Globalstar partnership interests, $121 million of investments in affiliates, offset by a reduction in restricted cash of $264 million, primarily used for the construction of Loral Orion satellites. Cash used in investing activities for 1997 was $1 billion, primarily due to the cash portion of the purchase price of Skynet and the SS/L equity interests for $546 million, the purchase of equity interests in Globalstar and SatMex for $256 million and, capital expenditures of $255 million, primarily for the construction of Loral Skynet's satellites by SS/L and for facility expansion and renovation at SS/L, offset by the proceeds from the sale of K&F stock of $80 million.
NET CASH PROVIDED BY FINANCING ACTIVITIES
During 1998, net cash provided by financing activities was $789 million compared with $299 million in 1997, due primarily to the net proceeds of the Company's equity offering of $602 million in 1998, partially offset by lower proceeds from borrowings under existing credit facilities in 1998. Net cash provided by financing activities was $1.2 billion in 1996, due primarily to Lockheed Martin's contribution in connection with the distribution of Loral Corporation's space and communications business to its shareholders in 1996 and from the issuance of CPEOs in 1996.
OTHER MATTERS
Effect of Year 2000
The Company's Year 2000 Program is proceeding on schedule. The Year 2000 issue is the result of computer programs which were written using two digits rather than four to signify a year (i.e., the year 1999 is denoted as "99" and not "1999"). Computer programs written using only two digits may recognize the year 2000 as the year 1900. This could result in a system failure or miscalculations causing disruption of operations.
The Company and its operating affiliates, Globalstar and SatMex, have implemented a Year 2000 program (the "Year 2000 Program") for their internal products, system and equipment, as well as for key vendor and customer supplied products, systems and equipment. As part of the Year 2000 Program, the Company and its operating affiliates are assessing the Year 2000 capabilities of, among other things, their satellites, ground equipment, research and development activities, manufacturing processes and facility management systems. The Year 2000 Program consists of the following phases: inventory of Year 2000 items, assessment (including prioritization), remediation (including modification, upgrading and replacement), testing and auditing. This five-step program is divided into six major sections covering both information and non- information technology systems: 1) business systems, 2) technical systems, 3) products and services, 4) imbedded hardware/firmware, 5) vendor supplied products and 6) customer provided products. As of February 28, 1999, the Company and its operating affiliates had completed approximately 95% of the inventory phase and approximately 60% of the assessment phase. The Company expects to complete the first four phases, through the testing phase, of the Year 2000 Program during the third quarter of 1999, which is prior to any anticipated material impact on the operations of the Company and its operating affiliates. The fifth phase, the audit phase, commenced in January 1999 and is expected to continue through the third quarter of 1999 to accommodate re-audits if deemed necessary.
Both internal and external resources are being utilized to execute the Company's plan. The program to address Year 2000 has been underway since July 1997. The incremental costs incurred through December 31, 1998 for this effort by the Company and its operating affiliates were approximately $1.4 million. Based on the efforts of the Company and its operating affiliates to date, the Company anticipates additional incremental expenses of approximately $5.7 million will be incurred to substantially complete the effort.
Based upon the accomplishments to date, no contingency plans are expected to be needed. As risks are identified, contingency plans will be developed and implemented as necessary. However, because of the
37 progress achieved to date and the Company's expectations that its Year 2000 program will be substantially complete in the third quarter of calendar 1999, the Company believes adequate time will be available to insure alternatives can be developed, assessed and implemented prior to a Year 2000 issue having a material negative impact on the operations of the Company. However, there can be no assurance that such modifications and conversions, if required, will be completed on a timely basis.
The cost of the program and the dates on which the Company believes it will substantially complete Year 2000 modifications are based on management's best estimates. Such estimates were derived using software surveys and programs to evaluate calendar date exposures and numerous assumptions of future events, including the continued availability of certain resources, third-party Year 2000 readiness and other factors. Because none of these estimates can be guaranteed, actual results could differ materially and adversely from those anticipated. Specific factors that might cause an adjustment of costs are: number of personnel trained in this area, the ability to locate and correct all relevant computer codes, the ability to validate supplier certification and similar uncertainties.
The Company's failure to remediate a material Year 2000 problem could result in an interruption or failure of certain basic business operations. These failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company and its operating affiliates are also assessing the Year 2000 readiness of their key third-party suppliers. Information requests have been distributed to such suppliers and replies are being evaluated. If the risk is deemed material, on-site visits to suppliers will be conducted to verify the adequacy of the information received. However, due to the general uncertainty of the Year 2000 problem, including uncertainty with regard to third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have an adverse material impact on the Company's results of operations, liquidity or financial condition. There can be no assurance given that the Company's Year 2000 Program will be successful in avoiding any interruption or failure of certain basic business operations, which may have a material adverse effect on the Company's results of operations or financial position.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or financial position. The Company is required to adopt SFAS 133 on January 1, 2000.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
The Company has limited involvement with derivative financial instruments and does not use such instruments for trading purposes. The derivative financial instruments are used to manage foreign currency exchange risk.
As of December 31, 1998, the Company had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $197.5 million. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed by SS/L through May 2006. The fair value of these contracts, based on quoted market prices as of December 31, 1998, was $189.7 million. As of December 31, 1998, deferred gains on forward contracts to sell foreign currencies, primarily yen, were $11.7 million and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $3.9 million.
The Company is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation.
38 The maturity of foreign currency exchange contracts held as of December 31, 1998 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. These foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL ------AT AT AT AT YEARS TO CONTRACT MARKET CONTRACT MARKET MATURITY RATE RATE RATE RATE ------1...... $ 97,776 $101,924 $56,158 $49,705 2 to 5...... 11,124 10,913 20,748 17,949 6 to 10...... 11,725 9,257 ------$108,900 $112,837 $88,631 $76,911 ======
Interest
As of December 31, 1998, the fair value of the Company's long-term debt is estimated to be $1.4 billion using quoted market prices. The long- term debt carrying value exceeded fair value by $173 million. Market risk on debt is estimated as the potential increase in annual interest expense resulting from a hypothetical one percent increase in interest rates and amounts to $15 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules on page 42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
39 PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is presented in the Company's 1999 definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ------Bernard L. Schwartz...... 73 Chairman of the Board of Directors and Chief Executive Officer since January 1996. Prior to that, Chairman and Chief Executive Officer of Old Loral since 1972. Gregory J. Clark...... 56 President and Chief Operating Officer since January 1998. Prior to that, President of News Technology Group, a division of News Corporation, since September 1994. Prior to that, Director of Science and Technology of IBM in Australia since 1988. Michael P. DeBlasio...... 62 First Senior Vice President since September 1998. Prior to that, First Senior Vice President and Chief Financial Officer since February 1998. Prior to that, Senior Vice President and Chief Financial Officer since March 1996. Prior to that, Senior Vice President -- Finance of Old Loral since 1979. Robert E. Berry...... 70 Senior Vice President since November 1996 and President of Space Systems/Loral since 1990. Nicholas C. Moren...... 52 Senior Vice President and Treasurer since February 1998. Prior to that, Vice President and Treasurer since March 1996. Prior to that, Vice President and Treasurer of Old Loral since April 1991. Richard J. Townsend...... 48 Senior Vice President and Chief Financial Officer since October 1998. Prior to that, Corporate Controller and Director of Strategy for ITT Industries since 1997. Prior to that, Vice President of Finance Worldwide Industries for IBM and various other financial management positions with IBM since 1979. Eric J. Zahler...... 48 Senior Vice President, General Counsel and Secretary since February 1998. Prior to that, Vice President, General Counsel and Secretary since March 1996. Prior to that, Vice President and General Counsel of Old Loral since April 1992. Laurence D. Atlas...... 41 Vice President, Government Relations -- Telecommunications since May 1997. Prior to that, Associate Chief of the Common Carrier Bureau of the FCC since January 1995. Prior to that, Associate Chief of the FCC's Wireless Telecommunications Bureau since November 1994. Prior to that, associate in the law firm of Willkie Farr & Gallagher since 1982. W. Neil Bauer...... 52 Vice President since March 1998. Prior to that, Chief Executive Officer and President of Orion Network Systems, Inc. since September 1993.
40 NAME AGE POSITION ------Jeanette H. Clonan...... 50 Vice President -- Communications and Investor Relations since November 1996. Prior to that, Director -- Corporate Communications from June 1996. Prior to that, Vice President -- Corporate Relations of Jamaica Water Securities since September 1992. Terry J. Hart...... 52 Vice President since February 1998 and President of Loral Skynet since March 1997. Prior to that, Division Manager of AT&T Skynet Satellite Services since 1991. Stephen L. Jackson...... 57 Vice President -- Administration since March 1997. Prior to that, Vice President -- Administration of Old Loral since 1978. Avi Katz...... 40 Vice President, Deputy General Counsel and Assistant Secretary since February 1998. Prior to that, Deputy General Counsel and Assistant Secretary since August 1997. Prior to that, Associate General Counsel and Assistant Secretary since July 1996. Prior to that, associate in the law firm of Willkie Farr & Gallagher since 1987. Ronald C. Maehl...... 51 Vice President since February 1998 and President of CyberStar since March 1997. Prior to that, Senior Vice President of Strategic Ventures of SS/L since April 1996. Prior to that, Senior Vice President of Advance Programs of SS/L since January 1993. Russell R. Mack...... 44 Vice President -- Business Ventures since February 1998. Prior to that, Director of Business Planning and Development since April 1996. Prior to that, Manager of Project Finance of Old Loral since July 1991. Harvey B. Rein...... 45 Vice President and Controller since April 1996. Prior to that, Assistant Controller of Old Loral since 1985. Thomas B. Ross...... 69 Vice President -- Government Relations since November 1996. Prior to that, Vice President -- Corporate Communications from April 1996. Prior to that, Vice President -- Communications of Globalstar from May 1995 to April 1996. Prior to that, Special Assistant to the President and Senior Director for Public Affairs of the National Security Council from April 1994 to May 1995 and Senior Vice President of Hill & Knowlton.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under Items 11, 12 and 13, is presented in the Company's 1999 definitive proxy statement which is incorporated herein by reference.
41 PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
PAGE ---- Index to Financial Statements...... F-1 Loral Space & Communications Ltd. Independent Auditors' Report...... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997...... F-3 Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996...... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996...... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996...... F-6 Notes to Consolidated Financial Statements...... F-7 Space Systems/Loral, Inc. Independent Auditors' Report...... F-40 Consolidated Statement of Income for the nine months ended December 31, 1996...... F-41 Consolidated Statement of Shareholders' Equity for the nine months ended December 31, 1996...... F-42 Consolidated Statement of Cash Flows for the nine months ended December 31, 1996...... F-43 Notes to Consolidated Financial Statements...... F-44 Globalstar, L.P. (A development stage limited partnership) Independent Auditors' Report...... * Consolidated Balance Sheets as of December 31, 1998 and 1997...... * Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 and cumulative...... * Consolidated Statements of Partners' Capital and Subscriptions Receivable for the period March 23, 1994 (commencement of operations) to December 31, 1998...... * Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 and cumulative...... * Notes to Consolidated Financial Statements...... * ------* Incorporated herein by reference from the Annual Report on Form 10-K of Globalstar Telecommunications Limited and Globalstar, L.P. for the year ended December 31, 1998, pages F-1 through F-36. (a) 2. Financial Statement Schedules Independent Auditors' Report...... S-1 Schedule I -- Condensed Financial Information of Registrant...... S-2 Financial statement schedules not listed are either not required or the information required is reflected in the consolidated financial statements.
(a) 3. Exhibits
42 EXHIBIT NUMBER DESCRIPTION ------2.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General Partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and Lockheed Martin Corporation(1) 2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as April 15, 1996(1) 2.3 Agreement for the Purchase and Sale of Assets dated as of September 25, 1996 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(2) 2.4 First Amendment to Agreement for the Purchase and Sale of Assets dated as of March 14, 1997 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(3) 2.5 Agreement and Plan of Merger dated as of October 7, 1997 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(4) 2.6 First Amendment to Agreement and Plan of Merger dated as of February 11, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(5) 2.7 Second Amendment to Agreement and Plan of Merger dated as of March 20, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(12) 3.1 Memorandum of Association(1) 3.2 Memorandum of Increase of Share Capital(1) 3.3 Second Amended and Restated Bye-laws(1) 3.4 Schedule III to Second Amended and Restated Bye-laws relating to Registrant's 6% Series C Convertible Redeemable Preferred Stock(6) 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent(1) 4.2 Indenture dated as of January 15, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006+ 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant(1) 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation(1) 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation(1) 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of January 26, 1999 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, Inc., Dacom Corporation, Dacom International, Inc., Hyundai Corporation, Hyundai Electronics Industries Co., Ltd., Loral/DASA Globalstar, L.P., Loral Space & Communications Ltd., San Giorgio S.p.A., TeleSat Limited, TE.S.AM and Vodafone Satellite Services Limited+ 10.5 Service Provider Agreements by and between Globalstar, L.P. and each of Loral General Partner, Inc. and Loral/DASA Globalstar, L.P.(8) 10.6 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.(8) 10.7 1996 Stock Option Plan(1)++ 10.7.1 Amendment to 1996 Stock Option Plan+++ 10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++ 10.9 Employment Agreement between the Registrant and Bernard L. Schwartz(1)++ 10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement between the Registrant and Bernard L. Schwartz(12)++
43 EXHIBIT NUMBER DESCRIPTION ------10.10 Registration Rights Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership L.P. and Lehman Brothers Offshore Investment Partnership-Japan L.P.(9) 10.11 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006(6) 10.12 Registration Rights Agreement (Series C Preferred Stock) dated as of March 31, 1997 between Loral Space & Communications Ltd. and Finmeccanica S.p.A. and dated as June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.13 Registration Rights Agreement (Common Stock) dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.14 Alliance Agreement dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI, Alcatel Espace and Finmeccanica S.p.A.(10) 10.15 Principal Stockholder Agreement dated as of October 7, 1997 among Loral Space & Communications Ltd., Loral Satellite Corporation, Orion Network Systems, Inc. and certain Orion stockholders signatory thereto(4) 10.16 Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank(11) 10.16.1 First Amendment dated as of May 7, 1998 to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank+ 10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as of June 30, 1997(12) 10.18 Purchase and Sale Agreement dated November 17, 1997 between the Federal Government of the United Mexican States and Corporativo Satelites Mexicanos, S.A. de C.V. for the purchase and sale of the capital stock of Satelites Mexicanos, S.A. de C.V. (English translation of Spanish original)(12) 10.19 Amended and Restated Membership Agreement dated and effective as of August 21, 1998 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.+ 10.20 Letter Agreement dated December 29, 1997 between Loral Space & Communications Ltd., Telefonica Autrey S.A. de C.V., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and Lehman Commercial Paper Inc. and related Agreement between the Federal Government of United Mexican States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma, S.A. de C.V., Loral Space & Communications Ltd., Loral SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de C.V.(12) 10.21 Shareholders Agreement dated December 7, 1998 by and among Alcatel SpaceCom, Loral Space & Communications Ltd., Dr. Jurgen Schulte-Hillen and EuropeStar Limited+ 10.22 Registration Rights Agreement dated as of January 21, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006+ 12 Statement Re: Computation of Ratios+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+
44 EXHIBIT NUMBER DESCRIPTION ------27 Financial Data Schedule (EDGAR only)+ 99.1 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report(13)
(1) Incorporated by reference from the Registrant's Registration Statement on Form 10 (No. 1-14180).
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on September 27, 1996.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K on March 28, 1997.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on October 10, 1997.
(5) Incorporated by reference from the Registrant's Registration Statement on Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the nine month period ended December 31, 1996.
(7) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456).
(8) Incorporated by reference from the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on August 13, 1996.
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on July 8, 1997.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on December 9, 1997.
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(13) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed by Globalstar Telecommunications Limited and Globalstar, L.P. (File No. 0-25456).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
None.
45 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
By: /s/ BERNARD L. SCHWARTZ ------Bernard L. Schwartz (Chairman of the Board and Chief Executive Officer) Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ BERNARD L. SCHWARTZ Chairman of the Board, Chief March 30, 1999 ------Executive Officer and Director Bernard L. Schwartz (Principal Executive Officer)
/s/ HOWARD GITTIS Director March 30, 1999 ------Howard Gittis
/s/ ROBERT B. HODES Director March 30, 1999 ------Robert B. Hodes
/s/ GERSHON KEKST Director March 30, 1999 ------Gershon Kekst
/s/ CHARLES LAZARUS Director March 30, 1999 ------Charles Lazarus
/s/ MALVIN A. RUDERMAN Director March 30, 1999 ------Malvin A. Ruderman
/s/ E. DONALD SHAPIRO Director March 30, 1999 ------E. Donald Shapiro
/s/ ARTHUR L. SIMON Director March 30, 1999 ------Arthur L. Simon
/s/ DANIEL YANKELOVICH Director March 30, 1999 ------Daniel Yankelovich
/s/ RICHARD J. TOWNSEND Chief Financial Officer and March 30, 1999 ------Senior Vice President Richard J. Townsend (Principal Financial Officer)
/s/ HARVEY B. REIN Vice President and Controller March 30, 1999 ------(Principal Accounting Officer) Harvey B. Rein
46 INDEX TO FINANCIAL STATEMENTS
Loral Space & Communications Ltd. and Subsidiaries
Independent Auditors' Report...... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997...... F-3 Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996...... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996...... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 and for the nine months ended December 31, 1996...... F-6 Notes to Consolidated Financial Statements...... F-7 Space Systems/Loral, Inc. Independent Auditors' Report...... F-40 Consolidated Statement of Income for the nine months ended December 31, 1996...... F-41 Consolidated Statement of Shareholders' Equity for the nine months ended December 31, 1996...... F-42 Consolidated Statement of Cash Flows for the nine months ended December 31, 1996...... F-43 Notes to Consolidated Financial Statements...... F-44
F-1 INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF LORAL SPACE & COMMUNICATIONS LTD.
We have audited the accompanying consolidated balance sheets of Loral Space & Communications Ltd. (a Bermuda company) and its subsidiaries (collectively, the "Company") as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1998 and 1997, and the nine months ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP New York, New York February 16, 1999
F-2 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ------1998 1997 ------ASSETS Current assets: Cash and cash equivalents...... $ 546,772 $ 226,547 Restricted cash...... 50,180 Accounts receivable, net...... 23,637 5,351 Contracts in process...... 378,685 372,783 Inventories...... 191,245 98,325 Other current assets...... 51,188 51,612 ------Total current assets...... 1,241,707 754,618 Property, plant and equipment, net...... 1,667,508 926,679 Cost in excess of net assets acquired, net...... 966,260 361,411 Long-term receivables...... 301,674 168,639 Restricted cash...... 22,675 Investments in affiliates...... 707,917 497,471 Deposits...... 140,970 154,970 Other assets...... 180,504 146,659 ------$5,229,215 $3,010,447 ======LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of debt...... $ 22,736 $ 2,146 Accounts payable...... 213,507 189,790 Accrued employment costs...... 44,256 38,797 Customer advances...... 122,326 68,159 Accrued interest and preferred dividends...... 37,860 11,192 Other current liabilities...... 37,276 26,059 Income taxes payable...... 17,630 30,121 ------Total current liabilities...... 495,591 366,264 Deferred income taxes...... 38,370 99,696 Pension and other postretirement liabilities...... 50,470 48,398 Long-term liabilities...... 147,320 73,117 Long-term debt...... 1,533,039 433,252 Minority interest...... 28,704 9,200 Commitments and contingencies (Notes 6, 7, 10 and 12) Shareholders' equity: Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized, 45,896,977 shares issued...... 459 459 Series B preferred stock, $.01 par value; 750,000 shares authorized and unissued...... 6% Series C convertible redeemable preferred stock ($745,472 redemption value), $.01 par value; 20,000,000 shares authorized, 14,909,437 shares issued...... 735,437 733,762 Common stock, $.01 par value; 750,000,000 shares authorized, 243,861,719 and 200,950,864 shares issued...... 2,439 2,010 Paid-in capital...... 2,330,755 1,216,377 Treasury stock, at cost; 174,195 and 101,053 shares...... (3,360) (1,680) Unearned compensation...... (8,231) (249) Retained earnings (deficit)...... (162,657) 22,566 Accumulated other comprehensive income...... 40,879 7,275 ------Total shareholders' equity...... 2,935,721 1,980,520 ------$5,229,215 $3,010,447 ======
See notes to consolidated financial statements.
F-3 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Revenues from satellite sales...... $1,117,721 $1,243,255 Revenues from satellite services...... 183,981 69,336 Management fee from affiliate...... $ 5,088 ------Total revenues...... 1,301,702 1,312,591 5,088 Costs of satellite sales...... 995,401 1,127,863 Costs of satellite services...... 134,473 44,077 Selling, general and administrative expenses...... 205,608 127,099 17,289 ------Operating income (loss)...... (33,780) 13,552 (12,201) Interest and investment income...... 53,867 49,069 34,699 Interest expense...... 51,209 15,230 6,000 Gain on investments, net...... 5,494 79,591 ------Income (loss) before income taxes, equity in net loss of affiliates and minority interest...... (25,628) 126,982 16,498 Income tax expense (benefit)...... (3,871) 34,871 2,912 ------Income (loss) before equity in net loss of affiliates and minority interest...... (21,757) 92,111 13,586 Equity in net loss of affiliates...... (120,417) (49,037) (4,709) Minority interest...... 3,376 (3,070) ------Net income (loss)...... (138,798) 40,004 8,877 Preferred dividends and accretion...... (46,425) (26,315) ------Net income (loss) applicable to common stockholders... $ (185,223) $ 13,689 $ 8,877 ======Earnings (loss) per share: Basic and diluted...... $ (0.68) $ 0.06 $ 0.04 ======Weighted average shares outstanding: Basic...... 273,402 242,070 228,997 ======Diluted...... 273,402 243,591 229,396 ======
See notes to consolidated financial statements.
F-4 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31, 1996 (in thousands, except per share amounts)
6% SERIES C SERIES A CONVERTIBLE CONVERTIBLE REDEEMABLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------SHARES SHARES SHARES PAID-IN TREASURY UNEARNED ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL STOCK COMPENSATION ------Balance April 1, 1996...... 12 $ 354,396 Advances from Old Loral...... 2,425 April 23, 1996 Distribution: Other assets transferred and liabilities assumed, net from Old Loral...... 4,070 Common stock issued to Old Loral shareholders and option holders...... 183,580 $1,836 254,152 Sale of Series A Convertible Preferred Stock...... 45,897 $459 343,541 Common stock issued to acquire interest in SS/L...... 7,500 75 100,238 Net income and comprehensive income...... ------Balance December 31, 1996...... 45,897 459 191,092 1,911 1,058,822 Shares issued: Exercise of stock options and related tax benefits, net of shares tendered...... 208 2 2,015 $(1,680) Employee savings plan...... 352 4 6,997 Acquisition of equity interest in SS/L...... 2,909 $149,600 8,043 80 130,820 Acquisition of Globalstar partnership interests...... 1,256 13 17,474 Mandatory exchange of Convertible Preferred Equivalent Obligations, net of unamortized issue costs...... 12,000 583,282 Unearned compensation...... 249 $ (249) Preferred dividends $3.00 per share...... Accretion to redemption value..... 880 Net income...... Other comprehensive income...... Comprehensive income...... ------Balance December 31, 1997...... 45,897 459 14,909 733,762 200,951 2,010 1,216,377 (1,680) (249) Shares issued: Common stock and vested options issued to acquire Orion...... 17,969 179 468,846 Unvested options issued to acquire Orion...... 4,512 (4,512) Orion note conversion and fractional shares...... 32 (5) Common stock sold to public, net...... 23,000 230 601,586 Exercise of stock options and related tax benefits, net of shares tendered...... 739 8 8,112 (1,680) Employee savings plan...... 1,171 12 25,669 Unearned compensation...... 5,658 (5,658) Amortization of unearned compensation...... 2,188 Preferred dividends $3.00 per share...... Accretion to redemption value..... 1,675 Net loss...... Other comprehensive income...... Comprehensive loss...... ------Balance December 31, 1998...... 45,897 $459 14,909 $735,437 243,862 $2,439 $2,330,755 $(3,360) $(8,231) ======
ACCUMULATED RETAINED OTHER TOTAL EARNINGS COMPREHENSIVE SHAREHOLDERS' (DEFICIT) INCOME EQUITY ------Balance April 1, 1996...... $ 354,396 Advances from Old Loral...... 2,425 April 23, 1996 Distribution: Other assets transferred and liabilities assumed, net from Old Loral...... 4,070 Common stock issued to Old Loral shareholders and option holders...... 255,988 Sale of Series A Convertible Preferred Stock...... 344,000 Common stock issued to acquire interest in SS/L...... 100,313 Net income and comprehensive income...... $ 8,877 8,877 ------Balance December 31, 1996...... 8,877 1,070,069 Shares issued: Exercise of stock options and related tax benefits, net of shares tendered...... 337 Employee savings plan...... 7,001 Acquisition of equity interest in SS/L...... 280,500 Acquisition of Globalstar partnership interests...... 17,487 Mandatory exchange of Convertible Preferred Equivalent Obligations, net of unamortized issue costs...... 583,282 Unearned compensation...... Preferred dividends $3.00 per share...... (25,435) (25,435) Accretion to redemption value..... (880) Net income...... 40,004 Other comprehensive income...... $ 7,275 Comprehensive income...... 47,279 ------Balance December 31, 1997...... 22,566 7,275 1,980,520 Shares issued: Common stock and vested options issued to acquire Orion...... 469,025 Unvested options issued to acquire Orion...... Orion note conversion and fractional shares...... (5) Common stock sold to public, net...... 601,816 Exercise of stock options and related tax benefits, net of shares tendered...... 6.440 Employee savings plan...... 25,681 Unearned compensation...... Amortization of unearned compensation...... 2,188 Preferred dividends $3.00 per share...... (44,750) (44,750) Accretion to redemption value..... (1,675) Net loss...... (138,798) Other comprehensive income...... 33,604 Comprehensive loss...... (105,194) ------Balance December 31, 1998...... $(162,657) $40,879 $2,935,721 ======
See notes to consolidated financial statements.
F-5 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Operating activities: Net income (loss)...... $(138,798) $ 40,004 $ 8,877 Gain on investments, net...... (5,494) (79,591) Equity in net loss of affiliates...... 120,417 49,037 4,709 Minority interest...... (3,376) 3,070 Deferred taxes...... (5,940) 419 (926) Accretion on GTL CPEOs and other non-cash interest income...... (14,249) (1,739) Non-cash interest expense...... 20,474 Depreciation and amortization...... 135,029 62,764 1,051 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net...... (4,086) (5,351) Contracts in process...... (5,902) (33,690) Inventories...... (90,897) (23,753) Deposits...... 14,000 (107,670) Long-term receivables...... (133,035) (78,634) Other assets...... (10,798) (37,981) Accounts payable...... 9,048 27,845 (1,832) Accrued expenses and other current liabilities...... 19,432 (36,602) (4,506) Income taxes payable...... (8,322) 24,873 Customer advances...... 54,090 (57,778) Long-term liabilities...... 51,844 24,529 (1,124) Other...... 980 (9,252) ------Cash provided by (used in) operating activities...... 4,417 (230,248) (3,003) ------Investing activities: Cash acquired in connection with Orion acquisition...... 53,801 Acquisition of businesses, net of cash acquired...... (6,877) (545,642) Proceeds from the sale of investment in affiliates, net.... 246,867 79,591 Investments in affiliates...... (541,701) (255,666) (6,425) Other assets...... (45,715) Use and transfer of restricted cash...... 264,123 Capital expenditures...... (489,448) (255,340) (540) Proceeds from the sale of property, plant and equipment.... 5,003 ------Cash used in investing activities...... (473,235) (1,022,772) (1,962) ------Financing activities: Proceeds from sale of common stock, net...... 601,816 Borrowings (repayments) under revolving credit facility, net...... 150,000 (4,000) Borrowings under note purchase facility...... 38,423 38,958 Proceeds from issuance of term loan...... 275,000 Repayments under Export-Import credit facility...... (2,146) (2,146) Repayments of other long-term obligations...... (7,819) Proceeds from convertible preferred equivalent obligations...... 583,292 Proceeds from exercise of stock options and issuances to employee savings plan...... 32,121 7,338 Contributions from minority partners...... 21,398 9,100 Preferred dividends...... (44,750) (25,435) Proceeds from the Distribution...... 612,274 Transaction expenses related to the Distribution...... (12,286) Advances from Loral Corporation prior to the Distribution...... 2,425 ------Cash provided by financing activities...... 789,043 298,815 1,185,705 ------Increase (decrease) in cash and cash equivalents...... 320,225 (954,205) 1,180,740 Cash and cash equivalents -- beginning of period...... 226,547 1,180,752 12 ------Cash and cash equivalents -- end of period...... $ 546,772 $ 226,547 $1,180,752 ======Non-cash activities: Common stock issued to acquire Orion...... $ 469,025 ======Unrealized gain on available-for-sale securities...... $ 32,988 $ 7,275 ======Mandatory exchange of Convertible Preferred Equivalent Obligations...... $ 583,282 ======Issuance of Series C Preferred Stock to acquire equity interest in SS/L...... $ 149,600 ======Issuance of Loral common stock to acquire equity interest in SS/L and Globalstar partnership interests...... $ 148,387 $ 100,313 ======Deferred purchase price to acquire Globalstar partnership interests...... $ 24,787 ======Assets transferred from Loral Corporation at the Distribution...... $ 31,383 ======Liabilities assumed from Loral Corporation at the Distribution...... $ 27,313 ======Transfer of GTL common stock to acquire equity interest in SS/L...... $ 5,158 ======Supplemental information: Interest paid...... $ 68,485 $ 40,866 ======Taxes paid...... $ 9,789 $ 8,901 $ 1,528 ======
See notes to consolidated financial statements.
F-6 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. (together with its subsidiaries, "Loral" or the "Company") is one of the world's leading satellite communications companies with substantial activities in satellite manufacturing and satellite-based communications services. Loral is developing the building blocks necessary to create a seamless, global networking capability for the information age. In 1998, Loral organized and integrated its businesses to form four distinct operating segments (see Note 15):
Satellite Manufacturing and Technology: Designing and manufacturing satellites and other space systems and developing satellite technology for a broad variety of customers and applications through Space Systems/Loral, Inc. ("SS/L"),
Fixed Satellite Services ("FSS"): Leasing transponder capacity and providing value-added services to customers for a wide variety of applications, including the distribution of broadcast programming, news gathering, business television, distance learning and direct-to-home ("DTH") services, through the activities of Loral Skynet, Loral Orion, Inc. ("Loral Orion"), Satelites Mexicanos, S.A. de C.V. ("SatMex") and the recently formed Europe*Star Limited ("Europe*Star"),
Data Services: Business in development, providing managed communications networks and Internet and intranet services through Loral Orion and delivering high-speed broadband data communications through CyberStar, L.P. ("CyberStar"), using transponder capacity on the Telstar and Loral Orion fleets, and
Global Mobile Telephony: Will provide worldwide wireless mobile telephony and narrow-band data communications through a constellation of low-earth orbiting ("LEO") satellites (the "Globalstar System") operated by Globalstar, L.P. ("Globalstar").
Loral was formed to effectuate the distribution of Loral Corporation's ("Old Loral") space and communications businesses (the "Distribution") to shareholders of Old Loral and holders of options to purchase Old Loral common stock pursuant to a merger agreement (the "Merger") dated January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). The Distribution of approximately 183.6 million shares of Loral common stock was made on April 23, 1996. In connection with the Distribution, Lockheed Martin contributed $612 million in cash to the Company. Of the amount contributed, $344 million represented the purchase of 45,896,977 shares of Loral Series A Convertible Preferred Stock ("Series A Preferred Stock"). Such stock is subject to certain voting limitations, restrictions on transfer and standstill provisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Loral, a Bermuda company, has a December 31 fiscal year-end. The consolidated financial statements for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, include the accounts of Loral and the consolidated results of SS/L from January 1, 1997, Skynet from March 14, 1997 and Orion from April 1, 1998 (see Note 3) and have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). All intercompany transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of expenses reported for the period. Actual results could differ from estimates.
F-7 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) A significant portion of Loral's satellite manufacturing and technology revenue is associated with long-term contracts which require significant estimates. These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the potential for component obsolescence in connection with long-term procurements. Significant estimates for the Company's FSS segment include the estimated useful lives of the Company's satellites.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less.
Restricted Cash
In connection with the acquisition of Orion, Loral acquired cash and cash equivalents which are restricted in use to the payment of interest on Orion's senior notes and payments for satellite construction. At December 31, 1998, restricted cash aggregated $72.9 million, of which $50.2 million is current.
Concentration of Credit Risk
Financial instruments which potentially subject Loral to concentrations of credit risk consist principally of cash and cash equivalents, foreign exchange contracts and contracts in process and long-term receivables. Loral's cash and cash equivalents are maintained with high-credit- quality financial institutions. Historically, Loral's customers have been primarily large multinational corporations and U.S. and foreign governments for which the creditworthiness was generally substantial. In recent years, the Company has added commercial customers which include companies in emerging markets or the development stage, some of which are highly leveraged or partially funded. Management believes that its credit evaluation, approval and monitoring processes combined with negotiated billing arrangements mitigate potential credit risks with regard to the Company's current customer base.
Accounts Receivable
As of December 31, 1998 and 1997, accounts receivable was reduced by an allowance for doubtful accounts of $2.5 million and $337,000, respectively.
Inventories
Inventories consist principally of common subassemblies not specifically identified to contracts in process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost method.
Investments in Affiliates
Investments in affiliates are accounted for using the equity method. Income and losses of the affiliates are recorded based on Loral's beneficial interest. Intercompany profit arising from transactions between affiliates is eliminated to the extent of the Company's beneficial interest. Equity in losses of affiliates is not recognized after the carrying value of the investment has been reduced to zero, unless guarantees or other obligations exist.
In connection with Loral's investment in Globalstar, a development stage company, Loral capitalizes interest cost on its investment. For the years ended December 31, 1998 and 1997 the amount of interest capitalized on the investment in Globalstar was $25.4 million and $13.2 million, respectively.
F-8 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Investment in Available-For-Sale Securities and Other Securities
The Company accounts for investments in equity securities in accordance with Statement of Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and Equity Securities. Accordingly, the Company's investment in CD Radio, Inc. ("CD Radio") common stock which shares are classified as available-for-sale, is recorded at fair value, with the resulting unrealized gain excluded from net income and reported as a component of other comprehensive income (see Note 11). As of December 31, 1998 and 1997, the Company owned approximately 1.9 million shares of CD Radio acquired at an average cost of approximately $13.16 per share. The Company's investment in CD Radio is included in other long-term assets.
The Company has made certain other investments in non-marketable equity securities which are included in other long-term assets. In the fourth quarter of 1998, the Company wrote off certain non-strategic investments totaling $29.5 million, which were determined to have no future value to Loral.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided primarily on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements.
Costs incurred in connection with the construction and successful deployment of the Company's satellites and related equipment are capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch insurance and construction period interest. Capitalized interest related to the construction of satellites for the years ended December 31, 1998 and 1997 was $34.7 million and $9.4 million, respectively. All capitalized satellite costs are amortized over the estimated useful life of the related satellite. The estimated useful life of the satellites, ranging from 12 to 18 years, was determined by engineering analyses performed at the in-service date. Losses from unsuccessful launches and in-orbit failures of the Company's satellites, net of insurance proceeds, will be recorded in the period a loss occurs.
Cost in Excess of Net Assets Acquired
The excess of the cost of purchased businesses over the fair value of net assets acquired is being amortized over 40 years using the straight-line method. Accumulated amortization was $32.2 million and $10.8 million as of December 31, 1998 and 1997, respectively.
Valuation of Long-Lived Assets and Cost in Excess of Net Assets Acquired
The carrying value of Loral's long-lived assets and cost in excess of net assets acquired is reviewed for impairment whenever events or changes in circumstances indicate that an asset may not be recoverable. The Company looks to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. If an impairment is determined to exist, any related impairment loss is calculated based on fair value.
Revenue Recognition
Revenue from satellite sales under long-term fixed-price contracts is recognized using the cost-to-cost percentage-of-completion method. Revenue includes estimated orbital incentives discounted to their present value at launch date. Costs include the development effort required for the production of high-technology
F-9 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) satellites, non-recurring engineering and design efforts in early periods of contract performance, as well as the cost of qualification testing requirements.
Revenue under cost-reimbursable type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the contract term.
Contracts with the U.S. government are subject to termination by the U.S. government for convenience or for default. Other government contract risks include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will not have a material effect on Loral's financial position or its results of operations.
Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable.
In accordance with industry practice, contracts-in-process include unbilled amounts relating to contracts and programs with long production cycles, a portion of which may not be billable within one year.
Loral Skynet and Loral Orion provide satellite capacity under lease agreements that generally provide for the use of satellites and, in certain cases, earth stations for periods generally ranging from one year to the life of the satellite. Some of these agreements have certain obligations, including providing spare or substitute capacity, if available, in the event of satellite failure. If no spare or substitute capacity is available, the agreement may be terminated. Revenue under transponder lease agreements is recognized as services are performed.
Research and Development
Independent research and development costs, which are expensed as incurred, were $68.5 million and $56.8 million, respectively for the years ended December 31, 1998 and 1997 and are included in selling, general and administrative expenses.
Foreign Exchange Contracts
Loral enters into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable under contracts in process which are denominated in foreign currencies. Realized and unrealized gains and losses on foreign exchange contracts designated as hedges are deferred and recognized over the lives of the related contracts in process.
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, Loral accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25").
Income Taxes
Commencing with the Distribution, Loral became subject to U.S. federal, state and local income taxation at regular corporate rates plus an additional 30% "branch profits" tax on any income that is effectively connected with the conduct of a U.S. trade or business. U.S. subsidiaries are subject to regular corporate tax on their worldwide income.
F-10 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying tax rates in effect at the end of each year.
Earnings Per Share
The Company follows Financial Accounting Standards Board Statement No. 128, Earnings per share ("SFAS 128"), in presenting basic and diluted earnings per share ("EPS"). The calculation of basic and diluted EPS is presented in Note 14.
Comprehensive Income
On January 1, 1998, Loral adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, which established rules for the reporting and disclosure of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's foreign currency translation adjustments and unrealized gains on investments in securities to be included in other comprehensive income. Prior years amounts have been restated. The components of accumulated other comprehensive income are as follows:
ACCUMULATED YEARS ENDED OTHER DECEMBER 31, COMPREHENSIVE ------INCOME 1998 1997 ------(IN THOUSANDS) Cumulative translation adjustment...... $ 616 $ 616 Unrealized gains on available-for-sale securities.... 40,263 32,988 $7,275 ------Accumulated other comprehensive income...... $40,879 $33,604 $7,275 ======
New Accounting Pronouncements
For the year ended 1998, Loral adopted Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS 131") and Statement of Financial Accounting Standards No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits ("SFAS 132"). See Notes 15 and 10, respectively for the related disclosures for these standards.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or financial position. The Company is required to adopt SFAS 133 on January 1, 2000.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to the current year's presentation.
F-11 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
SS/L
On April 1, 1996, Loral had an effective 32.7% interest in SS/L. In 1996, Loral made a strategic decision to increase its ownership in SS/L to 100%. The first step in implementing this decision was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with Lehman Brothers (the "Lehman Partnerships") in exchange for 7.5 million newly issued shares of Loral common stock, 1,069,024 shares (as adjusted for the two-for-one stock splits, see Note 6) of common stock of Globalstar Telecommunications Limited ("GTL") previously held by the Company and $4 million in cash. As a result of this transaction, the Company increased its interest in SS/L from 32.7% to 51%.
In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million. In March 1997, Loral acquired 24.5% of SS/L's common stock for $93.5 million in cash and $93.5 million of Loral's Convertible Preferred Equivalent Obligations ("CPEOs"). In June 1997, the Company acquired the remaining 24.5% of SS/L's common stock for $187 million in the form of 8,042,922 shares of Loral common stock and 1,063,663 shares of Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). The aggregate purchase price of the 67.3% interest in SS/L acquired by Loral was $493.2 million. The purchase price represented $174.4 million in excess of SS/L's proportionate net book value which was allocated primarily to the incremental value of SS/L's investment in Globalstar of $62.2 million and cost in excess of net assets acquired of $105.9 million. The consolidated financial statements include the results of operations of SS/L since January 1, 1997, with a reduction for the earnings attributed to the minority shareholders. Prior to this date, the Company accounted for its investment in SS/L using the equity method.
The three former Alliance Partners who accepted Loral securities in exchange for their SS/L shares continue to have certain rights as strategic partners of SS/L for as long as they continue to hold at least 81.6% of their Loral securities; in return, the parties have agreed generally to operate as a team on satellite programs worldwide. Each strategic partner is permitted one representative on SS/L's seven member Board of Directors; certain corporate actions require the vote of at least five members of the Board. In 1998, two of the strategic partners merged to form one company; the resulting entity, however, continued to have the right to designate two representatives to SS/L's Board of Directors. In the event certain actions are approved by the Board over the objection of one of the strategic partners, the strategic partner can elect to sell its Loral securities in the open market within 30 days and be reimbursed for the amount, if any, such proceeds are less than the original value of the securities received. In addition, the strategic partners have a right of first offer at fair market value on SS/L shares in the event of a change of control (as defined) of either Loral or SS/L, including the right to use their Loral holdings as part of the SS/L purchase price.
Loral Skynet
On March 14, 1997, Loral acquired Skynet from AT&T for $462.1 million in cash. The fair value of assets and liabilities recorded in connection with the purchase price allocation were $569.8 million and $107.7 million, respectively, including cost in excess of net assets acquired of $39 million. Loral's consolidated financial statements include the results of operations of Skynet from the date of acquisition.
Loral Orion
On March 20, 1998, Loral acquired all of the outstanding stock, of Orion Network Systems, Inc. ("Orion") in exchange for Loral common stock. Loral issued 18 million shares of its common stock and assumed existing Orion vested options and warrants to purchase 1.4 million shares of Loral common stock representing an aggregate purchase price of $472.5 million. The purchase price represented $447.7 million in excess of Orion's net book value, which was primarily allocated to costs in excess of net assets acquired of $619.7 million, and a fair value adjustment of $153.4 million to increase the carrying value of Orion's senior
F-12 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS -- (CONTINUED) notes and senior discount notes. In addition, Loral agreed to assume Orion's unvested employee stock options, which resulted in a new measurement date and an unearned compensation charge of $4.5 million, to be amortized over the vesting periods of the options. Loral's consolidated financial statements include Orion's results of operations from April 1, 1998.
The above acquisitions were accounted for using the purchase method. Had the acquisitions of SS/L, Loral Skynet and Loral Orion and the investment in SatMex (see Note 6) occurred on January 1, 1997 the unaudited pro forma revenue, net loss applicable to common stockholders and related basic and diluted loss per share for the years ended December 31, 1998 and 1997 would have been: $1.3 billion and $1.4 billion; $205 million and $101 million, and, $0.74 and $0.38, respectively. These results, which are based on various assumptions, are not necessarily indicative of what would have occurred had the acquisitions been consummated on January 1, 1997.
4. CONTRACTS-IN-PROCESS AND LONG-TERM RECEIVABLES
DECEMBER 31, ------1998 1997 ------(IN THOUSANDS) U.S. government contracts: Amounts billed...... $ 9,099 $ 5,243 Unbilled contract receivables...... 11,543 10,274 ------20,642 15,517 ------Commercial contracts: Amounts billed...... 216,775 189,646 Unbilled contract receivables...... 141,268 167,620 ------358,043 357,266 ------Contracts-in-Process $378,685 $372,783 ======
Unbilled amounts include recoverable costs and accrued profit on progress completed which has not been billed. Such amounts are billed upon shipment of the product, achievement of contractual milestones, or completion of the contract and are reclassified to billed receivables.
Billed receivables relating to long-term contracts are expected to be collected within one year. Loral classifies billings deferred (see Note 6) and the orbital component of unbilled receivables expected to be collected beyond one year as long-term. Receivable balances related to satellite orbital incentive payments and billings deferred as of December 31, 1998 are scheduled to be received as follows (in thousands):
1999...... $133,567 2000...... 64,479 2001...... 47,660 2002...... 73,532 2003...... 54,172 Thereafter...... 61,831 ------435,241 Less current portion...... (133,567) ------Long-term receivables $301,674 ======
F-13 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------1998 1997 ------(IN THOUSANDS) Land and land improvements...... $ 25,073 $ 24,999 Buildings...... 61,539 58,443 Leasehold improvements...... 16,906 10,234 Satellites...... 745,649 486,919 Satellites under construction...... 690,661 218,933 Earth stations...... 52,914 34,204 Equipment, furniture and fixtures...... 216,294 154,684 Other construction in progress...... 50,430 29,823 ------1,859,466 1,018,239 Accumulated depreciation...... (191,958) (91,560) ------$1,667,508 $ 926,679 ======
Depreciation expense was $106.2 million, $52.0 million and $1.1 million for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively.
6. INVESTMENTS IN AFFILIATES
DECEMBER 31, ------1998 1997 ------(IN THOUSANDS) Globalstar...... $555,906 $383,714 SatMex...... 74,159 88,925 Europe*Star...... 45,413 SkyBridge...... 14,053 15,504 Other affiliates...... 18,386 9,328 ------$707,917 $497,471 ======
Equity in net income (loss) of affiliates consists of (in thousands):
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Globalstar, net of tax benefit...... $ (67,016) $(40,877) $(18,105) SatMex...... (16,317) (6,396) SS/L...... 13,396 Europe*Star...... (3,624) SkyBridge, net of tax benefit...... (25,465) (1,764) Other affiliates...... (7,995) ------$(120,417) $(49,037) $ (4,709) ======
Globalstar
Loral is the managing general partner of Globalstar. Globalstar is preparing to operate a worldwide, LEO satellite-based digital telecommunications system (the "Globalstar(TM) System"), that is designed to enable
F-14 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED) local service providers to offer low-cost, high quality wireless voice telephony and data services in virtually every populated area of the world. As of March 15, 1999, Globalstar has launched 16 of the 52 satellites that will complete its full constellation, and is scheduled to commence service in September 1999 with at least 32 satellites (unaudited). Globalstar expects to complete its full constellation by December 1999.
In May 1997 and in June 1998, Globalstar Telecommunications Limited ("GTL"), a general partner of Globalstar, issued two-for-one stock splits in the form of 100% stock dividends. Accordingly, all GTL share and per share amounts have been restated to reflect the two-for-one stock splits. Prior to the stock splits, GTL's equity securities and convertible securities were represented by equivalent Globalstar partnership interests on an approximate one-for-one basis. Globalstar's partnership interests were not affected by the GTL stock splits and, accordingly, GTL's equity securities are now represented by equivalent Globalstar partnership interests on an approximate four-for-one basis.
As of December 31, 1998, Loral owned directly and indirectly approximately 24.8 million Globalstar ordinary partnership interests (corresponding to approximately 99.2 million equivalent shares of GTL common stock), or approximately 43% of the total 58.2 million Globalstar ordinary partnership interests (corresponding to approximately 232.8 million equivalent shares of GTL common stock) outstanding. As of December 31, 1998, the market value of the 8.3 million shares of GTL stock owned by Loral, based on the last reported sale, was $166.5 million.
On September 14, 1995, Old Loral in its capacity as managing general partner of Globalstar, granted certain officers of Old Loral, who were also officers of GTL and Globalstar, options to purchase 560,000 shares of the GTL common stock owned by Loral at an exercise price of $5.00 per share. On December 12, 1995, Loral granted non-employee directors of Loral options to purchase 800,000 shares of the GTL common stock owned by Loral at an exercise price of $8.35 per share. These options were immediately exercisable and expire 12 years from date of grant. On October 9, 1996 and in January 1998, Loral, in its capacity as managing general partner, granted certain officers of Loral, who were also officers of GTL and Globalstar, options to purchase 608,000 and 20,000 shares of the GTL common stock owned by Loral at exercise prices of $6.25 and $12.88 per share, respectively. Such options vest over a three-year period and expire 10 years from date of grant. During 1998, options were exercised to purchase 240,000 shares at $5.00 per share and 80,000 shares at $8.35 per share.
On December 15, 1995, Globalstar entered into a $250 million credit agreement (the "Globalstar Credit Agreement") with a group of banks. Lockheed Martin, SS/L and certain other Globalstar partners have guaranteed $206.3 million, $11.7 million and $32.0 million of the Globalstar Credit Agreement, respectively. In addition, Loral agreed to indemnify Lockheed Martin for any liability in excess of $150 million. In exchange for the guarantee and indemnity, GTL issued warrants to purchase 16,741,272 shares of GTL common stock at $6.63 per share as follows: Loral and SS/L 4,550,088 warrants, Lockheed Martin 10,044,760 warrants and certain other Globalstar partners 2,146,424 warrants. In February 1997, GTL accelerated the vesting and exercisability of these warrants and the holders exercised such warrants. In addition, GTL distributed to the holders of its common stock rights to subscribe for and purchase 4,524,672 GTL shares for a price of $6.63 per share of which Loral received rights to purchase 636,688 shares and agreed to purchase all shares not purchased upon exercise of the rights. In March 1997, Loral exercised warrants to purchase 4,550,088 shares of common stock of GTL for $30.1 million and, in April 1997, Loral exercised its right to purchase an additional 700,696 shares of GTL common stock for $6.63 per share. GTL used the proceeds from the exercise of the warrants and the rights, to purchase additional Globalstar ordinary partnership interests.
In March 1996, Loral purchased $100 million principal amount of GTL 6 1/2% Convertible Preferred Equivalent Obligations, due 2006 par value $50 per share, ("GTL CPEOs") for $97 million. In April 1996,
F-15 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED) Loral purchased an additional $2.5 million principal amount of the GTL CPEOs for $2.4 million. Such amounts are included in the investment in Globalstar. On April 30, 1998, Loral's holdings of GTL CPEOs were converted into 13,664,060 shares of GTL common stock, including additional shares issued in satisfaction of a required interest make-whole payment. Loral's interest and investment income includes $7.2 million, for the years ended December 31, 1998 and 1997 and $5.5 million for the nine months ended December 31, 1996, related to its investment in GTL CPEOs.
During 1997, Loral acquired 2,208,372 Globalstar ordinary partnership interests (corresponding to approximately 8.8 million equivalent shares of GTL common stock) from other Globalstar partners for $97.5 million in cash and 1,255,684 shares of Loral common stock. In addition, on October 21, 1997, Loral acquired 540,000 ordinary partnership interests of Globalstar (corresponding to approximately 2.2 million equivalent shares of GTL common stock) from another Globalstar partner, for $24.8 million. The purchase price was payable in installments during 1998 and accrued interest at 6%. The unpaid balance of $26 million at December 31, 1998 was paid in January 1999.
In July 1998, Loral purchased 4.2 million Globalstar ordinary partnership interests (corresponding to approximately 16.8 million equivalent shares of GTL common stock) from certain founding service provider partners of Globalstar for $420 million in cash (the "Globalstar Purchase"). The founding service provider partners participating in the transaction deposited one half of their proceeds ($210 million) into escrow accounts to be used for the purchase of Globalstar gateways and user terminals. Loral used $175 million of the proceeds from its 1998 equity offering, (see Note 9), to finance the Globalstar Purchase and the remaining balance was provided through the concurrent sale by Loral of 8.4 million shares of GTL common stock owned by Loral to persons or entities advised by or associated with Soros Fund Management LLC ("Soros") for $245 million in cash. The shares of GTL common stock acquired by Soros are restricted for U.S. securities law purposes. With respect to such shares, GTL has agreed to file a shelf registration statement and have such registration statement declared effective within one year from the closing date. As a result of the sale to Soros, Loral recognized a gain of approximately $35 million, which is included in gain on investments in Loral's consolidated statement of operations.
On November 5, 1998, Loral acquired 276,000 additional Globalstar partnership interests (corresponding to approximately 1.1 million equivalent shares of GTL common stock) from other Globalstar partners in exchange for 717,600 shares of GTL common stock owned by Loral.
Pursuant to the Globalstar partnership agreement, Loral is responsible for managing the operations of Globalstar and is entitled to receive a Managing Partner's Allocation on commencement of commercial operations.
SS/L is the prime contractor for the construction and launch of Globalstar's satellites under contracts aggregating approximately $2.1 billion. SS/L has awarded subcontracts to third parties, including other investors in Globalstar, for substantial portions of its obligations under the contracts. Revenue recorded under the Globalstar contract for the years ended December 31, 1998 and 1997 was $598.7 million and $408.1 million, respectively. Billed and unbilled receivables from Globalstar as of December 31, 1998 and 1997, were $187.8 million and $84.2 million, respectively.
Through December 31, 1998, Globalstar incurred costs of approximately $2.7 billion for the design and construction of the space and ground segments. Costs incurred during 1998 were approximately $871 million. Qualcomm is in the process of completing its revision to cost estimates for its portion of the ground segment. Due to additional scope and cost growth and based on preliminary information, Globalstar expects the increase from Qualcomm to be less than 3% of the total project cost. The Qualcomm estimate is still subject to further review by Globalstar. As of December 31, 1998, and including the effect of the preliminary Qualcomm estimate, Globalstar's budgeted expenditures were $3.17 billion for the design, construction and deployment of
F-16 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED) the Globalstar System to commence commercial service and $340 million for budgeted financing costs. In addition to expenditures for operating costs and debt service, Globalstar anticipates additional expenditures on system software for the improvement of system functionality and the addition of new features beyond those planned for the commencement of commercial service. Substantial additional financing will be required if there are delays in the commencement of commercial service and, in any event, after the commencement of commercial service and before positive cash flow is achieved. Although Globalstar believes it will be able to obtain these additional funds, there can be no assurance that such funds will be available on favorable terms or on a timely basis, if at all.
Globalstar has agreed, subject to its partners' approval, to purchase from SS/L 12 additional spare satellites for which the cost and payment terms have not as yet been negotiated. It is anticipated that approximately $100 million will be expended for these spare satellites by commencement of commercial service. In addition, in order to accelerate the deployment of gateways around the world, Globalstar has agreed to help finance approximately $80 million of the cost of up to 32 of the initial 38 gateways. The contracts for the 38 gateways aggregate approximately $345 million. Ericsson, Qualcomm and Telital are in the process of manufacturing approximately 300,000 handheld and fixed user terminals under contracts totaling $353 million from Globalstar and its service providers. Globalstar has agreed to finance approximately $151 million of the cost of handheld and fixed user terminals. Globalstar expects to recoup such costs upon acceptance by the service providers of the gateways and user terminals.
On March 4, 1998, Qualcomm entered into a deferred payment agreement with Globalstar providing $100 million of vendor financing. The deferred payments will accrue interest at a rate of 5.75% per annum, and will be added to the outstanding principal balance. Beginning January 1, 2000, Globalstar will make eight equal quarterly principal payments. The final payment including all unpaid interest is due October 1, 2001.
In January 1999, GTL, completed a private offering of $350 million of convertible preferred stock (of which Loral purchased approximately $150 million face amount, to maintain its ownership percentage). GTL in turn used the net proceeds from its offering to purchase convertible redeemable preferred partnership interests of Globalstar.
As of January 31, 1999, Globalstar has raised or received commitments for approximately $3.3 billion. Globalstar intends to raise the remaining funds required, of approximately $600 million, prior to the initiation of commercial service from a combination of sources including: high yield debt issuance (which may include an equity component), bank financing, equity issuance, financial support from the Globalstar partners, projected service provider payments and anticipated payments from the sale of gateways and Globalstar subscriber terminals.
SS/L provides Globalstar with approximately $330 million of billings deferred as follows - $224 million of vendor financing (of which $163 million was provided at December 31, 1998) and $106 million of orbital incentives. SS/L's subcontractors have assumed a portion of the vendor financing commitments totaling approximately $116 million (of which $96 million was provided as of December 31, 1998), which will be paid on similar terms. The $224 million of vendor financing consists of three tranches -- $110 million, $90 million and $24 million. Only the $90 million tranche is interest bearing and bears interest at the 30-day LIBOR rate plus 3% per annum. Globalstar will repay the $110 million and $24 million tranches as follows: 50% will be paid over five years in equal monthly installments following the launch and acceptance of 24 or more satellites (the "Preliminary Constellation") and the remaining 50% will be paid over five years in equal monthly installments following the launch and acceptance of 48 or more satellites (the "Full Constellation"). Payment of the $90 million interest bearing vendor financing will be due beginning March 31, 1999. Interest and principal will be repaid in 20 equal quarterly installments during the next five years. Approximately
F-17 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED) $47 million of orbital incentives will be paid at both the Preliminary Constellation Date and Full Constellation Date with the remainder being paid with the delivery of the remaining satellites.
The following table presents summary financial data for Globalstar as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 and cumulative (in thousands):
CUMULATIVE MARCH 23, 1994 (COMMENCEMENT OF OPERATIONS) YEARS ENDED DECEMBER 31, TO DECEMBER 31, ------1998 1998 1997 1996 ------STATEMENT OF OPERATIONS DATA: Revenues...... $ -- $ -- $ -- $ -- Operating loss...... 404,033 146,684 88,071 61,025 Net loss...... 346,256 129,543 67,586 54,646 Preferred distributions...... 60,722 22,197 21,202 17,323 Net loss applicable to ordinary partnership interests...... 406,978 151,740 88,788 71,969
DECEMBER 31, ------1998 1997 ------BALANCE SHEET DATA: Current assets...... $ 236,288 $ 493,780 Total assets...... 2,670,025 2,149,053 Current liabilities...... 401,190 143,810 Long-term debt...... 1,396,175 1,099,531 Long-term liabilities...... 270,259 221,795 Redeemable preferred partnership interests...... 303,089 Ordinary partners' capital...... 602,401 380,828
SatMex
In connection with the privatization by the Federal Government of Mexico (the "Mexican Government") of its fixed satellite services business, Loral and Principia, S.A. de C.V. ("Principia"), formerly known as Telefonica Autrey, S.A. de C.V., formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Principia equity contribution of $50.9 million and debt issued by a subsidiary of Holdings. As part of the acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of Holdings agreed to issue a $129.9 million seven year obligation bearing interest at 6.03% to the Mexican Government (the "Government Obligation") in consideration for the assumption by SatMex of the debt incurred by Servicios in connection with the acquisition. The debt of SatMex and Servicios is non-recourse to Loral and Principia. However, Loral and Principia have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. As of December 31, 1998, Loral and Principia have pledged their respective shares in Holdings in such trust. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Loral and Principia have committed to make an equity investment in SatMex of up to $35 million prior to March 31, 1999.
F-18 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED) Loral, together with Principia, are responsible for managing SatMex. They are entitled to receive an aggregate management fee, based on a sliding scale, applied to SatMex's quarterly gross revenues up to a maximum of 3.75% of each year's cumulative gross revenues. Such fees to Loral were $181,000 for the year ended December 31, 1998. In addition, beginning in 1999, Skynet will license certain intellectual property to SatMex for a fee of 1.5% of SatMex's gross revenues.
The following table presents summary financial data for SatMex as of December 31, 1998 and 1997, and for the year ended December 31, 1998 and the period November 17, 1997 (date of investment) through December 31, 1997 (in thousands):
NOVEMBER 17, YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1998 1997 ------STATEMENT OF OPERATIONS DATA: Revenues...... $ 104,779 $ 12,893 Operating income...... 32,841 4,015 Net loss...... 23,650 4,440
DECEMBER 31, ------1998 1997 ------BALANCE SHEET DATA: Current assets...... $ 55,833 $ 65,484 Total assets...... 1,138,618 1,035,095 Current liabilities...... 91,612 10,952 Long-term liabilities...... 85,535 87,735 Long-term debt...... 608,000 569,000 Shareholders' equity...... 353,471 367,408
SkyBridge
In June 1997, Loral and Alcatel formed a strategic partnership to jointly develop, deploy and operate high-speed global multimedia satellite networks that will bring high-bandwidth services to businesses and to consumers. The agreement includes cross investments in Loral's geostationary (GEO) satellite-based CyberStar project and Alcatel's low-earth-orbit (LEO) satellite-based SkyBridge project. Each company will participate in the development of the two projects. The SkyBridge project is currently in the development stage. As of December 31, 1998, Loral had contributed to SkyBridge and Alcatel had contributed to CyberStar approximately $45 million and $30 million, respectively. As of December 31, 1998, Loral owned approximately 16% of the outstanding partnership interests in SkyBridge.
SS/L is a contractor for the construction of the SkyBridge satellites. Revenue recorded under the Skybridge contract for the year ended December 31, 1998 was $6.9 million. There were no outstanding receivables related to this contract as of December 31, 1998.
F-19 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED) The following table presents summary financial data for SkyBridge as of December 31, 1998 and 1997 for the year ended December 31, 1998, for the period from February 26, 1997 to December 31, 1997, and cumulative (in thousands):
CUMULATIVE FEBRUARY 26, 1997 (INCEPTION) TO YEAR ENDED FEBRUARY 26, 1997 DECEMBER 31, DECEMBER 31, TO DECEMBER 31, 1998 1998 1997 ------STATEMENT OF OPERATIONS DATA: Revenues...... $ -- $ -- $ -- Operating loss...... 191,898 144,624 47,274 Net loss...... 188,239 141,714 46,525
DECEMBER 31, ------1998 1997 ------BALANCE SHEET DATA: Current assets...... $74,186 $64,197 Total assets...... 74,585 64,197 Current liabilities...... 35,132 20,309 Net partners' capital...... 39,453 43,888
Europe*Star
In December 1998, Loral finalized its strategic partnership with a subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary satellite system anticipated to provide broadcast and telecommunications services to Europe, the Middle East, Southeast Asia, India and South Africa. Alcatel will serve as the primary contractor of the Europe*Star turnkey system. SS/L will provide the satellite bus and test and integrate the satellites. During 1998, Loral invested $49 million in Europe*Star. In January 1999, Loral invested an additional $17 million in Europe*Star. As of December 31, 1998 and January 31, 1999, Loral owned 47% of Europe*Star.
SS/L is a subcontractor for the construction of Europe*Star's satellites. Revenue recorded under the Europe*Star contract for the year ended December 31, 1998 was $18.1 million. There were no outstanding receivables related to this contract at December 31, 1998.
SS/L
In 1997, Loral discontinued the use of the equity method of accounting for SS/L and consolidated SS/L's financial position and results of operations in its financial statements (see Note 3).
The SS/L stockholders' agreement provided for management fees to be paid to Loral, ranging from 0.5% to 1% of sales, as defined, depending upon SS/L's operating performance. Such management fee was $5.1 million for the nine months ended December 31, 1996. The stockholders' agreement also required SS/L to pay Loral an annual fee for overhead reimbursement, not to exceed 1% of SS/L's adjusted sales, as defined, for each fiscal year. This fee amounted to $2.7 million for the nine months ended December 31, 1996.
F-20 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
The following table presents summary financial data for SS/L for the nine months ended December 31, 1996 (in thousands):
NINE MONTHS ENDED DECEMBER 31, 1996 ------STATEMENT OF OPERATIONS DATA: Revenues...... $1,017,653 Operating income...... 54,011 Net income...... 31,025
K&F
Old Loral's 22.5% voting equity interest in K&F Industries, Inc. ("K&F") was transferred to Loral at the Distribution. Loral used the equity method to account for its investment in K&F; however, no income or loss was recognized due to K&F's financial position. In December 1997, Loral sold its 22.5% equity interest for $80.6 million and recorded a $79.6 million gain on the sale.
7. LONG-TERM DEBT
DECEMBER 31, ------1998 1997 ------(IN THOUSANDS) Term loan, 6.7% and 7.2% at December 31, 1998 and 1997, respectively...... $ 275,000 $275,000 Revolving credit facility, 6.7% and 7.2% at December 31, 1998 and 1997, respectively...... 205,000 55,000 Note purchase facility...... 126,657 88,234 Export-Import credit facility...... 15,018 17,164 Other...... 605 Non-recourse debt of Orion: 11.25% Senior notes due 2007 (principal amount $443 million)...... 507,573 12.5% Senior discount notes due 2007 (principal amount $484 million)...... 408,812 Other...... 17,110 ------Total debt...... 1,555,775 435,398 Less, current maturities...... 22,736 2,146 ------$1,533,039 $433,252 ======
Loral SpaceCom Corporation ("Loral SpaceCom"), a wholly owned subsidiary of Loral, and SS/L entered into an $850 million amended and restated credit and participation agreement (the "Credit Agreement") with a group of banks on November 14, 1997. The Credit Agreement provides for a $275 million term loan facility, a $500 million revolving credit facility, of which up to $175 million may be used for letters of credit, and a separate $75 million letter of credit facility. Both the term loan facility and revolving credit facility are for a period of five years. The separate letter of credit facility runs for a two-year period. The term loan facility requires repayment in 12 consecutive quarterly installments beginning December 31, 1999. The
F-21 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT -- (CONTINUED) first four installments are $18,750,000 each with the final eight installments being $25,000,000 each. Borrowings under the facilities are secured by the stock of Loral SpaceCom and SS/L and bear interest, at Loral SpaceCom's option, at various rates based on margins over the lead bank's base rate or the London Interbank Offer Rate ("LIBOR") for periods of one to six months. Loral SpaceCom pays a commitment fee on the unused portion of the facilities. The Credit Agreement contains customary covenants including an interest coverage ratio and debt to capitalization ratios. In addition, the Credit Agreement contains limitations on indebtedness, liens, guarantee obligations, asset sales, dividends, investments and transactions with affiliates. Under the terms of the Credit Agreement, Loral SpaceCom may pay dividends to its parent if the cumulative dividend payments do not exceed 50% of cumulative net income, as defined, and the ratio of funded debt to EBITDA, as defined, is less than three to one. Notwithstanding this dividend payment limitation, as of December 31, 1998 Loral SpaceCom could pay a dividend to its parent of up to $70 million. Loral SpaceCom has an intercompany note payable outstanding with its parent in the amount of $347 million at December 31, 1998. This note requires semi-annual interest payments of $31.5 million to be made on the first day of April and October. This note, however, can be prepaid down to $200 million under the terms of the Credit Agreement. As of December 31, 1998 Loral SpaceCom could borrow an additional $151 million under the Credit Agreement.
In 1994, SS/L entered into a $139.3 million note purchase facility with an Italian bank. Borrowings were determined by formula and were made in accordance with a specified schedule. The drawdown period has been extended through June 30, 1999. The outstanding principal is to be repaid on the earlier of twenty-three months from the final acceptance date of certain satellite deliveries or April 30, 2000. Interest is charged at a weighted average annual rate of 4.26% and is payable semiannually. Interest, however, on any borrowings that occur after January 13, 1999 and until delivery of the satellites related to the specific borrowings that have taken place will be at full market rates for this period and not at the 4.26% rate. All borrowings under this facility reduce the amount available under the Credit Agreement.
SS/L borrowed a total of $42.9 million under an export-import credit facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is fully secured by a letter of credit arrangement with another bank. As of December 31, 1998, no amounts remained available for borrowing under this facility. The outstanding principal is to be repaid in semiannual installments through November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable semiannually on May 1 and November 1.
In connection with the Orion acquisition, Loral did not assume Orion's senior notes, senior discount notes or other debt instruments. Such debt is non-recourse to Loral and includes certain restrictions on Loral Orion's ability to pay dividends or make loans to Loral. The carrying value of the Orion senior notes and senior discount notes was increased to reflect a fair value adjustment of $153.4 million based on quoted market prices at the date of acquisition. Such adjustment will result in effective interest rates of 8.69% and 9.69% on the senior notes and senior discount notes, respectively, through maturity.
The Orion senior notes are due in 2007, bear interest of 11.25% and pay interest semi-annually on January 15 and July 15 of each year. As of December 31, 1998 Orion had $73 million in restricted cash for future interest payments. The Orion senior discount notes are due in 2007, bear interest of 12.5% and pay interest semi-annually on January 15 and July 15 commencing on July 15, 2002.
Along with the issuance of each Orion senior note and Orion senior discount note, one warrant was issued to purchase shares of common stock. Upon the acquisition of Orion, each warrant was converted so that it could purchase shares of Loral common stock. At the time of acquisition, the senior note warrants could purchase a total of 263,794 shares of Loral common stock at a conversion rate of 0.6056 shares per warrant and the senior discount note warrants could purchase a total of 229,265 shares of Loral common stock at a conversion rate of 0.4743 shares per warrant. As of December 31, 1998, exercisable warrants for 234,934
F-22 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT -- (CONTINUED) shares of Loral common stock under the senior notes and 225,867 shares of Loral common stock under the senior discount notes are yet to be exercised.
The aggregate maturities of total debt for the years 1999 through 2003 are as follows: $22,736,000, $85,397,000, $104,547,000, $411,715,000 and $3,898,000.
On January 21, 1999, Loral sold $350 million of 9 1/2% senior notes due 2006. Loral used a portion of the proceeds to purchase $150 million face amount of GTL convertible preferred stock issued, in order to maintain its ownership interest in Globalstar (see Note 6).
8. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in thousands):
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Current: U.S. federal...... $ 2,069 $27,204 $2,913 State and local...... 7,248 925 ------2,069 34,452 3,838 Deferred: U.S. federal...... (9,219) 1,762 (759) State and local...... 3,279 (1,343) (167) ------(5,940) 419 (926) ------Total (benefit) provision for income taxes...... $(3,871) $34,871 $2,912 ======
The (benefit) provision for income taxes excludes: current tax benefits related to the exercise of stock options, credited directly to Shareholders' Equity, of $0.4 million and $0.5 million for the years ended December 31, 1998 and 1997, respectively; a current tax benefit of $0.3 million and $4.3 million, and a deferred tax benefit of $2.1 million and a liability of $2.7 million for the years ended December 31, 1998 and 1997, respectively, related to the Globalstar partnership loss, and a deferred tax benefit of $3.9 million for the year ended December 31, 1998, related to the SkyBridge partnership loss, which are included in equity in net loss of affiliates; and a deferred tax liability of $0.6 million for the year ended December 31, 1998, related to the minority interest for Cyberstar.
The effective income tax rate differs from the statutory U.S. Federal income tax rate for the following reasons:
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Statutory U.S. federal income tax rate...... 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax...... (8.3) 3.0 3.0 Non-U.S. income and losses taxed at lower rates...... 20.3 (15.0) (22.5) Non-deductible amortization of cost in excess of net assets acquired...... (28.8) 2.6 Other, net...... (3.1) 1.9 2.2 ------Effective income tax rate... 15.1% 27.5% 17.7% ======
F-23 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED) As of December 31, 1998, the Company had net operating loss carryforwards of approximately $323.1 million, which includes $153.1 million related to Loral Orion for its pre-acquisition tax years, the future use of which is limited due to the ownership changes experienced by Orion, and tax credit carryforwards of approximately $1.7 million. The separate company loss carryforwards for Loral Orion expire at varying dates from 2003 through 2017. The balance generally expires from 2011 through 2018. Due to uncertainty regarding its ability to realize the benefits of the net operating loss carryforwards and certain other net deferred tax assets related to Loral Orion for the years preceding the acquisition date, the Company has established a valuation allowance of $70.9 million against these net deferred tax assets. For the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, income before income taxes includes approximately $15 million, $72 million and $10 million, respectively, of non-U.S. source income.
The significant components of the net deferred income tax liability are (in thousands):
DECEMBER 31, ------1998 1997 ------Postretirement benefits other than pensions...... $ (15,547) $(14,927) Inventoried costs...... (44,288) (37,457) Net operating loss and tax credit carryovers...... (124,270) (13,562) Compensation and benefits...... (11,655) (11,129) Premium on senior notes...... (69,203) Other, net...... 5,780 (74) Pension costs...... 4,335 5,957 Property, plant and equipment...... 92,875 54,838 Income recognition on long-term contracts...... 125,967 120,237 ------subtotal...... (36,006) 103,883 Less valuation allowance...... 70,894 ------Net deferred income tax liability...... $ 34,888 $103,883 ======
The net deferred income tax liability is classified as follows (in thousands):
DECEMBER 31, ------1998 1997 ------Other current assets...... $(3,482) ======Income taxes payable...... $ 4,187 ======Long-term deferred income tax liability...... $38,370 $99,696 ======
9. SHAREHOLDERS' EQUITY
Common Stock
On June 29, 1998, Loral sold 23 million shares of its common stock for $27 per share. The net proceeds were $602 million, of which Loral used $175 million, net, to fund the Globalstar Purchase (see Note 6).
Series A Preferred Stock
Significant terms of the Company's Series A Preferred Stock include a liquidation preference of $.01 per share prior to pro rata participation with the common stock and the ability to convert to common stock upon the receipt of certain antitrust clearance or sales to an unaffiliated third party. The Series A Preferred Stock has the same voting rights as the Company's common stock except, it has no right to vote for the election of directors.
F-24 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY -- (CONTINUED) Series B Preferred Stock
The Series B Preferred Stock will, if issued, be junior to any other series of preferred stock which may be authorized and issued.
6% Series C Preferred Stock
On November 1, 1996, the Company sold $600 million of 6% Convertible Preferred Equivalent Obligations which, were mandatorily exchanged on June 5, 1997 into shares of the Company's Series C Preferred Stock resulting in a reclassification of these amounts into shareholders' equity. In addition, the Company issued additional CPEOs and shares of Series C Preferred Stock in connection with the acquisition of interests in SS/L and Globalstar (see Notes 3 and 6). The Series C Preferred Stock has an aggregate liquidation preference equal to its $745 million aggregate redemption value and a mandatory redemption date of November 1, 2006. The Series C Preferred Stock is convertible into shares of common stock of the Company at a conversion price of $20 per share. As of December 31, 1998, the outstanding Series C Preferred Stock was convertible into 37,273,593 shares of Loral common stock.
The Series C Preferred Stock, with respect to dividend rights and rights upon liquidation, winding up and dissolution, ranks pari passu with Loral's Series A Preferred Stock and senior to or pari passu with all other existing and future series of preferred stock of Loral and senior to Loral common stock. The Series C Preferred Stock is redeemable in cash or Loral common stock at any time, in whole or in part, at the option of the Company (at a premium which declines over time) commencing November 5, 1999.
Stock Plans
In April 1996, Loral established the 1996 Stock Option Plan. An aggregate of 18 million shares of common stock have been reserved for issuance. Under this plan, options are granted at the discretion of the Company's Board of Directors to employees of the Company and its affiliates. Such options become exercisable as determined by the Board, generally over five years, and generally expire no more than 10 years from the date of the grant.
As discussed in Note 2, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB 25, and its related interpretations. Accordingly, no compensation expense based on the fair value method has been recognized in the financial statements for employee stock arrangements.
SFAS 123 requires the disclosure of pro forma net income and earnings per share as though the Company had adopted the fair value method. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996: expected life, six months following vesting; stock volatility, 25%; risk free interest rate, 4.44% to 6.55% based on date of grant; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1998, 1997 and 1996 awards, including stock-based compensation awards to employees of the Company's affiliates, had been amortized to expense over the vesting period of the awards, pro forma net (loss) income applicable to common stockholders would have (increased) decreased by $(7.5) million ($(.02) per diluted share), $4.4 million ($.02 per diluted share) and $4.1 million ($.02 per diluted share) to $(192.7) million ($(.70) per diluted share), $9.3 million ($.04 per
F-25 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY -- (CONTINUED) diluted share) and $4.8 million ($.02 per diluted share) for the years December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively.
A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and changes during the periods then ended is presented below:
WEIGHTED- AVERAGE EXERCISE SHARES PRICE ------Outstanding at April 1, 1996...... -- $ -- Granted at fair market value (weighted average fair value $2.93 per share)...... 6,412,000 10.60 Forfeited...... (500) 10.50 ------Outstanding at December 31, 1996...... 6,411,500 10.60 Granted at fair market value (weighted average fair value $3.98 per share)...... 642,500 14.41 Granted below fair market value (weighted average fair value $3.85 per share)...... 90,000 10.50 Exercised...... (207,750) 10.50 Forfeited...... (175,800) 12.98 ------Outstanding at December 31, 1997...... 6,760,450 10.90 Granted at fair market value (weighted average fair value $5.63 per share)...... 3,737,400 21.73 Granted below fair market value (weighted average fair value $5.71 per share)...... 600,000 11.72 Orion stock options converted to Loral stock options (weighted average fair value $5.22 per share)...... 1,443,240 14.78 Exercised...... (806,781) 12.15 Forfeited...... (857,477) 13.34 ------Outstanding at December 31, 1998...... 10,876,832 $14.90 ======Options exercisable at December 31, 1998...... 3,638,305 $12.44 ======Options exercisable at December 31, 1997...... 2,014,250 $10.53 ======Options exercisable at December 31, 1996...... 1,200,000 $10.50 ======
The following table summarizes information about Loral's outstanding stock options at December 31, 1998:
DECEMBER 31, 1998 ------OUTSTANDING ------EXERCISABLE WEIGHTED ------AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE ------$10.50 - $16.00...... 7,835,409 7.56 $11.48 3,379,805 $11.53 $16.00 - $24.00...... 498,803 4.72 17.49 8,500 17.18 $24.00 - $27.28...... 2,542,620 9.16 24.92 250,000 24.44 ------10,876,832 7.81 $14.90 3,638,305 $12.44 ======
F-26 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY -- (CONTINUED) All options granted during the year were non-qualified stock options, except for Incentive Stock Options ("ISOs") of Orion Network Systems, Inc. which were converted into 461,241 of Loral ISOs. As of December 31, 1998, 7,524,280 shares of common stock were available for future grant under the Plan.
10. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
The Company maintains a pension plan and a supplemental retirement plan. These plans are defined benefit pension plans and members in certain locations may contribute to the pension plan in order to receive enhanced benefits. Eligibility for participation in these plans vary and benefits are based on members' compensation and/or years of service. In connection with the Distribution, Loral assumed the obligations of such members previously employed by Old Loral, in exchange for plan assets as defined. None of the employees associated with the acquisition of Orion were transferred into these plans. The Company's funding policy is to fund the pension plan in accordance with the Internal Revenue Code and regulations thereon and to fund the supplemental retirement plan on an actuarial basis, including service cost and amortization amounts. Contributions of $1.9 million were made in 1998 and 1997. No contributions were made for the nine months ended December 31, 1996. Plan assets are generally invested in U.S. government and agency obligations and listed stocks and bonds.
Other Benefits
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for the Company's pension plan. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions.
Effective December 31, 1998 the Company adopted SFAS 132. Prior years' disclosures have been restated. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets for the years ended December 31, 1998 and 1997, and a statement of the funded status as of December 31, 1998 and 1997, respectively.
PENSION BENEFITS OTHER BENEFITS ------1998 1997 1998 1997 ------(IN THOUSANDS) Reconciliation of benefit obligation Obligation at January 1...... $204,166 $ 28,539 $ 36,010 $ 178 Acquisition of SS/L...... 151,488 29,318 Service cost...... 8,340 6,539 1,460 915 Interest cost...... 15,358 14,278 2,553 2,315 Participant contributions...... 1,228 1,161 593 Plan amendments...... (422) Actuarial (gain) loss...... 7,231 11,631 (1,406) 4,431 Benefit payments...... (9,944) (9,470) (2,023) (1,147) ------Obligation at December 31...... $225,957 $204,166 $ 37,187 $ 36,010 ------
F-27 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ------1998 1997 1998 1997 ------(IN THOUSANDS) Reconciliation of fair value of plan assets Fair value of plan assets at January 1...... $198,013 $ 9,450 $ 2,022 Acquisition of SS/L...... 167,635 $ 2,055 Actual return on plan assets...... 36,040 27,310 124 (33) Employer contributions...... 1,898 1,927 1,134 1,147 Participant contributions...... 1,228 1,161 683 Benefit payments...... (9,944) (9,470) (2,023) (1,147) ------Fair value of plan assets at December 31...... $227,235 $198,013 $ 1,940 $ 2,022 ------Funded status Funded status at December 31...... $ 1,278 $ (6,153) $(35,247) $(33,988) Unrecognized prior service cost...... (371) 55 (10,198) (11,470) Unrecognized (gain) loss...... (8,270) 2,028 12,600 14,347 ------Net amount recognized...... $ (7,363) $ (4,070) $(32,845) $(31,111) ======
The following table provides the details of the net pension liability recognized in the balance sheet as of December 31, 1998 and 1997, respectively (in thousands):
1998 1997 ------Prepaid benefit cost...... $ 10,262 $ 13,217 Accrued benefit liability...... (17,625) (17,287) ------Net amount recognized...... $ (7,363) $ (4,070) ======
The Company has a supplemental retirement plan, which had an accumulated benefit obligation in excess of plan assets. The accumulated benefit obligation and fair value of plan assets for the supplemental retirement plan were $25.1 million and $8.6 million and $24.1 million and $8.3 million, as of December 31, 1998 and 1997, respectively.
The following table provides the components of net periodic benefit cost for the plans for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996, respectively (in thousands):
PENSION BENEFITS OTHER BENEFITS ------1998 1997 1996 1998 1997 1996 ------Service cost...... $ 8,340 $ 6,539 $ 268 $ 1,460 $ 915 $13 Interest cost...... 15,358 14,278 1,410 2,553 2,315 9 Expected return on plan assets...... (18,531) (16,433) (576) (192) (196) Amortization of prior service cost...... 4 4 (1,272) (1,272) Amortization of net (gain) loss...... 20 2 319 194 ------Net periodic benefit cost..... $ 5,191 $ 4,390 $1,102 $ 2,868 $1,956 $22 ======
F-28 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED) The principal actuarial assumptions were:
1998 1997 1996 ------Discount rate...... 7.00% 7.25% 7.75% Expected return on plan assets...... 9.50% 9.50% 9.50% Rate of compensation increase...... 4.25% 4.50% 4.50%
Actuarial assumptions used a health care cost trend rate of 8.75% decreasing gradually to 5.25% by 2003. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates for 1998 would have the following effects:
1% INCREASE 1% DECREASE ------Effect on total of service and interest cost components of net periodic postretirement health care benefit cost...... $ 664,000 $ (522,000) Effect on the health care component of the accumulated postretirement benefit obligation..... 4,436,000 (3,785,000)
Employee Savings Plan
In April, 1996 the Company adopted the employee savings plan which provides that the Company match the contributions of participating employees up to a designated level. Under this plan, the matching contributions in Loral common stock or cash were $6.1 million and $5.6 million for the years ended December 31, 1998 and 1997, respectively and $0.1 million for the nine months ended December 31, 1996.
11. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value:
The carrying amount of cash and cash equivalents and restricted cash approximates fair value because of the short maturity of those instruments. The fair value of the investment in available-for-sale securities and Series C Preferred Stock are based on market quotations. The fair value of the Company's long-term debt is based on carrying value for those obligations that have short-term variable interest rates on the outstanding borrowings and based on quoted market prices for obligations with long-term interest rates.
The estimated fair values of the Company's financial instruments are as follows (in thousands):
DECEMBER 31, ------1998 1997 ------CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------Cash and cash equivalents...... $ 546,772 $ 546,772 $226,547 $226,547 Restricted cash...... 72,855 72,855 Investment in available-for-sale securities...... 65,273 65,273 32,285 32,285 Long-term debt, including current maturities...... 1,555,775 1,382,890 435,398 435,398 Series C Preferred Stock...... 735,437 775,300 733,762 916,930
F-29 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED) The fair value of investments in available-for-sale securities includes unrealized gains of $40 million and $7 million as of December 31, 1998 and 1997, respectively, which is included in accumulated other comprehensive income (see Note 2).
Foreign Currency Hedges
As of December 31, 1998 and 1997, the Company had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $197.5 million and $175.1 million, respectively. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed by SS/L through May 2006. The fair value of these contracts, based on quoted market prices, was $189.7 million and $139 million as of December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997, deferred gains on forward contracts to sell foreign currencies, primarily yen, were $11.7 million and $26.6 million, respectively, and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $3.9 million and $9.5 million, respectively.
The Company is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held as of December 31, 1998 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. As of December 31, 1998 these foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL ------AT AT AT AT CONTRACT MARKET CONTRACT MARKET YEARS TO MATURITY RATE RATE RATE RATE ------1...... $ 97,776 $101,924 $ 56,158 $49,705 2 to 5...... 11,124 10,913 20,748 17,949 6 to 10...... 11,725 9,257 ------$108,900 $112,837 $ 88,631 $76,911 ======
12. COMMITMENTS AND CONTINGENCIES
In connection with the Merger between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"), Lockheed Martin assumed approximately $206 million of the guarantee under the Globalstar credit agreement. The balance of $44 million of the guarantee was assumed by various Globalstar partners, including $11.7 million by SS/L. In addition, Loral has agreed to indemnify Lockheed Martin for its liability, if any, in excess of $150 million under its guarantee of the Globalstar credit agreement. Globalstar is currently financed without recourse to Loral other than the indemnification described above.
The Company leases certain facilities, equipment and transponder capacity under agreements expiring at various dates. Certain leases covering facilities contain renewal and or purchase options which may be exercised by the Company. Rent expense was $26.4 million and $17.7 million for the year ended December 31, 1998 and 1997, respectively.
F-30 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consisted of the following as of December 31, 1998 (in thousands):
1999...... $ 28,173 2000...... 25,346 2001...... 24,000 2002...... 20,604 2003...... 17,164 Thereafter...... 53,414 ------$168,701 ======
The Company had outstanding letters of credit of approximately $98.7 million and $71.5 million as of December 31, 1998 and 1997, respectively.
Loral has also guaranteed a $115 million term loan as of December 31, 1998.
Due to the long lead times required to produce purchased parts and launch vehicles, the Company has entered into various purchase commitments with suppliers. These commitments aggregated approximately $900 million as of December 31, 1998.
Prior to its acquisition by Loral, Loral Skynet sold several transponders under which title to specific transponders was transferred to the customer upon the customer's acceptance. Under the terms of the contracts, Loral Skynet continues to operate the satellites on which the transponders are located and provides a warranty for a period of 10 to 14 years, generally the economic life of the satellite. Depending on the contract, Loral Skynet is required to replace the transponders failing to meet operating specifications. All customers are entitled to a refund equal to the reimbursement value, as defined, in the event there is no repair or replacement. The reimbursement value is determined based on the original purchase price plus an interest factor from the time the payment is received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In case of satellite failure, the reimbursement value may be paid from proceeds received from insurance policies.
In 1997, two satellites built by SS/L experienced solar array circuit failures. One customer asserted that, in light of the failures and uncertainty as to future failure, it has not accepted the satellite. Loral believes that this customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. SS/L settled the other customer's claims in 1997. The statement of operations for 1997 includes the estimated impact of these events. In 1998, another SS/L-built satellite experienced degradation in the performance of two of its Ku-band antennae, which SS/L currently estimates could result in the loss of approximately 25% of the applicable orbital incentives, although further warranty claims could be made. Loral's 1998 consolidated financial statements include the effect of this item. Management believes that these matters will not have a material adverse effect on the financial condition or results of operations of Loral.
SS/L is a target of a grand jury investigation being conducted by the office of the U.S. Attorney for the District of Columbia with respect to possible violations of export control laws that may have occurred in connection with the participation of SS/L employees on a committee formed in the wake of the 1996 crash of a Long March rocket in China and whose purpose was to consider whether studies of the crash made by the Chinese had correctly identified the cause of the failure. The Company is not in a position to predict the direction or outcome of the investigation. If SS/L were to be indicted and convicted of a criminal violation of
F-31 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) the Arms Export Control Act, it would be subject to a fine of $1 million per violation and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a material adverse effect on SS/L's business, which is important to the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Whether or not SS/L is indicted or convicted, SS/L will remain subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds a violation of the Arms Export Control Act that puts SS/L's reliability in question, and it can suspend export privileges whenever it determines that grounds for debarment exist and that such suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was conveyed to the Chinese, and no secret or classified information was discussed with or reported to them. SS/L believes that its employees acted openly and in good faith and that none engaged in intentional misconduct. Accordingly, the Company does not believe that SS/L has committed a criminal violation of the export control laws. The Company does not expect the grand jury investigation or its outcome to result in a material adverse effect upon its business. However, there can be no assurance as to these conclusions.
Several Congressional committees have held hearings on U.S. satellite export policy toward China, alleged influence of campaign contributions
(including contributions made by Loral's Chairman and Chief Executive Officer) on the Clinton Administration's export policy toward China and related matters. One of the House committees investigating these matters, chaired by Representative Cox, recently issued a classified report that is said to be critical of past government and industry technology transfer practices and policies. This report is also said to contain 38 proposals for legislative and executive action to address perceived concerns. It is possible that adoption of some or all of such proposals could have an adverse effect upon the ability of U.S.-based satellite manufacturers such as SS/L, and possibly other U.S. exporters, to market their products abroad in competition with foreign-based manufacturers, and might adversely affect their ability to perform existing contracts. In addition, the portions of the report that have not yet been declassified could contain negative comments about SS/L's compliance with the export control laws.
On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions, and believes that a review of the agreement will show that its terms comply with the new law. The ODTC, however, has not yet completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. If such a delay were to continue for an extended period, or if the suspension was not lifted, SS/L's customer could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($124 million as of December 31, 1998) and may incur penalties of up to $12 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance that SS/L will be able to find such a replacement customer.
F-32 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED PARTY TRANSACTIONS
In connection with contract performance, Loral provided services to and acquired services from Lockheed Martin for the years ended December 31, 1998 and 1997, respectively. A summary of such transactions and balances is as follows (in thousands):
YEARS ENDED DECEMBER 31, ------1998 1997 ------Revenue from services sold...... $ 1,301 $ 3,550 Cost of purchased services...... 70,569 78,160 Balance at year end: Receivable...... $ 2,159 $ 80 Payable...... 4,317 29,589 ------Net payable...... $ 2,158 $ 29,509 ======
Loral's sales to, purchase from, and balances with the Alliance Partners (see Note 3), including the effect of the related party transactions in Note 6, for the years ended December 31, 1998 and 1997, were as follows (in thousands):
1998 1997 ------Revenue from services sold...... $ 40,791 $ 39,303 Cost of purchased services...... 190,070 147,777 Balance at year end: Receivable...... $ 6,579 $ 10,492 Payable...... 72,807 81,716 ------Net payable...... $ 66,228 $ 71,224 ======
14. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted average number of shares of common stock and the Series A Preferred Stock outstanding. Diluted earnings (loss) per share excludes the assumed conversion of the Series C Preferred Stock as the effect would have been antidilutive for the years ended December 31, 1998 and 1997, respectively. For the year ended December 31, 1998, weighted options equating to approximately 1.8 million shares as calculated using the treasury stock method were excluded from the calculation of diluted loss per share, as the effect would have been antidilutive.
The following table sets forth the computation of basic and diluted earnings per share:
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------(IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income (loss)...... $(138,798) $ 40,004 $ 8,877 Preferred dividends and accretion...... (46,425) (26,315) ------Numerator for basic and diluted earnings per share -- net income (loss) applicable to common stockholders...... $(185,223) $ 13,689 $ 8,877 ======
F-33 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS (LOSS) PER SHARE -- (CONTINUED)
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------(IN THOUSANDS, EXCEPT PER SHARE DATA) Denominator: Weighted average shares: Common Stock...... 227,505 196,173 186,799 Series A Preferred Stock...... 45,897 45,897 42,198 ------Denominator for basic earnings per share...... 273,402 242,070 228,997 Effect of dilutive securities: Employee stock options...... 1,521 399 ------Denominator for diluted earnings per share.... 273,402 243,591 229,396 ======Basic and diluted earnings (loss) per share..... $ (0.68) $ 0.06 $ 0.04 ======
15. SEGMENTS
Loral has four reportable business segments: Satellite Manufacturing and Technology, Fixed Satellite Services, Data Services and Global Mobile Telephony (see Note 1).
In evaluating financial performance, management uses revenues and earnings before interest, taxes and depreciation and amortization ("EBITDA") as the measure of a segment's profit or loss. Segment results include the results of its subsidiaries and its affiliates, SatMex, Europe*Star and Globalstar, which are accounted for using the equity method in these consolidated financial statements. Intersegment revenues consist of satellites under construction by SS/L for Loral Skynet, Loral Orion, Globalstar and Europe*Star. The accounting policies of the reportable segments are the same as those described in Note 2.
F-34 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENTS -- (CONTINUED) Summarized financial information concerning the reportable segments is as follows (in thousands):
1998 SEGMENT INFORMATION
SATELLITE MANUFACTURING FIXED GLOBAL AND SATELLITE DATA MOBILE TECHNOLOGY(1) SERVICES(2) SERVICES(3) TELEPHONY(4) CORPORATE(5) TOTAL ------REVENUE AND EBITDA: Revenue from external customers...... $ 500,918 $ 248,904 $ 39,856 $ 789,678 Intersegment revenue...... 889,253 5,301 894,554 ------Gross revenue...... $1,390,171 $ 254,205 $ 39,856 1,684,232 ======Revenue of unconsolidated affiliates(6).... (104,779) Intercompany revenue(7)...... (277,751) ------Consolidated revenue...... $1,301,702 ======EBITDA before development and start-up costs and affiliate and intercompany eliminations...... $ 106,969 $ 171,239 $ (13,306) $ (31,875) $ 233,027 Development and start-up costs(8)...... (33,354) $ (144,953) (178,307) ------EBITDA before affiliate and intercompany eliminations...... $ 106,969 $ 171,239 $ (46,660) $ (144,953) $ (31,875) 54,720 ======EBITDA of unconsolidated affiliates(6)..... 70,184 Intercompany EBITDA(7)...... (23,655) ------EBITDA(9)...... 101,249 Depreciation and amortization...... 135,029 ------Operating loss...... $ (33,780) ======OTHER DATA: Depreciation and amortization before affiliate eliminations...... $ 39,696 $ 130,793 $ 10,193 $ 1,731 $ 2,981 $ 185,394 ======Depreciation and amortization of unconsolidated affiliates(6)...... (50,365) ------Depreciation and amortization...... $ 135,029 ======Capital expenditures before affiliate eliminations...... $ 39,650 $ 638,924 $ 27,287 $ 564,629 $ 2,387 $1,272,877 ======Capital expenditures of unconsolidated affiliates(6)...... (783,429) ------Capital expenditures...... $ 489,448 ======Total assets before affiliate eliminations...... $1,673,030 $3,371,073 $ 152,667 $2,670,025 $1,238,434 $9,105,229 ======Total assets of unconsolidated affiliates(6)...... (3,876,014) ------Total assets...... $5,229,215 ======
(1) Satellite Manufacturing and Technology includes 100% of SS/L's results. In 1996 Loral increased its ownership in SS/L from 32.7% to 51% and used the equity method of accounting. In February 1997, Loral agreed to acquire the remaining 49% of SS/L.
(2) Fixed Satellite Services includes 100% of the following companies since their respective dates of acquisition. Loral Skynet acquired on March 14, 1997; Loral Orion's transponder leasing business acquired on March 20, 1998; SatMex, a 49% equity investee, acquired on November 17, 1997; and Europe*Star, a 47% equity investee, since December 1998.
(3) Data services includes 100% of CyberStar and 100% of Loral Orion's data services business since its acquisition on March 20, 1998.
(4) Includes 100% of Globalstar. Loral owned approximately 43%, 40% and 32% at December 31, 1998, 1997 and 1996, respectively.
(5) Represents unallocated corporate expenses incurred in support of the Company's operations. (6) Represents amounts related to unconsolidated affiliates (SatMex, Europe*Star and Globalstar and in 1996, SS/L). These amounts are eliminated in order to arrive at Loral's consolidated results. Loral's proportionate share of these affiliates is included in equity in net loss from affiliates in Loral's consolidated statements of operations.
(7) Represents the elimination of intercompany sales and EBITDA, primarily for satellites under construction by SS/L for wholly-owned subsidiaries; as well as eliminating sales for the lease of transponder capacity by Data Services from Fixed Satellite Services.
(8) Represents EBITDA for operations in the development stage (CyberStar and Globalstar).
(9) EBITDA (which is equivalent to operating income/loss before depreciation and amortization) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of Loral's operating results. However, EBITDA should not be construed as an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies.
F-35 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENTS -- (CONTINUED)
1997 SEGMENT INFORMATION
SATELLITE MANUFACTURING FIXED GLOBAL AND SATELLITE DATA MOBILE TECHNOLOGY(1) SERVICES(2) SERVICES(3) TELEPHONY(4) CORPORATE(5) TOTAL ------REVENUES AND EBITDA: Revenue from external customers...... $ 822,885 $ 82,229 $ 905,114 Intersegment revenue...... 619,715 800 620,515 ------Gross revenue...... $1,442,600 $ 83,029 1,525,629 ======Revenue of unconsolidated affiliates(6)...... (12,893) Intercompany revenue(7)..... (200,145) ------Consolidated revenue...... $ 1,312,591 ======EBITDA before development and start-up costs and affiliate and intercompany eliminations...... $ 99,723 $ 51,821 $ (15,719) $ 135,825 Development and start-up costs(8)...... $ (32,612) $ (87,055) (119,667) ------EBITDA before affiliate and intercompany eliminations...... $ 99,723 $ 51,821 $ (32,612) $ (87,055) $ (15,719) 16,158 ======EBITDA of unconsolidated affiliates(6)...... 77,197 Intercompany EBITDA(7)...... (17,039) ------EBITDA(9)...... 76,316 Depreciation and amortization...... 62,764 ------Operating income...... $ 13,552 ======
OTHER DATA: Depreciation and amortization before affiliate eliminations.... $ 35,308 $ 31,825 $ 78 $ 1,016 $ 1,387 $ 69,614 ======Depreciation and amortization of unconsolidated affiliates(6)...... (6,850) ------Depreciation and amortization...... $ 62,764 ======Capital expenditures before affiliate eliminations.... $ 39,416 $ 212,183 $ 2,623 $ 589,373 $ 4,149 $ 847,744 ======Capital expenditures of unconsolidated affiliates(6)...... (592,404) ------Capital expenditures...... $ 255,340 ======Total assets before affiliate eliminations.... $1,483,759 $1,825,845 $ 24,921 $2,149,053 $ 711,017 $ 6,194,595 ======Total assets of unconsolidated affiliates(6)...... (3,184,148) ------Total assets...... $ 3,010,447 ======
F-36 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENTS -- (CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 1996 SEGMENT INFORMATION
SATELLITE MANUFACTURING GLOBAL AND MOBILE TECHNOLOGY(1) TELEPHONY(4) CORPORATE(5) TOTAL ------REVENUE AND EBITDA: Revenue from external customers...... $ 737,026 $ 737,026 Intersegment revenue...... 280,627 $ 5,088 285,715 ------Gross revenue...... $1,017,653 $ 5,088 1,022,741 ======Revenue of unconsolidated affiliates(6)...... (1,017,653) ------Consolidated revenue...... $ 5,088 ======EBITDA before development and start-up costs and affiliate and intercompany eliminations...... $ 77,253 $ (11,150) $ 66,103 Development and start-up costs(8)...... $ (45,036) (45,036) ------EBITDA before affiliate eliminations...... $ 77,253 $ (45,036) $ (11,150) 21,067 ======EBITDA from unconsolidated affiliates(6)...... (32,217) ------EBITDA(9)...... (11,150) Depreciation and amortization...... 1,051 ------Operating loss...... $ (12,201) ======
OTHER DATA: Depreciation and amortization before affiliate eliminations...... $ 23,242 $ 582 $ 1,051 $ 24,875 ======Depreciation and amortization of unconsolidated affiliates(6)...... (23,824) ------Depreciation and amortization...... $ 1,051 ======Capital expenditures before affiliate eliminations...... $ 26,731 $ 279,613 $ 540 $ 306,884 ======Capital expenditures of unconsolidated affiliates(6)...... (306,344) ------Capital expenditures...... $ 540 ======Total assets before affiliate eliminations...... $1,059,064 $ 942,913 $1,699,326 $3,701,303 ======Total assets of unconsolidated affiliates(6)...... (2,001,977) ------Total assets...... $1,699,326 ======
F-37 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENTS -- (CONTINUED)
Revenue by Customer Location
The following table presents revenues by country based on customer location for the years ended December 31, 1998 and 1997 and the nine months ended December 31, 1996 (in thousands).
1998 1997 1996 ------United States...... $1,096,497 $ 924,468 $5,088 People's Republic of China...... 48,985 102,147 Japan...... 53,567 45,179 France...... 43,702 40,719 Philippines...... 8,877 34,629 Thailand...... 9 77,422 Indonesia...... 71,880 Other...... 50,065 16,147 ------$1,301,702 $1,312,591 $5,088 ======
During 1998, three commercial customers of the Satellite Manufacturing and Technology segment accounted for approximately 46%, 20% and 11%, respectively, of consolidated revenues. During 1997, one customer of the Satellite Manufacturing and Technology segment accounted for approximately 31% of consolidated revenues. See Note 6. During the nine months ended December 31, 1996, all consolidated revenue was attributable to a management fee earned from SS/L.
With the exception of the Company's satellites in orbit (see Note 5), the Company's long-lived assets are primarily located in the United States.
16. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share amounts)
QUARTER ENDED ------MARCH 31, JUNE 30, SEPTEMBER 30,* DECEMBER 31,* ------YEAR ENDED DECEMBER 31, 1998 Revenues...... $295,213 $248,260 $289,588 $468,641 EBITDA (see Note 15)...... 18,410 12,175 19,936 50,728 Operating income (loss)...... 982 (26,266) (19,519) 11,023 Income (loss) before income taxes, equity in net loss of affiliates and minority interest...... 7,928 (31,299) 16,088 (18,345) Net loss...... 15,443 58,973 10,699 53,683 Preferred dividends and accretion...... 11,606 11,607 11,606 11,606 Net loss applicable to common shareholders...... 27,049 70,580 22,305 65,289 Loss per share -- basic and diluted...... (0.11) (0.27) (0.08) (0.23) Market price per share High...... 30 1/2 33 15/16 31 7/8 20 1/2 Low...... 19 24 1/2 12 1/8 10 3/4
* The results of operations for the quarter ended September 30, 1998, includes a $35 million pre-tax gain on the sale of stock in an affiliate. The results of operations for the quarter ended December 31, 1998 includes a pre-tax loss recorded on the write-off of non-strategic investments of $29.5 million.
F-38 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION -- (CONTINUED)
QUARTER ENDED ------MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,* ------YEAR ENDED DECEMBER 31, 1997 Revenues...... $340,353 $291,148 $371,118 $309,972 EBITDA (see Note 15)...... 18,914 12,018 20,912 24,472 Operating income (loss)...... 9,337 (2,505) 2,321 4,399 Income before income taxes, equity in net loss of affiliates and minority interest...... 19,476 3,120 9,663 94,723 Net income (loss)...... (406) (10,296) (3,962) 54,668 Preferred dividends and accretion...... (2,947) (11,633) (11,735) Net income (loss) applicable to common shareholders...... (406) (13,243) (15,595) 42,933 Earnings (loss) per share -- basic and diluted...... 0.00 (0.06) (0.06) 0.17 Market price per share High...... 19 1/2 17 1/2 21 24 1/4 Low...... 14 1/8 13 14 1/16 19
* The results of operations for the quarter ended December 31, 1997, includes a $79.6 million pre-tax gain on the sale of K&F stock.
F-39 INDEPENDENT AUDITORS' REPORT
Space Systems/Loral, Inc.:
We have audited the accompanying consolidated statements of income, shareholders' equity and cash flows of Space Systems/Loral, Inc. and its subsidiaries for the nine months ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects the results of operations and cash flows of Space System/Loral, Inc. and its subsidiaries for the nine months ended December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP San Jose, California February 24, 1997
F-40 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENT OF INCOME (In thousands)
NINE MONTHS ENDED DECEMBER 31, 1996 ------Revenues...... $1,017,653 Costs and expenses...... 953,496 ------Gross profit...... 64,157 Amortization of cost in excess of net assets acquired...... 5,058 Management fee...... 5,088 ------Operating income...... 54,011 Interest income...... 9,179 Interest expense...... 3,098 ------Income before income taxes, minority interest and equity in net loss of affiliate...... 60,092 Provision for income taxes...... 27,643 ------Income before minority interest and equity in net loss of affiliate...... 32,449 Minority interest in losses of ISTI...... 125 Equity in net loss of Globalstar, net of tax benefit...... (1,549) ------Net income...... $ 31,025 ======
See notes to consolidated financial statements.
F-41 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 (In thousands, except share data)
COMMON STOCK RETAINED ------EARNINGS SHARES (ACCUMULATED ISSUED AMOUNT DEFICIT) TOTAL ------Balance April 1, 1996...... 4,000 $466,668 $(18,800) $447,868 Net income...... -- -- 31,025 31,025 ------Balance December 31, 1996...... 4,000 $466,668 $ 12,225 $478,893 ======
See notes to consolidated financial statements.
F-42 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
NINE MONTHS ENDED DECEMBER 31, 1996 ------Cash flows from operating activities: Net income...... $ 31,025 Depreciation and amortization...... 23,242 Deferred income taxes...... 26,673 Minority interest in losses of ISTI...... (125) Equity in net loss of Globalstar...... 1,549 Changes in operating assets and liabilities: Contracts in process, including long-term receivables...... (152,454) Inventories...... (37,990) Deposits and other current assets...... (39,212) Prepaid pension cost and other assets...... (16,208) Accounts payable and other current liabilities...... (7,803) Customer advances...... 37,501 Postretirement and other liabilities...... 317 ------Net cash used in operating activities...... (133,485) ------Investing activities: Capital expenditures...... (26,731) Investment in ABCN...... (10,000) ------Net cash used in investing activities...... (36,731) ------Financing activities: Proceeds from borrowings...... 290,408 Repayment of debt...... (227,874) ------Net cash provided by financing activities...... 62,534 ------Net decrease in cash and cash equivalents...... (107,682) Cash and cash equivalents, beginning of period...... 126,863 ------Cash and cash equivalents, end of period...... $ 19,181 ======Supplemental information: Interest paid, net of amounts capitalized...... $ 2,562 ======Income taxes paid...... $ 1,449 ======
See notes to consolidated financial statements.
F-43 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Space Systems/Loral, Inc. ("SS/L"), a corporate joint venture owned by Loral Space & Communications Ltd. ("Loral") and four international aerospace and communications companies (the "Alliance Partners"), designs and produces geosynchronous and low-earth-orbit satellites and subsystems for communications, remote earth sensing and direct-to-home broadcast television. At December 31, 1996, Loral owned 51% of the common stock of SS/L and has agreed to increase its ownership to 100% by acquiring the remaining 49% held by the Alliance Partners (see Note 6). SS/L has operated under various agreements which specify actions which can be taken by it or its equity investors. The consolidated financial statements include the accounts of SS/L, its wholly owned foreign sales corporation subsidiary, and International Space Technology, Inc. ("ISTI"), a partially owned, corporate joint venture. All significant intercompany balances and transactions have been eliminated. The investment in Globalstar is accounted for on the equity method; intercompany profit is eliminated based on ownership interests.
Change in Fiscal Year-end
In 1996, SS/L changed its fiscal year-end to December 31 from March 31. The accompanying financial statements include audited financial statements for the nine month transition period ended December 31, 1996.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of expenses reported for the period. Actual results could differ from estimates.
A significant portion of SS/L's revenue is associated with long-term contracts which require significant estimates. These estimates include forecasting costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the potential for component obsolescence in connection with long-term procurements.
Cash and Cash Equivalents
Cash equivalents consist of money market investments with an original maturity of less than 90 days.
Major Customers
Sales to the U.S. government represented 8% of revenues for the nine months ended December 31, 1996. Sales to foreign customers, primarily in Asia, represented 25% of revenues for the nine months ended December 31, 1996. For the nine months ended December 31, 1996 two commercial customers represented 28% and 15% of revenues.
Inventories
Inventories consist principally of common subassemblies not specifically identified to contracts in process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost method.
F-44 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue under long-term fixed-price contracts is recognized using the cost-to-cost percentage-of-completion method. Revenue includes estimated orbital incentives discounted to present value at the launch date. Costs include the development effort required for the production of high-technology satellites, non-recurring engineering and design efforts in early periods of contract performance, as well as the cost of qualification testing requirements.
Revenue under cost-reimbursement type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the contract term.
Contracts with the U.S. government are subject to termination by the U.S. government for convenience or for default. Other government contract risks include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will not have a material effect on SS/L's financial position or results of operations.
Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable.
In accordance with industry practice, contracts-in-process include unbilled amounts relating to contracts and programs with long production cycles, a portion of which may not be billable within one year.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," SS/L accounts for stock- based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided using predominantly accelerated methods over the estimated useful lives of the related assets (buildings and improvements 20 to 45 years; all other assets 2 to 10 years). Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the improvements.
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), establishes the accounting standards for the impairment of long-lived assets and certain intangible assets. SS/L adopted SFAS 121 in the nine months ended December 31, 1996 and such adoption did not have any impact on its financial position or results of operations.
Foreign Exchange Contracts
SS/L enters into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable denominated in foreign currencies. Realized and unrealized gains and losses on foreign exchange contracts designated as hedges are deferred and recognized over the lives of the related contracts in process.
Cost in Excess of Net Assets Acquired
Cost in excess of the fair value of net assets acquired is being amortized over 40 years using the straight line method.
F-45 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of Cost in Excess of Net Assets Acquired is evaluated on a recurring basis. Current and future profitability as well as current and future undiscounted cash flows, excluding financing costs, are primary indicators of recoverability. For the nine months ended December 31, 1996 there was no adjustment to the carrying amount of the Cost in Excess of Net Assets Acquired resulting from these evaluations.
Operating Expenses
Selling, general and administrative expenses for the nine months ended December 31, 1996 was $45,231,000 and includes independent research and development costs of $16,274,000. Depreciation and amortization expense was $18,184,000 and capitalized interest costs were $97,000 for the nine months ended December 31, 1996. Rent expense was $7,838,000 for the nine months ended December 31, 1996.
2. INCOME TAXES
The components of the provision for income taxes are as follows:
NINE MONTHS ENDED DECEMBER 31, 1996 ------(IN THOUSANDS) Current: Federal...... $ 683 State, local & foreign...... 287 ------970 Deferred, principally federal...... 26,673 ------Total...... $27,643 ======
The provision for income taxes excludes a deferred tax benefit of $834,000 for the nine months ended December 31, 1996, related to SS/L's share of Globalstar, L.P. losses (see Note 3).
The income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons:
NINE MONTHS ENDED DECEMBER 31, 1996 ------(IN THOUSANDS) Provision at statutory federal income tax rate...... $21,032 State income taxes, net of federal income tax benefit...... 4,042 Non-deductible goodwill amortization...... 1,770 Losses of ISTI...... 229 Non-deductible meals, entertainment and lobbying expense.... 370 Other...... 200 ------Total provision for income taxes...... $27,643 ======
3. INVESTMENTS
In March 1994, SS/L purchased an 11% limited partnership interest in Loral Qualcomm Satellite Services, L.P. ("LQSS") for $6,000,000. LQSS's only asset is 18,000,000 ordinary partnership interests in Globalstar, L.P. ("Globalstar"), which represents a 38.3% interest in the ordinary partnership interests of Globalstar at December 31, 1996. At December 31, 1996, SS/L and Loral had an effective 4.2% and 31.7% interest, respectively, in Globalstar's ordinary partnership interests. Globalstar was formed to design, construct
F-46 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and operate a worldwide, low-earth-orbit satellite-based digital telecommunications system. SS/L's investment has been reduced by $2,383,000 for the nine months ended December 31, 1996, to reflect the pretax effect of its proportionate share of Globalstar's losses.
In connection with the construction of the Globalstar system, Globalstar entered into a $1.4 billion contract with SS/L to design, manufacture, test and obtain launch vehicles and launch services for its constellation of 56 satellites. Under the contract, SS/L has agreed to act as Globalstar's agent to obtain launch vehicles, arrange for the launch of Globalstar satellites and obtain insurance to cover the replacement cost of satellites or launch vehicles lost in the event of a launch failure. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost of approximately $175 million. SS/L has entered into subcontracts with certain of Globalstar's direct or indirect limited partners, some of whom are shareholders of SS/L. Revenue recorded under the Globalstar contract for the nine months ended December 31, 1996 was $280,627,000.
4. RELATED PARTY TRANSACTIONS
SS/L, its shareholders and Loral have entered into a stockholders' agreement ("the Stockholders' Agreement") which provides for management fees to be paid to Loral, ranging from 0.5% to 1% of sales, as defined, depending upon SS/L's operating performance. Such management fees were $5,088,000 for the nine months ended December 31, 1996.
The Stockholders' Agreement also requires SS/L to pay Loral an annual fee for overhead reimbursement, not to exceed 1% of SS/L's adjusted sales, as defined, for each fiscal year. This fee amounted to $2,695,000 for the nine months ended December 31, 1996.
For the nine months ended December 31, 1996, SS/L was billed $10,066,000 by Loral and $5,154,000 by Lockheed Martin for certain operational, executive, administrative, financial, legal and other services provided by Loral and Lockheed Martin.
In connection with contract performance, SS/L provided services to and acquired services from Lockheed Martin for the nine months ended December 31, 1996. A summary of such transactions is as follows:
NINE MONTHS ENDED DECEMBER 31, 1996 ------(IN THOUSANDS) Revenue from services sold...... $ 3,174 Cost of purchased services...... 124,275
SS/L's sales to, and purchases from, the Alliance partners are as follows:
NINE MONTHS ENDED DECEMBER 31, 1996 ------(IN THOUSANDS) Revenue from services sold...... $ 55,019 Cost of purchased services...... 150,608
Certain employees of SS/L participate in Loral's 1996 Stock Option Plan. Under this plan, options are granted at the discretion of Loral's Board of Directors to employees of Loral and its affiliates. Such options become exercisable as determined by the Board, generally over five years, and generally expire no more than 10 years from the date of grant. For the nine months ended December 31, 1996 Loral granted certain key employees of SS/L options to purchase 1,474,000 shares of Loral common stock at a weighted average price
F-47 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of $10.67 per share (weighted average fair value of $2.95 per share.) No options were exercised, and at December 31, 1996, options to purchase 1,473,500 shares were outstanding, none of which were exercisable.
As described in Note 1, SS/L accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. SFAS No. 123, "Accounting for Stock- Based Compensation" requires the disclosure of pro forma net income had SS/L adopted the fair value method. SFAS No. 123 requires that equity instruments granted to an employee by a principal stockholder be included as part of the disclosure. The pro forma incremental effect on net income required to be disclosed under SFAS No. 123 is not material to SS/L's results of operations for the nine months ended December 31, 1996.
5. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, SS/L was party to various noncancellable real estate leases with minimum aggregate rental commitments payable as follows (in thousands):
1997...... $ 9,875 1998...... 8,574 1999...... 7,776 2000...... 7,284 2001...... 6,848 Thereafter...... 22,954 ------$63,311 ======
Leases covering major items of real estate contain renewal and/or purchase options which may be exercised by SS/L.
Due to the long lead times required to produce purchased parts and launch vehicles, SS/L has entered into various purchase commitments with suppliers. These commitments aggregated $1,014,429,000 at December 31, 1996.
SS/L is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on SS/L's financial position or results of operations.
6. SS/L SHAREHOLDERS
Loral has made a strategic decision to increase its ownership of SS/L to 100%. The first step in implementing this decision was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with Lehman Brothers (the "Lehman Partnerships") in exchange for 7,500,000 newly issued shares of common stock of the Company, 267,256 shares of common stock of GTL previously held by the Company and $4 million in cash. As a result of this transaction, the Company increased its interest in SS/L from 32.7% to 51%. On February 12, 1997, Loral completed negotiations with SS/L's Alliance Partners to acquire their respective ownership interests in SS/L for $374 million of which $93 million will be paid in cash and the balance in Loral common stock and Loral convertible preferred equivalent obligations. Partners exchanging SS/L common stock for Loral common stock or convertible preferred equivalent obligations will retain representation on the SS/L Board of Directors and continue their strategic operating relationships with SS/L. Beginning in 1997, the financial position and results of operations of SS/L will be consolidated in the financial statements of Loral.
F-48 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
SS/L maintains a contributory defined benefit pension plan covering substantially all employees. Benefits are based on members' salaries and years of service. SS/L's funding policy is generally to contribute in accordance with cost accounting standards that affect government contractors, subject to the Internal Revenue Code and regulations thereon. No contributions were made for the nine months ended December 31, 1996. Plan assets are invested primarily in U.S. government and agency obligations and listed stocks and bonds.
Net pension costs include the following components:
NINE MONTHS ENDED DECEMBER 31, 1996 ------(IN THOUSANDS) Service cost -- benefits earned during the period...... $ 3,808 Interest cost on projected benefit obligation...... 8,205 Actual loss (return) on plan assets...... (9,934) Net amortization and deferral...... 574 ------Net pension costs...... $ 2,653 ======
The principal actuarial assumptions are as follows: Discount rate...... 7.75% Rate of increase in compensation levels...... 4.50% Expected long-term rate of return on plan assets...... 9.50%
Postretirement Health Care and Life Insurance Cost
In addition to providing pension benefits, SS/L provides certain health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for SS/L's pension plans. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions.
In March 1993, SS/L adopted various plan amendments resulting in unrecognized prior service gains, which are being amortized commencing in 1994.
Postretirement health care and life insurance costs include the following components:
NINE MONTHS ENDED DECEMBER 31, 1996 ------(IN THOUSANDS) Service cost -- benefits earned during the period...... $ 622 Interest cost on accumulated postretirement benefit obligation...... 1,599 Net amortization and deferrals...... (916) ------Total postretirement health care and life insurance costs... $1,305 ======
F-49 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal assumptions used in determining the pension benefit obligation are as follows:
Discount rate...... 7.75% Rate of increase in compensation levels...... 4.50% Present healthcare cost trend rate...... 10.59% Ultimate trend rate by the year 2004...... 5.50%
Changing the assumed health care cost trend rate by 1% in each year would change the aggregate service and interest cost components for the nine months ended December 31, 1996 by approximately $325,000.
Employee Savings Plan
SS/L employees participate in the Loral Savings Plan ("the Plan"). Under the Plan, SS/L matches 60% of participating SS/L employees' contributions up to 6% of base pay. SS/L's matching cash contributions were $2,859,000 for the nine months ended December 31, 1996.
8. INTERNATIONAL SPACE TECHNOLOGY, INC. COMMON STOCK TRANSACTIONS
In September 1993 and March 1994, International Space Technology, Inc. ("ISTI"), a corporate joint venture with unrelated third parties, entered into agreements to sell, in installments, a 22.8% equity interest in ISTI to two unaffiliated entities. Under the first installment, ISTI sold 267.85 common shares for $2.9 million in 1994, representing a 17.6% equity interest in ISTI. In November 1994, in conjunction with the stock sales agreements, ISTI issued an additional 28.95 common shares to one of the minority shareholders, increasing the minority interest in ISTI by 1.6% to 19.2%. Accordingly, 17.6% of the losses of ISTI incurred subsequent to the sale and prior to November 8, 1994, and 19.2% of such incurred losses after November 7, 1994, have been allocated to the minority interest. Additional sales of shares under the agreements are contingent upon completion of certain product qualifications by SS/L.
F-50 INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of Loral Space & Communications Ltd. (a Bermuda company) as of December 31, 1998 and 1997, and for the years ended December 31, 1998 and 1997, and the nine months ended December 31, 1996, and have issued our report thereon dated February 16, 1999, included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule listed in Item 14(a)2 of this Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP New York, New York February 16, 1999
S-1 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LORAL SPACE & COMMUNICATIONS LTD.
BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ------1998 1997 ------ASSETS Current assets: Cash and cash equivalents...... $ 401,269 $ 171,850 Other current assets...... 1,147 3,864 ------Total current assets...... 402,416 175,714 Note receivable from unconsolidated subsidiary...... 346,600 349,000 Investments in affiliates...... 626,977 435,053 Investment in unconsolidated subsidiaries...... 1,255,773 778,257 Due from unconsolidated subsidiaries...... 284,609 245,089 Other assets...... 72,279 50,234 ------$2,988,654 $2,033,347 ======LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities...... $ 31,041 $ 29,187 Accrued interest and preferred dividends...... 8,928 9,478 Income taxes payable...... 2,844 12,004 Deferred income taxes...... 1,796 1,796 ------Total current liabilities...... 44,609 52,465 Deferred income taxes...... 6,542 362 Long-term liabilities...... 1,782 Commitments and contingencies Shareholders' equity: Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized, 45,896,977 shares issued...... 459 459 Series B preferred stock, $.01 par value; 750,000 shares authorized and unissued...... 6% Series C convertible redeemable preferred stock ($745,472 redemption value), $.01 par value; 20,000,000 shares authorized, 14,909,437 shares issued...... 735,437 733,762 Common stock, $.01 par value; 750,000,000 shares authorized, 243,861,719 and 200,950,864 shares issued...... 2,439 2,010 Paid-in capital...... 2,330,755 1,216,377 Treasury stock, at cost; 174,195 and 101,053 shares...... (3,360) (1,680) Unearned compensation...... (8,231) (249) Retained earnings (deficit)...... (162,657) 22,566 Accumulated other comprehensive income...... 40,879 7,275 ------Total shareholders' equity...... 2,935,721 1,980,520 ------$2,988,654 $2,033,347 ======
See note to financial statements.
S-2 LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Costs and expenses...... $ 34,112 $ 14,123 $ 6,561 ------Operating loss...... (34,112) (14,123) (6,561) Interest and investment income...... 53,217 60,915 34,717 Interest expense...... 695 6,000 Gain on sale of investments, net...... 15,494 79,591 ------Income before income taxes and equity in net loss of unconsolidated subsidiaries and affiliates...... 34,599 125,688 22,156 Income taxes...... 9,872 19,644 1,263 ------Income before equity in net loss of unconsolidated subsidiaries and affiliates...... 24,727 106,044 20,893 Equity in net loss of unconsolidated subsidiaries...... (46,593) (19,243) (7,307) Equity in net loss of affiliates...... (116,932) (46,797) (4,709) ------Net income (loss)...... (138,798) 40,004 8,877 Preferred dividends and accretion...... (46,425) (26,315) ------Net income (loss) applicable to common stockholders..... $(185,223) $ 13,689 $ 8,877 ======Earnings (loss) per share: Basic and diluted...... $ (0.68) $ 0.06 $ 0.04 ======Weighted average shares outstanding: Basic...... 273,402 242,070 228,997 ======Diluted...... 273,402 243,591 229,396 ======
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Net income (loss)...... $(138,798) $ 40,004 $ 8,877 Other comprehensive income - unrealized gains on available-for-sale securities...... 32,988 7,275 ------Comprehensive income (loss)...... $(105,810) $ 47,279 $ 8,877 ======
See note to financial statements.
S-3 LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS (in thousands)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Operating activities: Net income (loss)...... $(138,798) $ 40,004 $ 8,877 Gain on investments...... (15,494) (79,591) Equity in net loss of affiliates...... 116,932 46,797 4,709 Equity in net loss of unconsolidated subsidiaries...... 46,593 19,243 7,307 Deferred income taxes...... 10,082 (2,158) Accretion on GTL CPEOs and other non-cash interest income...... (6,012) (1,739) Depreciation and amortization...... 78 Changes in operating assets and liabilities, net of acquisitions: Due from unconsolidated subsidiaries...... (39,520) (244,898) 191 Accounts payable and other current liabilities...... 1,854 4,218 (217) Accrued interest and preferred dividends...... (773) 3,283 5,340 Income taxes payable...... (9,160) 10,741 1,263 Other...... (8,953) (64,630) (5,010) ------Cash used in operating activities...... (43,249) (268,652) 22,460 ------Investing activities: Proceeds from the sale of investments, net of expenses.... 246,868 79,591 Investment in affiliates...... (517,272) (250,496) (6,425) Investments in unconsolidated subsidiaries...... (48,515) (144,060) (26,734) Other assets...... (52,454) ------Cash used in investing activities...... (318,919) (367,419) (33,159) ------Financing activities: Proceeds from sale of common stock...... 601,816 Repayment (issuance) of note to unconsolidated subsidiary...... 2,400 (349,000) Proceeds from convertible preferred equivalent obligations...... 583,292 Proceeds from exercise of stock options and issuances to employee savings plan...... 32,121 7,338 Preferred dividends...... (44,750) (25,435) Proceeds from the Distribution...... 612,274 Transaction expenses related to the Distribution...... (12,286) Advances from Loral Corporation prior to the Distribution...... 2,425 ------Cash provided by financing activities...... 591,587 (367,097) 1,185,705 ------Increase (decrease) in cash and cash equivalents...... 229,419 (1,003,168) 1,175,006 Cash and cash equivalents -- beginning of period...... 171,850 1,175,018 12 ------Cash and cash equivalents -- end of period...... $ 401,269 $ 171,850 $ 1,175,018 ======Non-cash transactions: Common stock issued to acquire Orion...... $ 469,025 ======Unrealized gain on available-for-sale securities...... $ 32,988 $ 7,275 ======Mandatory exchange of Convertible Preferred Equivalent Obligations...... $ 583,282 ======Issuance of Series C Preferred Stock to acquire equity interest in SS/L...... $ 149,600 ======Issuance of Loral common stock to acquire equity interest in SS/L and Globalstar partnership interests...... $ 148,387 $ 100,313 ======Deferred purchase price to acquire Globalstar partnership interests...... $ 24,787 ======Assets transferred from Loral Corporation at the Distribution...... $ 31,383 ======Liabilities assumed from Loral Corporation at the Distribution...... $ 27,313 ======Transfer of GTL common stock to acquire equity interest in SS/L...... $ 5,158 ======Supplemental information: Interest paid...... $ 2,023 $ 22,823 ======Taxes paid...... $ 8,586 $ 6,205 ======
See notes to financial statements.
S-4 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO FINANCIAL STATEMENTS
1. Loral Space & Communications Ltd. ("Loral"), a Bermuda company, is a holding company which is the ultimate parent of all Loral subsidiaries and is the registrant of all Loral securities. The accompanying financial statements reflect the financial position, results of operations and cash flows of Loral on a separate company basis. All subsidiaries of Loral are reflected as investments accounted for under the equity method of accounting. Accordingly intercompany payables and receivables have not been eliminated. This condensed financial information should be read in conjunction with the consolidated financial statements of Loral, included in Loral's Annual Report on Form 10-K for the year ended December 31, 1998.
Loral's significant transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the management fee charged by Loral SpaceCom Corporation ("SpaceCom") to Loral and intercompany payables and receivables resulting primarily from the funding of the construction of the Telstar and Loral Orion Satellites. The note receivable from SpaceCom relates to the Loral Skynet acquisition and bears interest at 8.2% per annum. Principal payments are restricted to a maximum of $149,000,000 by a financing arrangement entered into by SpaceCom.
No cash dividends were paid to Loral by its subsidiaries or its affiliates during the years ended December 31, 1998 and 1997, or the nine months ended December 31, 1996.
S-5 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------2.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General Partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and Lockheed Martin Corporation(1) 2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as April 15, 1996(1) 2.3 Agreement for the Purchase and Sale of Assets dated as of September 25, 1996 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(2) 2.4 First Amendment to Agreement for the Purchase and Sale of Assets dated as of March 14, 1997 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(3) 2.5 Agreement and Plan of Merger dated as of October 7, 1997 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(4) 2.6 First Amendment to Agreement and Plan of Merger dated as of February 11, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(5) 2.7 Second Amendment to Agreement and Plan of Merger dated as of March 20, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(12) 3.1 Memorandum of Association(1) 3.2 Memorandum of Increase of Share Capital(1) 3.3 Second Amended and Restated Bye-laws(1) 3.4 Schedule III to Second Amended and Restated Bye-laws relating to Registrant's 6% Series C Convertible Redeemable Preferred Stock(6) 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent(1) 4.2 Indenture dated as of January 15, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006+ 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant(1) 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation(1) 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation(1) 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of January 26, 1999 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, Inc., Dacom Corporation, Dacom International, Inc., Hyundai Corporation, Hyundai Electronics Industries Co., Ltd., Loral/DASA Globalstar, L.P., Loral Space & Communications Ltd., San Giorgio S.p.A., TeleSat Limited, TE.S.AM and Vodafone Satellite Services Limited+ 10.5 Service Provider Agreements by and between Globalstar, L.P. and each of Loral General Partner, Inc. and Loral/DASA Globalstar, L.P.(8) 10.6 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.(8)
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------10.7 1996 Stock Option Plan(1)++ 10.7.1 Amendment to 1996 Stock Option Plan+++ 10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++ 10.9 Employment Agreement between the Registrant and Bernard L. Schwartz(1)++ 10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement between the Registrant and Bernard L. Schwartz(12)++ 10.10 Registration Rights Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership L.P. and Lehman Brothers Offshore Investment Partnership-Japan L.P.(9) 10.11 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006(6) 10.12 Registration Rights Agreement (Series C Preferred Stock) dated as of March 31, 1997 between Loral Space & Communications Ltd. and Finmeccanica S.p.A. and dated as June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.13 Registration Rights Agreement (Common Stock) dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.14 Alliance Agreement dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI, Alcatel Espace and Finmeccanica S.p.A.(10) 10.15 Principal Stockholder Agreement dated as of October 7, 1997 among Loral Space & Communications Ltd., Loral Satellite Corporation, Orion Network Systems, Inc. and certain Orion stockholders signatory thereto(4) 10.16 Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank(11) 10.16.1 First Amendment dated as of May 7, 1998 to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank+ 10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as of June 30, 1997(12) 10.18 Purchase and Sale Agreement dated November 17, 1997 between the Federal Government of the United Mexican States and Corporativo Satelites Mexicanos, S.A. de C.V. for the purchase and sale of the capital stock of Satelites Mexicanos, S.A. de C.V. (English translation of Spanish original)(12) 10.19 Amended and Restated Membership Agreement dated and effective as of August 21, 1998 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.+
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------10.20 Letter Agreement dated December 29, 1997 between Loral Space & Communications Ltd., Telefonica Autrey S.A. de C.V., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and Lehman Commercial Paper Inc. and related Agreement between the Federal Government of United Mexican States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma, S.A. de C.V., Loral Space & Communications Ltd., Loral SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de C.V.(12) 10.21 Shareholders Agreement dated December 7, 1998 by and among Alcatel SpaceCom, Loral Space & Communications Ltd., Dr. Jurgen Schulte-Hillen and EuropeStar Limited+ 10.22 Registration Rights Agreement dated as of January 21, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006+ 12 Statement Re: Computation of Ratios+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+ 27 Financial Data Schedule (EDGAR only)+ 99.1 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report(13)
(1) Incorporated by reference from the Registrant's Registration Statement on Form 10 (No. 1-14180).
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on September 27, 1996.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K on March 28, 1997.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on October 10, 1997.
(5) Incorporated by reference from the Registrant's Registration Statement on Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the nine month period ended December 31, 1996.
(7) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456).
(8) Incorporated by reference from the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on August 13, 1996.
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on July 8, 1997.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on December 9, 1997.
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(13) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed by Globalstar Telecommunications Limited and Globalstar, L.P. (File No. 0-25456).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
None. EXECUTION COPY
LORAL SPACE & COMMUNICATIONS LTD., Issuer
9-1/2% Senior Notes due 2006
INDENTURE
Dated as of January 15, 1999
THE BANK OF NEW YORK, Trustee CROSS-REFERENCE TABLE
TIA Indenture Section Section ------
310(a)(1) ...... 7.10 (a)(2) ...... 7.10 (a)(3) ...... N.A. (a)(4) ...... N.A. (b) ...... N.A. (c) ...... N.A. 311(a) ...... 7.11 (b) ...... 7.11 (c) ...... N.A. 312(a) ...... N.A. (b) ...... 11.03 (c) ...... 11.03 313(a) ...... 7.06 (b)(1) ...... N.A. (b)(2) ...... 7.06 (c) ...... N.A. (d) ...... N.A. 314(a) ...... N.A. 314(a)(4) ...... 4.14 (b) ...... N.A. (c)(1) ...... N.A. (c)(2) ...... N.A. (c)(3) ...... N.A. (d) ...... N.A. (e) ...... N.A. (f) ...... N.A. 315(a) ...... N.A. (b) ...... N.A. (c) ...... N.A. (d) ...... N.A. (e) ...... N.A. 316(a)(last sentence) ...... N.A. (a)(1)(A) ...... N.A. (a)(1)(B) ...... N.A. (a)(2) ...... N.A. (b) ...... N.A. 317(a)(1) ...... N.A. (a)(2) ...... N.A. (b) ...... N.A. 318(a) ...... N.A.
N.A. means Not Applicable.
------
Note: This Cross -Reference Table shall not, for any purpose, be deemed to be part of this Indenture. TABLE OF CONTENTS
ARTICLE 1 Page ----
Definitions and Incorporation by Reference
SECTION 1.01. Definitions ...... 1 SECTION 1.02. Other Definitions ...... 24 SECTION 1.03. Incorporation by Reference of Trust Indenture Act ...... 24 SECTION 1.04. Rules of Construction ...... 25
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating ...... 26 SECTION 2.02. Execution and Authentication ...... 26 SECTION 2.03. Registrar and Paying Agent ...... 27 SECTION 2.04. Paying Agent To Hold Money in Trust ...... 27 SECTION 2.05. Holder Lists ...... 28 SECTION 2.06. Transfer and Exchange ...... 28 SECTION 2.07. Replacement Securities ...... 29 SECTION 2.08. Outstanding Securities ...... 29 SECTION 2.09. Temporary Securities ...... 30 SECTION 2.10. Cancelation ...... 30 SECTION 2.11. Defaulted Interest ...... 30 SECTION 2.12. CUSIP Numbers ...... 30 SECTION 2.13. Amount of Securities, Issuable in Series ...... 31
ARTICLE 3
Redemption
SECTION 3.01. Right of Redemption ...... 32 SECTION 3.02. Notices to Trustee ...... 33 SECTION 3.03. Selection of Securities To Be Redeemed ...... 34 SECTION 3.04. Notice of Redemption ...... 34 SECTION 3.05. Effect of Notice of Redemption ...... 35 SECTION 3.06. Deposit of Redemption Price ...... 35 SECTION 3.07. Securities Redeemed in Part ...... 35 SECTION 3.08. Special Tax Redemption ...... 36
i ARTICLE 4
Covenants
SECTION 4.01. Intentionally Omitted ...... 37 SECTION 4.02. Payment of Securities ...... 37 SECTION 4.03. Reports ...... 37 SECTION 4.04. Restricted Payments ...... 38 SECTION 4.05. Incurrence of Indebtedness and Issuance of Preferred Stock ...... 42 SECTION 4.06. Liens ...... 45 SECTION 4.07. Sale and Leaseback Transactions ...... 45 SECTION 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries ...... 45 SECTION 4.09. Designation of Restricted and Unrestricted Subsidiaries ...... 48 SECTION 4.10. Transactions with Affiliates ...... 48 SECTION 4.11. Limitation on Issuances and Guarantees of Indebtedness ...... 50 SECTION 4.12. Business Activities ...... 50 SECTION 4.13. Change of Control ...... 50 SECTION 4.14. Asset Sales ...... 52 SECTION 4.15. Additional Amounts ...... 54 SECTION 4.16. Compliance Certificate; Statement by Officers as to Default ...... 57 SECTION 4.17. Further Instruments and Acts ...... 57
ARTICLE 5
Successor Issuer
SECTION 5.01. When Issuer May Merge, Consolidate or Sell Assets ...... 57
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default ...... 59 SECTION 6.02. Acceleration ...... 61 SECTION 6.03. Other Remedies ...... 62 SECTION 6.04. Waiver of Past Defaults ...... 62 SECTION 6.05. Control by Majority ...... 62 SECTION 6.06. Limitation on Suits ...... 63 SECTION 6.07. Rights of Holders to Receive Payment ...... 63 SECTION 6.08. Collection Suit by Trustee ...... 64 SECTION 6.09. Trustee May File Proofs of Claim ...... 64 SECTION 6.10. Priorities ...... 64
ii SECTION 6.11. Undertaking for Costs ...... 64 SECTION 6.12. Waiver of Stay or Extension Laws ...... 65
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee ...... 65 SECTION 7.02. Rights of Trustee ...... 67 SECTION 7.03. Individual Rights of Trustee ...... 67 SECTION 7.04. Trustee's Disclaimer ...... 68 SECTION 7.05. Notice of Defaults ...... 68 SECTION 7.06. Reports by Trustee to Holders ...... 68 SECTION 7.07. Compensation and Indemnity ...... 68 SECTION 7.08. Replacement of Trustee ...... 69 SECTION 7.09. Successor Trustee by Merger ...... 70 SECTION 7.10. Eligibility; Disqualification ...... 71 SECTION 7.11. Preferential Collection of Claims Against Issuer ...... 71
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities; Defeasance ...... 71 SECTION 8.02. Conditions to Defeasance ...... 72 SECTION 8.03. Application of Trust Money ...... 74 SECTION 8.04. Repayment to Issuer ...... 75 SECTION 8.05. Indemnity for Government Obligations ...... 75 SECTION 8.06. Reinstatement ...... 75
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders ...... 76 SECTION 9.02. With Consent of Holders ...... 76 SECTION 9.03. Compliance with Trust Indenture Act ...... 78 SECTION 9.04. Revocation and Effect of Consents and Waivers ...... 78 SECTION 9.05. Notation on or Exchange of Securities ...... 78 SECTION 9.06. Trustee To Sign Amendments ...... 79 SECTION 9.07. Payment for Consent ...... 79
iii ARTICLE 10
Miscellaneous
SECTION 10.01. Trust Indenture Act Controls ...... 79 SECTION 10.02. Notices ...... 79 SECTION 10.03. Communication by Holders with Other Holders ...... 80 SECTION 10.04. Certificate and Opinion as to Conditions Precedent ...... 80 SECTION 10.05. Statements Required in Certificate or Opinion ...... 81 SECTION 10.06. When Securities Disregarded ...... 81 SECTION 10.07. Rules by Trustee, Paying Agent and Registrar ...... 81 SECTION 10.08. Legal Holidays ...... 81 SECTION 10.09. Governing Law ...... 82 SECTION 10.10. No Recourse Against Others ...... 82 SECTION 10.11. Successors ...... 82 SECTION 10.12. Multiple Originals ...... 82 SECTION 10.13. Table of Contents; Headings ...... 82 SECTION 10.14. Jurisdiction, Consent to Service of Process ...... 83
Rule 144A/Regulation S Appendix
iv INDENTURE dated as of January 15, 1999, between Loral Space & Communications Ltd., a Bermuda company (the "Issuer") and The Bank of New York, a New York banking corporation (the "Trustee").
The Issuer and the Trustee agree as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Issuer's 9-1/2% Senior Notes due 2006 (the "Initial Securities") and, if and when issued pursuant to a registered exchange for Initial Securities, the Issuer's 9-1/2% Senior Notes due 2006 (the "Exchange Securities") and, if and when issued pursuant to a private exchange for Initial Securities, the Issuer's 9-1/2% Senior Notes due 2006 (the "Private Exchange Securities", together with the Exchange Securities and the Initial Securities, the "Securities"). The term "Securities" shall also refer to any additional series of Securities authorized by Section 2.13.
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Restricted Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Restricted Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control," as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of 2 voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, transfer, conveyance or other disposition of any assets or rights, other than sales of inventory in the ordinary course of business consistent with past practices (other than a sale, lease, transfer, conveyance or other disposition of all or substantially all of the assets of the Issuer and its Restricted Subsidiaries taken as a whole); and
(2) the issuance of Equity Interests in any of the Issuer's Restricted Subsidiaries or the sale of Equity Interests in any of its Restricted Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be Asset Sales:
(1) any single transaction or series of related transactions that: (A) involves assets having a fair market value of less than $5 million; or (B) results in net proceeds to the Issuer and its Restricted Subsidiaries of less than $5 million;
(2) a transfer of assets between or among the Issuer and its Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary to the Issuer or to another Restricted Subsidiary;
(4) the sale or lease of satellites, transponders or other equipment, inventory, accounts receivable or other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted under Section 4.04; and
(7) the issuance of partnership interests by CyberStar, L.P. pursuant to participation bonuses in accordance with Section 4.3 of the CyberStar, L.P. partnership agreement. 3
"Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular "person" (as that term is used in Section 13(d)(3) of the Exchange Act), such "person" shall be deemed to have beneficial ownership of all securities that such "person" has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. The term "beneficially owns" shall have a corresponding meaning.
"Board of Directors" means the Board of Directors of the Issuer.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right to receive a share of the 4 profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case, with any lender party to the Credit Agreement or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above;
(5) commercial paper having one of the two highest ratings obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each case maturing within six months after the date of acquisition;
(6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (5) of this definition; and
(7) the Goldman Sachs US$ Liquid Reserves Fund and other funds with substantially similar investment policies.
"Change of Control" means the occurrence of any of the following: 5
(1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Issuer and its Restricted Subsidiaries taken as a whole to any "person" (as that term is used in Section 13(d)(3) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution of the Issuer;
(3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as that term is used in Section 13(d)(3) of the Exchange Act) becomes the Beneficial Owner, directly or indirectly, of more than 35% of the Voting Stock of the Issuer, measured by voting power rather than number of shares;
(4) the first day on which a majority of the members of the Board of Directors are not Continuing Directors; or
(5) the Issuer consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Issuer, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Issuer or such other Person is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of the Issuer outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission or any successor agency.
"Consolidated Capital Ratio" of any Person as of any date means the ratio of (1) the Total Indebtedness of such Person then outstanding to (2) the stockholders' equity as of such date as shown on the consolidated balance sheet of such Person in accordance with GAAP (which, in the case 6 of the Issuer, shall include the Series C Preferred Stock) after giving pro forma effect to (a) the incurrence of any Indebtedness proposed to be incurred or the issuance of any Disqualified Stock or Preferred Stock of a Subsidiary proposed to be issued and the receipt and application of the proceeds thereof, (b) any other Indebtedness incurred, Disqualified Stock issued or Preferred Stock of any Subsidiary issued or the repayment or retirement of any of the foregoing since such balance sheet date and the receipt and application of the proceeds thereof and (c) any asset dispositions or asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that has occurred since such balance sheet date, in each case as if they had occurred and such proceeds had been applied on the date of such balance sheet.
"Consolidated Cash Flow" means, with respect to any specified Person for any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized by such Person or any of its Restricted Subsidiaries in connection with an Asset Sale, to the extent such losses were deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus
(3) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and other intangibles but 7 excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such period, other than the accrual of revenue in the ordinary course of business, in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, amounts in respect of items (1), (2) and (4) for a Restricted Subsidiary of the Issuer shall be added to Consolidated Net Income to compute Consolidated Cash Flow of the Issuer only to the extent that a corresponding percentage of the Consolidated Net Income of such Restricted Subsidiary would be permitted at the date of determination to be dividended to the Issuer by such Restricted Subsidiary without prior approval (that has not been obtained) pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Leverage Ratio" means the ratio of (1) the Total Indebtedness of the Issuer outstanding as of the most recent available quarterly or annual balance sheet to (2) the Consolidated Cash Flow of the Issuer for the four full fiscal quarters next preceding the incurrence of such Indebtedness or the issuance of such Disqualified Stock for which consolidated financial statements are available; provided that pro forma effect shall be given to (a) the incurrence of any Indebtedness proposed to be incurred or the issuance of any Disqualified Stock or Preferred Stock of a Subsidiary proposed to be issued and the receipt and application of the proceeds thereof, (b) any other Indebtedness incurred, Disqualified Stock issued or Preferred Stock of any Subsidiary issued or the repayment or retirement of any of the foregoing since the beginning of such four fiscal quarter period and the receipt and application of the proceeds thereof and (c) any asset dispositions or asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that has occurred during such four fiscal quarter period, in each case as if they had occurred and 8 such proceeds had been applied on the first day of such four fiscal quarter period.
"Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or a Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded;
(4) the Net Income (but not loss) of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the specified person or one of its Subsidiaries; and
(5) the cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date, the sum of:
(1) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of Preferred Stock (other than Disqualified Stock) that by its terms is not entitled to the payment 9 of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such Preferred Stock.
"Consolidated Tangible Assets" of any Person means the total amount of assets (less applicable reserves and any other properly deductible items) which under GAAP would be included on a consolidated balance sheet of such Person and its Subsidiaries after deducting therefrom all goodwill (but not any other intangible assets) which under GAAP would be included on such consolidated balance sheet.
"Continuing Directors" means, as of any date of determination, any member of the Board of Directors who:
(1) was a member of the Board of Directors on the Issue Date; or
(2) was nominated for election or elected to the Board of Directors with the approval of a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election.
"Credit Agreement" means that certain Amended and Restated Credit and Participation Agreement among Loral SpaceCom Corporation, Space Systems/Loral, Inc., certain lending banks, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo Di Torino S.P.A., individually and as Italian Export Financing Arranger and as Selling Bank, dated as of November 14, 1997, providing for up to $850 million of credit extensions, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time.
"Credit Facilities" means one or more debt facilities (including, without limitation, the Credit Agreement) or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. 10
"Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default.
"Designated Other Permitted Consideration" means the fair market value of non-cash consideration received by the Issuer or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Other Permitted Consideration pursuant to an Officers' Certificate, setting forth the basis of such valuation, less the amount of cash or Cash Equivalents received in connection with a sale of such Designated Other Permitted Consideration.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Securities mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Issuer to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Issuer may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with Section 4.04.
"Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of Equity Interests (other than Disqualified Stock) of the Issuer, other than private sales to an Affiliate of the Issuer.
"Event of Default" has the meaning set forth in Section 6.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor act) and the rules and regulations thereunder.
"Existing Indebtedness" means Indebtedness of the Issuer and its Subsidiaries (other than Indebtedness under 11 the Credit Agreement) in existence on the Issue Date, until such amounts are repaid.
"GAAP" means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by any such other entity as have been approved by a significant segment of the accounting profession, which are in effect from time to time.
"Globalstar" means Globalstar, L.P., a Delaware limited partnership.
"GTL" means Globalstar Telecommunications Limited, a Bermuda company.
"Guarantee" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person, the obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and
(2) other agreements or arrangements entered into in the ordinary course of business and consistent with past practices designed to protect such Person against fluctuations in interest rates or currency exchange rates.
"Holders" means the registered holders from time to time of the Securities.
"Indebtedness" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of credit, excluding 12 letters of credit supporting obligations under customer contracts until such letters of credit are drawn;
(3) banker's acceptances;
(4) Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or
(6) Hedging Obligations, if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the Guarantee by the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount;
(2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness; and
(3) in the case of an obligation under a Hedging Obligation (A) zero if such obligation has been incurred pursuant to clause (7) of paragraph (b) of Section 4.05 or (B) the notional amount of such obligation if not incurred pursuant to such clause.
"Indenture" means this Indenture as amended or supplemented from time to time.
"Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the form of direct or indirect loans (including Guarantees or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity 13
Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided, however, that Investments shall not include any commercially reasonable (as determined in good faith by either the Board of Directors or senior management of the Issuer) extensions of credit to, or Investments made in, any Person in connection with the purchase or sale of satellites or satellite services. If the Issuer or any Restricted Subsidiary of the Issuer sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Issuer such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Issuer and is not a Permitted Venture, the Issuer shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in paragraph (c) of Section 4.04.
"Issue Date" means the date on which the Securities were originally issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Liquidated Damages" means additional cash interest with respect to the Securities payable upon the occurrence of certain events as specified in the Registration Rights Agreement dated as of January 21, 1999, among the Issuer and the Initial Purchasers named therein.
"Marketable Securities" means, with respect to any Asset Sale, any readily marketable equity securities that are (1) traded on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market and (2) issued by a corporation having a total equity market capitalization of not less than $250 million; provided that the excess of (a) the aggregate amount of securities of any one such corporation held by the Issuer and any Restricted Subsidiary over (b) ten times the average daily trading volume of such securities during the 20 immediately preceding trading days shall be deemed not to be Marketable Securities, as 14 determined on the date of the contract relating to such Asset Sale.
"Net Income" means, with respect to any specified Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with: (A) any Asset Sale or (B) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof, in each case, after taking into account any available tax credits or deductions and any tax sharing arrangements, and amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under any one or more Credit Facilities) secured by a Lien on the asset or assets that were the subject of such Asset Sale, and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness as to which neither the Issuer nor any of its Restricted Subsidiaries (other than the Restricted Subsidiary that is the primary obligor and its Subsidiaries so long as no Capital Stock of such Subsidiaries is owned by the Issuer or any other Restricted Subsidiary) (1) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (2) is directly or indirectly liable as a guarantor or otherwise, or (3) constitutes the lender.
"Obligations" means any principal, premium if any, interest, penalties, fees, indemnifications, guarantees, 15 reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness.
"Offer to Purchase" means a written offer (the "Offer") sent by the Issuer by first class mail, postage prepaid, to each Holder at his address appearing in the Securities register on the date of the Offer offering to purchase up to the principal amount of Securities specified in such Offer at the purchase price specified in such Offer (as determined pursuant to this Indenture). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date for purchase of Securities within five Business Days after the Expiration Date. The Issuer shall notify the Trustee at least 15 Business Days (or such shorter period as is acceptable to the Trustee) prior to the mailing of the Offer of the Issuer's obligation to make an Offer to Purchase, and the Offer shall be mailed by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. The Offer shall contain information concerning the business of the Issuer and its Subsidiaries which the Issuer in good faith believes will enable such Holders to make an informed decision with respect to the Offer to Purchase (which at a minimum shall include (1) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Trustee pursuant to this Indenture (which requirements may be satisfied by delivery of such documents together with the Offer), (2) a description of material developments in the Issuer's business subsequent to the date of the latest of such financial statements referred to in clause (1) (including a description of the events requiring the Issuer to make the Offer to Purchase), (3) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Issuer to make the Offer to Purchase and (4) any other information required by applicable law to be included therein). The Offer shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Offer to Purchase.
"Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Issuer. 16
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means an opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of, or counsel to, the Issuer or the Trustee.
"Permitted Business" means any of the lines of business conducted by the Issuer and its Restricted Subsidiaries or its existing Permitted Ventures on the Issue Date and any other space or communication businesses and any business reasonably related thereto.
"Permitted Investments" means:
(1) any Investment in the Issuer or in a Restricted Subsidiary of the Issuer;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Issuer or any Restricted Subsidiary of the Issuer in a Person engaged in a Permitted Business, if as a result of such Investment:
(A) such Person becomes a Restricted Subsidiary of the Issuer; or
(B) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or a Restricted Subsidiary of the Issuer;
(4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.14.
(5) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Issuer;
(6) Hedging Obligations;
(7) Investments in Permitted Ventures;
(8) Investments existing on the Issue Date;
(9) Investments in Skybridge, L.P. that are either (A) required pursuant to the partnership agreement in existence on the Issue Date or (B) required to avoid disproportionate dilution to the Issuer's equity 17 interest therein pursuant to such partnership agreement or to avoid financial penalties; and
(10) other Investments in any Person principally engaged in Permitted Businesses having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (10) at any time outstanding not to exceed 5% of the Issuer's Consolidated Tangible Assets.
"Permitted Liens" means:
(1) Liens on assets of the Issuer or its Restricted Subsidiaries securing Indebtedness and other Obligations under Credit Facilities that are permitted by the terms of this Indenture to be incurred;
(2) Liens in favor of the Issuer or any of its Restricted Subsidiaries;
(3) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with the Issuer or any Restricted Subsidiary of the Issuer; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Issuer or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by the Issuer or any Restricted Subsidiary of the Issuer; provided that such Liens were in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (4) of paragraph (b) of Section 4.05;
(7) Liens existing on the Issue Date and Liens the Issuer or any Restricted Subsidiary are or may be obligated to create pursuant to agreements in existence on the Issue Date; 18
(8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor;
(9) Liens incurred in the ordinary course of business of the Issuer or any Restricted Subsidiary of the Issuer with respect to obligations that do not exceed $50 million at any one time outstanding;
(10) other Liens incidental to the conduct of the Issuer's and its Restricted Subsidiaries' businesses or the ownership of their respective property not securing any Indebtedness, and which do not in the aggregate materially detract from the value of the Issuer's and its Restricted Subsidiaries' property when taken as a whole, or materially impair the use thereof in the operation of their respective businesses; and
(11) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Issuer or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable), of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest thereon and the amount of all customary expenses incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; 19
(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Securities, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Securities on terms at least as favorable to the Holders of Securities as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Issuer or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Venture" means:
(1) a corporation, partnership or other entity other than a Subsidiary of the Issuer engaged in one or more Permitted Businesses in respect of which the Issuer or a Restricted Subsidiary (A) beneficially owns at least 20% of the Capital Stock of such entity and (B) either is a party to an agreement providing for one or more parties to such agreement (which may or may not be the Issuer or a Subsidiary of the Issuer), or is a member of a group that, pursuant to the constituent documents of the applicable corporation, partnership or other entity, has the power to direct the policies, management and affairs of such entity; or
(2) GTL, so long as Globalstar is a Permitted Venture and GTL's principal asset consists of Equity Interests in Globalstar.
"Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity.
"Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. 20
"principal" of a Security means the principal of the Security plus the premium, if any, payable on the Secu rity which is due or overdue or is to become due at the relevant time.
"Restricted Investment" means an Investment other than a Permitted Investment.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividend or the making of any other payment or distribution on account of its Equity Interests (including, without limitation, any distribution, dividend or payment in connection with any merger or consolidation involving the Issuer or any of its Restricted Subsidiaries) or to the direct or indirect holders of its Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Issuer or to the Issuer or a Restricted Subsidiary of the Issuer);
(2) the purchase, redemption or other acquisition or retirement for value (including, without limitation, in connection with any merger or consolidation involving the Issuer) of any Equity Interests of the Issuer, any Restricted Subsidiary of the Issuer or any direct or indirect parent of the Issuer;
(3) the making of any payment on or with respect to, or the purchase, redemption, defeasance or other acquisition or retirement for value of any Indebtedness that is subordinated to the Securities, except the scheduled payment of interest or principal at the Stated Maturity thereof; or
(4) the making of any Restricted Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of such Person that is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Issuer or a Restricted Subsidiary transfers such property to a Person and the Issuer or a Restricted Subsidiary leases it from such Person.
"Securities" means the Securities issued under this Indenture. 21
"Securities Act" means the Securities Act of 1933, as amended (or any successor act) and the rules and regulations thereunder.
"Series C Preferred Stock" means the Issuer's 6% Series C Convertible Redeemable Preferred Stock due 2007.
"Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated by the Commission, as such Regulation is in effect on the date hereof, using a percentage of 5% for such calculations instead of the percentage set forth therein.
"Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person, any corporation, partnership, association or other business entity that would be required under GAAP to be consolidated in the financial statements of such Person or one or more of the other Subsidiaries of that Person (or a combination thereof).
"Tangible Net Worth" of any Person as of any date means the Consolidated Tangible Assets of such Person less the Total Indebtedness of such Person.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of this Indenture, except as provided by Section 9.03.
"Total Indebtedness" means, at any time of determination, without duplication, the sum of (1) all Indebtedness of the Issuer and its Restricted Subsidiaries at such time, (2) the aggregate redemption price of any Disqualified Stock and (3) the aggregate liquidation preference of any Preferred Stock of the Issuer's Restricted Subsidiaries, in each case as determined on a consolidated basis in accordance with GAAP.
"Trust Officer" means any officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. 22
"Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor.
"Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the Board of Directors, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with the Issuer or any Restricted Subsidiary of the Issuer unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Issuer or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Issuer;
(3) is a Person with respect to which neither the Issuer nor any of its Restricted Subsidiaries has any direct or indirect obligation (A) to subscribe for additional Equity Interests or (B) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Issuer or any of its Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a director or executive officer of the Issuer or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Issuer or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of the Issuer as an Unrestricted Subsidiary shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such 23 designation complied with the preceding conditions and was permitted by Section 4.04. If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Issuer as of such date and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.05, the Issuer shall be in default of such Section. The Board of Directors may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Issuer of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (1) such Indebtedness is permitted to be incurred under Section 4.05, calculated on a pro forma basis as if such designation had occurred at the beginning of the four- quarter reference period or balance sheet date, as applicable, and (2) no Default would be in existence following such designation.
"U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option.
"Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the board of directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (A) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (B) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness. 24
"Wholly Owned Subsidiary" of any specified Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person.
SECTION 1.02. Other Definitions.
Defined in Term Section ------
"Additional Amounts" ...... 4.15 "Affected Securities" ...... 3.07 "Affiliate Transaction" ...... 4.10 "Appendix" ...... 2.01 "Bankruptcy Law" ...... 6.01 "Change of Control Payment"...... 4.13 "Change of Control Payment Date"...... 4.13 "Change of Law"...... 3.07 "covenant defeasance option" ...... 8.01(b) "Custodian" ...... 6.01 "Exchange Securities" ...... Recital "Excess Proceeds"...... 4.14 "Guarantor"...... 4.11 "incur"...... 4.05 "Initial Securities" ...... Recital "Issuer" ...... Preamble "legal defeasance option" ...... 8.01(b) "Legal Holiday" ...... 10.08 "Notice of Default" ...... 6.01 "Paying Agent" ...... 2.03 "Payment Default"...... 6.01 "Permitted Debt"...... 4.05 "Private Exchange Securities" ...... Recital "Relevant Jurisdiction"...... 4.15 "Registrar"...... 2.03 "Securities" ...... Recital "Special Tax Redemption"...... 3.07 "Taxes"...... 4.15 "Trustee" ...... Preamble "United States Taxes"...... 3.07
25
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings:
"Commission" means the Commission;
"indenture securities" means the Securities;
"indenture security holder" means a Holder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture securities means the Issuer and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule have the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limita tion;
(5) words in the singular include the plural and words in the plural include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or junior to secured Indebtedness merely by virtue of its nature as unsecured Indebtedness;
(7) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP but accretion of principal on such 26 security shall not be deemed to be the incurrence of Indebtedness;
(8) the principal amount of any Preferred Stock shall be (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemp tion or mandatory repurchase price with respect to such Preferred Stock, whichever is greater;
(9) all references to the date the Securities were originally issued and, with respect to the covenants set forth in Article IV (and the related definitions) references to the Issue Date shall refer to the date the Initial Securities were originally issued; and
(10) the terms "redemption" and "redeemable" shall not be deemed to refer to Offers to Purchase or to repurchases pursuant to Section 4.13 or similar offers or repurchases. 27
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating. Provisions relating to the Initial Securities, the Private Exchange Securities and the Exchange Securities are set forth in the Rule 144A/Regulation S Appendix attached hereto (the "Appendix") which is hereby incorporated in and expressly made part of this Indenture. The Initial Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 1 to the Appendix which is hereby incorporated in and expressly made a part of this Indenture. Any subsequent series of Securities and the Trustee's certificate of authentication shall be in substantially the form of Exhibit A, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to a resolution of the Board, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Issuer and delivered to the Trustee at or prior to the delivery of the written order of the Issuer in the form of an Officers' Certificate contemplated by Section 2.02 for the authentication and delivery of such Securities. The Exchange Securities, the Private Exchange Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Issuer is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Issuer). Each Security shall be dated the date of its authentication. The terms of the Securities set forth in the Appendix and Exhibit A are part of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities for the Issuer by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenti cates the Security, the Security shall be valid neverthe less. 28
At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Securities of any series executed by the Issuer to the Trustee for authentication, together with a written order of the Issuer in the form of an Officers' Certificate for the authentication and delivery of such Securities, and the Trustee in accordance with such written order of the Issuer shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established by or pursuant to a resolution of the Board as permitted by Section 2.13, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Opinion of Counsel stating:
(1) if the form of such Securities has been established by or pursuant to a resolution of the Board, that such form has been established in conformity with the provisions of this Indenture;
(2) if the terms of such Securities have been established by or pursuant to a resolution of the Board as permitted by Section 2.13, that such terms have been established in conformity with the provisions of this Indenture; and
(3) that such Securities, when authenticated and delivered by the Trustee and issued by the Issuer in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Issuer enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles.
If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee.
Notwithstanding the provisions of Section 2.13 and the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to delivery the Officers' Certificate otherwise required pursuant to Section 2.13 or the written order of 29 the Company in the form of an Officers' Certificate and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued.
A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be con clusive evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate and deliver Securities for original issue upon a written order of the Issuer signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Issuer. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed that amount except as provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably acceptable to the Issuer to authenticate the Securities. Unless limited by the terms of such appoint ment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authen tication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The Issuer shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Secur ities and of their transfer and exchange. The Issuer may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any addi tional paying agent.
The Issuer shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provi sions of this Indenture that relate to such agent. The Issuer shall notify the Trustee of the name and address of any such agent. If the Issuer fails to maintain a Registrar 30 or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Issuer or any of its Wholly Owned Subsidiaries incorporated in the United States may act as Paying Agent, Registrar, co-registrar or transfer agent.
The Issuer initially appoints the Trustee as Registrar and Paying Agent in connection with the Securi ties.
SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to each due date of the principal and interest and Liquidated Damages (if any) on any Security, the Issuer shall deposit with the Paying Agent a sum sufficient to pay such principal and interest and Liquidated Damages (if any) when so becoming due. The Issuer shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of or interest and Liquidated Damages (if any) on the Securities and shall notify the Trustee of any default by the Issuer in making any such payment. If the Issuer or a Subsidiary of the Issuer acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Issuer at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee.
SECTION 2.05. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Holders. If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders.
SECTION 2.06. Transfer and Exchange. The Securities shall be issued in registered form and shall be transferable only upon the surrender of a Security for registration of transfer. When a Security is presented to the Registrar or a co-registrar with a request to register a transfer, the Registrar shall register the transfer as requested if the requirements of Section 8-401(1) (or any successor provision thereto) of the Uniform Commercial Code are met. When Securities are presented to the Registrar or a co -registrar with a request to exchange them for an equal 31 principal amount of Securities of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit registration of transfers and exchanges, the Issuer shall execute and the Trustee shall authenticate Securities at the Registrar's or co- registrar's request. The Issuer may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section 2.06. The Issuer shall not be required to make and the Registrar need not register transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date.
Prior to the due presentation for registration of transfer of any Security, the Issuer, the Trustee, the Paying Agent, the Registrar or any co- registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest and Liquidated Damages (if any) on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Issuer, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture will evidence the same debt and will be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated Security is surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 (or any successor provision thereto) of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. Such Holder shall furnish an indemnity bond sufficient in the judgment of the Issuer and the Trustee to protect the Issuer, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. The Issuer and the Trustee may charge the Holder for their expenses in replacing a Security. 32
Every replacement Security is an additional obligation of the Issuer.
SECTION 2.08. Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancelation and those described in this Section as not outstanding. A Security does not cease to be outstand ing because the Issuer or an Affiliate of the Issuer holds the Security.
If a Security is replaced pursuant to Sec tion 2.07, it ceases to be outstanding unless the Trustee and the Issuer receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest and Liquidated Damages (if any) payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest and Liquidated Damages (if any) on them ceases to accrue.
SECTION 2.09. Temporary Securities. Until definitive Securities are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Issuer considers appropriate for temporary Secur ities. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities.
SECTION 2.10 Cancelation. The Issuer at any time may deliver Securities to the Trustee for cancelation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and may, but shall not be required to, destroy (subject to the record retention requirements of the Exchange Act) all Securities surrendered for registration of transfer, exchange, payment or cancelation unless the Issuer directs the Trustee to deliver canceled Securities to the Issuer. The Issuer may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancelation. 33
SECTION 2.11. Defaulted Interest. If the Issuer defaults in a payment of interest and Liquidated Damages (if any) on the Securities, the Issuer shall pay defaulted interest and Liquidated Damages (if any) (plus interest on such defaulted interest and Liquidated Damages (if any) to the extent lawful) in any lawful manner. The Issuer may pay the defaulted interest and Liquidated Damages (if any) to the persons who are Holders on a subsequent special record date. The Issuer shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail to each Holder a notice that states the special record date, the payment date and the amount of defaulted interest and Liquidated Damages (if any) to be paid.
SECTION 2.12. CUSIP Numbers. The Issuer in issuing the Securities may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Issuer shall promptly notify the Trustee of any change in the CUSIP numbers.
SECTION 2.13 Amount of Securities; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is $500,000,000. The Trustee shall authenticate Securities for original issuance on January 21, 1999 in the aggregate principal amount of $350,000,000.
The Securities may be issued in one or more series. All Securities shall be identical in all respects other than interest rates, issuance dates and issuance prices. There shall be established in or pursuant to a resolution of the Board of Directors and, subject to Section 2.03, set forth, or determined in the manner provided in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series:
(1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series); 34
(2) the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture, which shall be in aggregate principal amounts of not less than $10 million per series and not to exceed $150 million in the aggregate (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Sections 2.06, 2.07 or 2.09 and except for Securities which, pursuant to Section 2.02, are deemed never to have been authenticated and delivered hereunder);
(3) the rate at which any Securities of the series shall bear interest, the date from which any such interest shall accrue, the interest payment dates on which such interest shall be payable and the record date for such interest payable on any interest payment Date; and
(4) if applicable, that any Securities of the series shall be issuable in whole or in part in the form or one or more global Securities and, in such case, the respective depositories for such Global Securities, the form of any legend or legends which shall be borne by any such global Security in addition to or in lieu of that set forth in the Appendix and any circumstances in addition to or in lieu of those set forth in the Appendix in which any such global Security maybe exchanged in whole or in part for Securities registered, and any transfer of such global Security in whole or in part may be registered, in the name or names of Persons other than the depository for such global Security or a nominee thereof.
All Securities of any one series shall be substantially identical except as to denomination. All series shall be identical in all respects other than interest rate and issuance dates.
If any of the terms of any series are established by action taken pursuant to a resolution of the Board of Directors, a copy of an appropriate record of such action shall be certified by the Secretary or any Assistant Secretary of the Issuer and delivered to the Trustee at or prior to the delivery of the Officers' Certificate or the supplemental indenture setting forth the terms of the series. 35
ARTICLE 3
Redemption
SECTION 3.01. Right of Redemption. (a) Except pursuant to paragraph (b) of this Section 3.01 and as set forth in Section 3.08, the Securities will not be redeemable at the option of the Issuer prior to January 15, 2003. Thereafter, the Securities will be redeemable, at the Issuer's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest, Additional Amounts and Liquidated Damages, if any, to the applicable redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) if redeemed during the 12-month period commencing on January 15 of the years set forth below:
Redemption Year Price ------2003...... 104.750% 2004...... 102.375% 2005 and thereafter...... 100.000%
(b) In addition, at any time and from time to time prior to January 15, 2002, the Issuer may on any one or more occasions redeem up to 35% of the aggregate principal amount of Securities originally issued under this Indenture at a redemption price (expressed as a percentage of principal amount) of 109.500%, plus accrued and unpaid interest, Additional Amounts and Liquidated Damages, if any, to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided that (1) at least 65% of the aggregate principal amount of Securities originally issued remain outstanding immediately after each such redemption (excluding Securities held by the Issuer and its Subsidiaries) and (2) the redemption must occur within 60 days of the date of the closing of such Equity Offering.
(c) In the case of any partial redemption (other than a redemption pursuant to paragraph (b) of this Section 3.01), selection of the Securities for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Security of $1,000 in original principal amount or less shall be redeemed in part. If any Security is to be redeemed in part 36 only, the notice of redemption relating to such Security shall state the portion of the principal amount thereof to be redeemed. A new Security in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancelation of the original Security.
SECTION 3.02. Notices to Trustee. If the Issuer elects to redeem Securities pursuant to Section 3.01 or 3.08, it shall notify the Trustee in writing of the redemption date, the principal amount of Securities to be redeemed and the section of this Indenture pursuant to which the redemption will occur.
The Issuer shall give each notice to the Trustee provided for in this Section 3.02 at least 60 days before the redemption date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Issuer to the effect that such redemption will comply with the relevant conditions herein.
SECTION 3.03. Selection of Securities To Be Redeemed. If less than all the Securities are to be redeemed at any time (other than pursuant to Section 3.08), the Trustee shall select the Securities to be redeemed by a method that complies with the requirements of the principal national securities exchange, if any, on which the Securities are listed, or if the Securities are not listed, on a pro rata basis, by lot or by such method as the Trustee in its sole discretion shall deem to be fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Secur ities that have denominations larger than $1,000. Secur ities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Issuer promptly of the Securities or portions of Securities to be redeemed.
SECTION 3.04. Notice of Redemption. At least 30 days but not more than 60 days before a date for redemp tion of Securities, the Issuer shall mail a notice of redemption by first -class mail to each Holder of Securities to be redeemed at such Holder's registered address. 37
The notice shall identify the Securities (including CUSIP number(s), if any) to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemp tion price;
(5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed;
(6) that, unless the Issuer defaults in making such redemption payment or the Paying Agent is pro hibited from making such payment pursuant to the terms of this Indenture, interest and Liquidated Damages (if any) on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to which the Securities called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities.
At the Issuer's request, the Trustee shall give the notice of redemption in the Issuer's name and at the Issuer's expense. In such event, the Issuer shall provide the Trustee with the information required by this Section 3.04.
SECTION 3.05. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surren der to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest and Liquidated Damages (if any) to the redemption date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. 38
SECTION 3.06. Deposit of Redemption Price. On or prior to the redemption date, the Issuer shall deposit with the Paying Agent (or, if the Issuer or a Subsidiary of the Issuer is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest and Liquidated Damages (if any) on all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Issuer to the Trustee for cancelation.
SECTION 3.07. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Issuer shall execute and the Trustee shall authenticate for the Holder (at the Issuer's expense) a new Security equal in principal amount to the unredeemed portion of the Security surrendered.
SECTION 3.08. Special Tax Redemption. If the Issuer determines, based upon an Opinion of Counsel, that it has become or would become obligated to pay, on the next date on which any amount would be payable with respect to a Security (an "Affected Security" and, collectively, the "Affected Securities"), any Additional Amounts as a result of a change in or an amendment to the laws (including any regulations promulgated thereunder) of any Relevant Jurisdiction, or any change in or amendment to any official position regarding the application or interpretation of such laws or regulations, which change or amendment becomes effective on or after the Issue Date and which change shall not have been disclosed to the public prior to the Issue Date, and that such obligation cannot be avoided by the Issuer taking reasonable measures available to it, then the Issuer may redeem, at its option, all the Affected Securities (but, except pursuant to clause (3) below, not less than all the Affected Securities), on not less than 30 nor more than 60 days' notice, at 100% of the principal amount thereof, plus accrued and unpaid interest (if any) and Liquidated Damages (if any) to the date of redemption (subject to the right of Holders on the relevant record date to receive interest due on the relevant interest payment date) (such optional redemption, a "Special Tax Redemption"); provided, however, that (1) no such notice of redemption may be given earlier than 60 days prior to the earliest date on which the Issuer would be obligated to pay such Additional Amounts were a payment in respect of the Securities then due, (2) at the time any such Special Tax Redemption notice is given, such obligation to pay such Additional Amounts must remain in effect and (3) the Issuer may redeem the Affected Securities in part if the Issuer redeems all Affected Securities held by Holders in respect of which, as a result of the foregoing, the Issuer is or 39 would be obligated to pay Additional Amounts based on a withholding tax rate in excess of 10%. Notwithstanding the foregoing, the Issuer may not redeem the Affected Securities if the Issuer is obligated to pay any Additional Amounts as a result of a change in or an amendment to the laws (including regulations promulgated thereunder), or any change in or amendment to any official position regarding the application or interpretation of such laws or regulations (any such change in or amendment to, a "Change of Law"), of a Relevant Jurisdiction that occurs or is disclosed on or before the six month anniversary of the date on which such Relevant Jurisdiction became a Relevant Jurisdiction; provided, however, that if the Issuer reincorporates in the United States and Additional Amounts are payable with respect to Taxes imposed by the United States or any political subdivision or taxing authority thereof or therein ("United States Taxes"), this restriction on the Issuer's ability to redeem the Affected Securities shall not apply unless the Change of Law occurs or is disclosed before the date of such reincorporation and shall not apply if, absent such reincorporation, (1) the Issuer would nonetheless have been required to pay Additional Amounts with respect to such Affected Securities in respect of such United States Taxes and (2) without regard to this proviso, the Issuer would have been entitled to redeem such Affected Securities pursuant to a Special Tax Redemption as a result of such payment of Additional Amounts.
ARTICLE 4
Covenants
SECTION 4.01. Intentionally Omitted.
SECTION 4.02. Payment of Securities. The Issuer shall promptly pay the principal of and interest and Liquidated Damages (if any) on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal, interest and Liquidated Damages (if any) shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal, interest and Liquidated Damages (if any) then due.
The Issuer shall pay interest on overdue principal at the rate specified therefor in the Securities, and shall pay interest on overdue installments of interest and Liquidated Damages (if any) at the same rate to the extent lawful. 40
SECTION 4.03. Reports. (a) Whether or not required by the Commission, so long as any Securities are outstanding, the Issuer shall furnish to the Holders of Securities, within the time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K (or any successor forms) if the Issuer were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Issuer and its Subsidiaries and, with respect to the annual information only, a report on the annual financial statements by the Issuer's certified independent accountants; and
(2) all current reports that would be required to be filed with the Commission on Form 8-K (or any successor form) if the Issuer were required to file such reports.
(b) If the Issuer has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by this Section 4.03 shall include selected financial information, either on the face of the financial statements or in the footnotes thereto, regarding the financial condition and results of operations of the Issuer and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Issuer.
(c) In addition, whether or not required by the Commission, the Issuer shall file a copy of all information and reports referred to in clauses (1) and (2) of paragraph (a) of this Section 4.03 with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request.
(d) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuer's compliance with any of its covenants hereunder 41
(as to which the Trustee is entitled to rely exclusively on Officers' Certificates).
SECTION 4.04. Restricted Payments. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make a Restricted Payment, unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and
(2) the Issuer would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to either test set forth in the proviso to paragraph (a) of Section 4.05; and
(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Issuer and its Restricted Subsidiaries after the Issue Date (excluding Restricted Payments permitted by clauses (2), (3), (4) and (6) of paragraph (b) of this Section 4.04) is less than the sum, without duplication, of:
(A) 50% of the Consolidated Net Income of the Issuer for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the Issue Date to the end of the Issuer's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus
(B) 100% of the aggregate net cash proceeds received by the Issuer since the Issue Date as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Issuer (other than Disqualified Stock) or from the issue or sale of Disqualified Stock or debt securities of the Issuer that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary 42 of the Issuer), except to the extent such net cash proceeds are used to increase the amount of dividends on Preferred Stock of the Issuer or the amount of Restricted Investments that may be made pursuant to clause (7) of paragraph (b) of this Section 4.04; plus
(C) 100% of the fair market value (as determined by the Board of Directors and evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of assets used or useful in a Permitted Business received by the Issuer since the Issue Date as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Issuer (other than Disqualified Stock); plus
(D) to the extent not already included in Consolidated Net Income of the Issuer for such period, if any Restricted Investment that was made by the Issuer or any Restricted Subsidiary after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (i) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Restricted Investment or designated amount of Unrestricted Subsidiary; plus
(E) to the extent that any Unrestricted Subsidiary is designated by the Issuer as a Restricted Subsidiary after the Issue Date, an amount equal to the lesser of (i) the net book value of the Issuer's Investment in such Unrestricted Subsidiary at the time of such designation and (ii) the fair market value of the Issuer's Investment in such Unrestricted Subsidiary at the time of such designation.
(b) The preceding paragraph (a) shall not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of the Issuer or of any Equity Interests 43 of the Issuer or any Restricted Subsidiary in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Issuer) of, Equity Interests of the Issuer (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (3)(B) of paragraph (a) of this Section 4.04;
(3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Issuer with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend or distribution by a Restricted Subsidiary of the Issuer to the holders of its common Equity Interests so long as the Issuer or such Restricted Subsidiary receives at least its pro rata share (and in like form) of such dividend or distribution in accordance with its common Equity Interests;
(5) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Issuer or any Restricted Subsidiary of the Issuer held by any employee of the Issuer or a Restricted Subsidiary or member of the Issuer's (or any of its Restricted Subsidiaries') management pursuant to any equity subscription agreement or stock option agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $10 million;
(6) the purchase by a Restricted Subsidiary of shares of Capital Stock of the Issuer from the Issuer or the deemed repurchase of Capital Stock by the Issuer or a Restricted Subsidiary on the exercise of stock options;
(7) payments of dividends by the Issuer on Preferred Stock of the Issuer or the making of Restricted Investments by the Issuer or any Restricted Subsidiary in an aggregate amount not to exceed 100% of the aggregate net cash proceeds received by the Issuer since the Issue Date from the issue or sale of Equity Interests of the Issuer (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such dividend 44 payment or Restricted Investment shall be excluded from clause (3)(B) of paragraph (a) of this Section 4.04;
(8) the purchase by the Issuer or a Restricted Subsidiary of Equity Interests in a Restricted Subsidiary from another Person;
(9) scheduled dividends payable on the Series C Preferred Stock;
(10) payment of dividends on Preferred Stock of a Restricted Subsidiary; and
(11) other Restricted Payments in an aggregate principal amount not to exceed $25 million; provided that the Issuer shall not and shall not permit any of its Restricted Subsidiaries to make any Restricted Payment contemplated by clauses (2) through (10) above so long as a Default has occurred and is continuing.
(c) The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the assets or securities proposed to be transferred or issued to or by the Issuer or a Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this Section 4.04 shall be either (1) determined by the Board of Directors, whose resolution with respect thereto shall be delivered to the Trustee or (2) based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of international standing if the fair market value exceeds $25 million. Not later than the date of making any Restricted Payment, the Issuer shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.04 were computed, together with a copy of any fairness opinion or appraisal required by this Section 4.04.
SECTION 4.05. Incurrence of Indebtedness and Issuance of Preferred Stock. (a) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt), and the Issuer shall not issue any Disqualified Stock and shall not permit any of its Restricted Subsidiaries to issue any shares of Preferred Stock; provided, however, that the 45
Issuer or any Restricted Subsidiary may incur Indebtedness (including Acquired Debt), and the Issuer may issue Disqualified Stock, and any Restricted Subsidiary may issue Preferred Stock, if, after giving effect to the incurrence of such Indebtedness or the issuance of such Disqualified Stock or Preferred Stock and the application of the proceeds thereof, no Default would occur as a consequence of such incurrence or issuance or be continuing following such incurrence or issuance and either (1) the Consolidated Leverage Ratio of the Issuer would be less than 5.0 to 1.0, or (2) the Issuer's Consolidated Capital Ratio as of the most recent available quarterly or annual balance sheet is less than 2.0 to 1.0.
(b) Nothing contained in paragraph (a) of this Section 4.05 shall prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Issuer and its Restricted Subsidiaries of additional Indebtedness and letters of credit pursuant to Credit Facilities in an aggregate principal amount at any one time outstanding under this clause (1) not to exceed $850 million as of such date of incurrence less the aggregate amount of all Net Proceeds of Asset Sales applied to repay term Indebtedness outstanding under one or more Credit Facilities pursuant to clause (1) of paragraph (b) of Section 4.14;
(2) the incurrence by the Issuer and its Restricted Subsidiaries of the Existing Indebtedness;
(3) the incurrence by the Issuer of Indebtedness represented by the Securities to be issued on the Issue Date;
(4) the issuance by a Subsidiary of Preferred Stock or the incurrence by the Issuer's Subsidiaries of Non-Recourse Debt (including Acquired Debt that constitutes Non-Recourse Debt); provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of a Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Issuer that was not permitted by this clause (4);
(5) the incurrence by the Issuer or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) 46 that was permitted by this Indenture to be incurred under paragraph (a) of this Section 4.05 or clauses (2), (3) or this clause (5) of this paragraph (b);
(6) the incurrence by the Issuer or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Issuer and any of its Restricted Subsidiaries; provided, however, that:
(A) if the Issuer is the obligor on such Indebtedness, such Indebtedness must be expressly subordinated to all Obligations with respect to the Securities and this Indenture; and
(B) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Issuer or a Restricted Subsidiary thereof and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either the Issuer or a Restricted Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Issuer or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (6);
(7) the incurrence by the Issuer or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk or currency exchange rate risk;
(8) the accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock or Preferred Stock in the form of additional shares of the same class of Disqualified Stock or Preferred Stock, as the case may be, will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock or Preferred Stock for purposes of this Section 4.05;
(9) the incurrence by the Issuer or any of its Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (9), not to exceed $50 million; or 47
(10) the incurrence by Restricted Subsidiaries of Guarantees of Indebtedness of the Issuer or any Restricted Subsidiary that is not subordinated to the Securities.
(c) The Issuer shall not incur any Indebtedness (including Permitted Debt) that is contractually subordinated in right of payment to any other Indebtedness of the Issuer unless such Indebtedness is also contractually subordinated in right of payment to the Securities on substantially identical terms; provided, however, that no Indebtedness of the Issuer shall be deemed to be contractually subordinated in right of payment to any other Indebtedness of the Issuer solely by virtue of being unsecured.
(d) For purposes of determining compliance with this Section 4.05, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (10) of paragraph (b) of this Section 4.05, or is entitled to be incurred pursuant to paragraph (a) of this Section 4.05, the Issuer shall be permitted to classify such item of Indebtedness on the date of its incurrence in any manner that complies with this Section 4.05.
SECTION 4.06. Liens. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind on any asset now owned or hereafter acquired, except Permitted Liens.
SECTION 4.07. Sale and Leaseback Transactions. The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any Sale and Leaseback Transaction; provided that the Issuer or any Restricted Subsidiary may enter into a Sale and Leaseback Transaction if:
(1) the Issuer or such Restricted Subsidiary, as applicable, could have (A) incurred Indebtedness in an amount equal to the Attributable Debt relating to such Sale and Leaseback Transaction under Section 4.05 and (B) incurred a Lien to secure such Indebtedness pursuant to Section 4.06;
(2) the gross cash proceeds of such Sale and Leaseback Transaction are at least equal to the fair market value, as determined in good faith by the Board of Directors and set forth in an Officers' Certificate 48 delivered to the Trustee, of the property that is the subject of such Sale and Leaseback Transaction; and
(3) the transaction complies with Section 4.14.
SECTION 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to the Issuer or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to the Issuer or any of its Restricted Subsidiaries;
(2) make loans or advances to the Issuer or any of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Issuer or any of its Restricted Subsidiaries.
(b) The restrictions set forth in paragraph (a) of this Section 4.08 shall not apply to encumbrances or restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the Issue Date and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in such Existing Indebtedness, as in effect on the Issue Date;
(2) any customary (as conclusively determined in good faith by the Chief Financial Officer of the Issuer) encumbrance or restriction applicable to the Issuer or a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Indebtedness of the Issuer or Indebtedness contained in any Credit Facilities or Indebtedness incurred pursuant to clause (4) of paragraph (b) of Section 4.05; provided that, other than with respect to Preferred Stock of a Subsidiary or Non -Recourse Debt of a 49
Subsidiary (including Non-Recourse Debt that is Acquired Debt), such encumbrances and restrictions permit the distribution of funds to the Issuer in an amount sufficient for the Issuer to make the timely payment of interest, premium (if any), Liquidated Damages (if any) and principal (whether at stated maturity, by way of a sinking fund applicable thereto, by way of any mandatory redemption, defeasance, retirement or repurchase thereof, including upon the occurrence of designated events or circumstances or by virtue of acceleration upon an event of default, or by way of redemption or retirement at the option of the holder of the Indebtedness, including pursuant to offers to purchase) according to the terms of this Indenture and the Securities and other Indebtedness that is solely an obligation of the Issuer, but provided further that such agreement may nevertheless contain customary (as so determined) net worth, leverage, invested capital and other financial covenants, customary (as so determined) covenants regarding the merger of or sale of all or any substantial part of the assets of the Issuer or any Restricted Subsidiary, customary (as so determined) restrictions on transactions with affiliates and customary (as so determined) subordination provisions governing Indebtedness owed to the Issuer or any Restricted Subsidiary;
(3) the Credit Agreement as in effect on the Issue Date and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in such Credit Agreement, as in effect on the Issue Date;
(4) this Indenture and the Securities;
(5) applicable law;
(6) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Issuer or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the 50
Person, or the property or assets of the Person, so acquired; provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of this Indenture to be incurred;
(7) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices;
(8) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (3) of paragraph (a) of this Section 4.08;
(9) any agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending its sale or other disposition;
(10) Permitted Refinancing Indebtedness; provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced;
(11) Liens securing Indebtedness that limit the right of the debtor to dispose of the assets subject to such Lien;
(12) provisions with respect to the disposition or distribution of assets or property in joint venture agreements, assets sale agreements, stock sale agreements and other similar agreements entered into in the ordinary course of business; and
(13) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business.
SECTION 4.09. Designation of Restricted and Unrestricted Subsidiaries. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate fair market value of all outstanding Investments owned by the Issuer and its Restricted Subsidiaries in the Subsidiary so designated will be deemed to be an Investment made as of the time of such designation and will reduce the amount available for 51
Restricted Payments under paragraph (a) of Section 4.04 or reduce the amount available for future Investments under one or more clauses of the definition of Permitted Investments set forth in Section 1.01, as the Issuer shall determine. That designation will only be permitted if such Investment would be permitted at that time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary set forth in Section 1.01. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default.
SECTION 4.10. Transactions with Affiliates. (a) The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Restricted Subsidiary with an unrelated Person; and
(2) the Issuer delivers to the Trustee with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $15 million, either (A) a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with this Section 4.10 and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors or (B) an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of international standing. 52
(b) The following items shall not be deemed to be Affiliate Transactions and, therefore, shall not be subject, except as set forth below, to the provisions of paragraph (a) of this Section 4.10:
(1) any employment agreement entered into by the Issuer or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Issuer or such Restricted Subsidiary, as the case may be;
(2) transactions between or among the Issuer and/or its Restricted Subsidiaries;
(3) any sale or other issuance of Equity Interests (other than Disqualified Stock) of the Issuer;
(4) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Issuer;
(5) Restricted Payments that are permitted by, and Permitted Investments that are not prohibited by, Section 4.04; and
(6) transactions between the Company and/or its Restricted Subsidiaries, on the one hand, and a Permitted Venture, on the other hand, provided that the condition set forth in clause (1) of paragraph (a) of this Section 4.10 is satisfied.
SECTION 4.11. Limitation on Issuances of Guarantees of Indebtedness. (a) The Issuer shall not permit any of its Restricted Subsidiaries, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Issuer unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for the Guarantee of the payment of the Securities by such Restricted Subsidiary (a "Guarantor"), which Guarantee shall (1) be senior to or pari passu with such Restricted Subsidiary's Guarantee of or pledge to secure such other Indebtedness and (2) remain in effect for so long as the Guarantee or pledge to secure such other Indebtedness remains in effect.
(b) No Guarantor shall incur any Indebtedness (including Permitted Debt) that is contractually subordinated in right of payment to any other Indebtedness of such Guarantor unless such Indebtedness is also contractually subordinated in right of payment to such Guarantor's Guarantee of the Securities on substantially 53 identical terms; provided, however, that no Indebtedness of a Guarantor shall be deemed to be contractually subordinated in right of payment to any other Indebtedness of such Guarantor solely by virtue of being unsecured.
SECTION 4.12. Business Activities. The Issuer shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to the extent as would not be material to the Issuer and its Restricted Subsidiaries, taken as a whole.
SECTION 4.13. Change of Control. (a) If a Change of Control occurs, each Holder of Securities shall have the right to require the Issuer to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of that Holder's Securities pursuant to a Change of Control Offer to Purchase. In the Change of Control Offer to Purchase, the Issuer shall offer a payment (a "Change of Control Payment") in cash equal to 101% of the aggregate principal amount of the Securities to be repurchased plus accrued and unpaid interest thereon and Liquidated Damages (if any), to the date of purchase. Within ten days following any Change of Control, the Issuer shall mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Securities on the date (the "Change of Control Payment Date") specified in such notice, pursuant to the procedures required by this Indenture and described in such notice. The Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Securities as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with this Section 4.13 or the requirements set forth in the definition of Offer to Purchase, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the provisions of this Section 4.13 or such definition by virtue of such conflict.
(b) On the Change of Control Payment Date, the Issuer shall, to the extent lawful:
(1) accept for payment all Securities or portions thereof properly tendered pursuant to the Change of Control Offer; 54
(2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Securities or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the Securities so accepted together with an Officers' Certificate stating the aggregate principal amount of Securities or portions thereof being purchased by the Issuer.
(c) The Paying Agent shall promptly mail to each Holder of Securities so tendered the Change of Control Payment for such Securities, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Security equal in principal amount to any unpurchased portion of the Securities surrendered, if any; provided that each such new Security will be in a principal amount of $1,000 or an integral multiple thereof.
(d) The Issuer shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.
(e) The Issuer shall not be required to make a Change of Control Offer to Purchase upon a Change of Control if a third party makes the Change of Control Offer to Purchase in the manner, at the times and otherwise in compliance with the requirements set forth in this Section 4.13 applicable to a Change of Control Offer to Purchase made by the Issuer and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer.
SECTION 4.14. Asset Sales. (a) The Issuer shall not, and shall not permit any Restricted Subsidiary to, consummate an Asset Sale unless:
(1) the Issuer (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of;
(2) such fair market value is (A) determined by two Officers of the Issuer if the fair market value is less than $25 million or (B) determined by the Board of Directors and evidenced by a resolution of the Board of Directors if the fair market value is $25 million or greater, and, in each case, such fair market value is 55 set forth in an Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by the Issuer or such Restricted Subsidiary is in the form of cash or Cash Equivalents. Only for purposes of this clause (3), each of the following shall be deemed to be cash:
(A) any liabilities (as shown on the Issuer's or such Restricted Subsidiary's most recent balance sheet), of the Issuer or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Securities) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Issuer or such Restricted Subsidiary from further liability;
(B) any securities, notes or other obligations received by the Issuer or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by the Issuer or such Restricted Subsidiary into cash (to the extent of the cash received in that conversion);
(C) any assets described in clause (2) or (4) of paragraph (b) of this Section 4.14;
(D) Marketable Securities; and
(E) Designated Other Permitted Consideration; provided that the aggregate fair market value (as determined pursuant to clause (2) above) of such Designated Other Permitted Consideration, taken together with the fair market value at the time of receipt of all other Designated Other Permitted Consideration received pursuant to this clause (E), less the amount of net cash proceeds previously realized in cash from prior Designated Other Permitted Consideration is less than 5% of the Issuer's Consolidated Tangible Assets at the time of the receipt of such Designated Other Permitted Consideration (with the fair market value of each item of Designated Other Permitted Consideration being measured at the time received and without giving effect to subsequent changes in value). 56
(b) Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Issuer may apply (or, in the case of clause (2), (3) or (4) below, enter into a binding commitment to apply) such Net Proceeds:
(1) to repay Indebtedness of the Issuer or any Restricted Subsidiary which is not subordinated to the Securities;
(2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another Permitted Business or to purchase Equity Interests of a Restricted Subsidiary from another Person;
(3) to make a capital expenditure in a Permitted Business or to make an Investment in a Permitted Venture; or
(4) to acquire or to acquire the right to use other long-term assets that are used or useful in a Permitted Business.
(c) Pending the final application of any such Net Proceeds, the Issuer may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture.
(d) Any Net Proceeds from Asset Sales that are not applied or invested as provided in paragraph (b) of this Section 4.14 shall constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15 million, the Issuer shall make an Offer to Purchase to all Holders of Securities and all holders of other Indebtedness that is pari passu with the Securities containing provisions similar to those set forth in this Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of Securities and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Offer to Purchase shall be equal to 100% of principal amount plus accrued and unpaid interest and Liquidated Damages (if any) to the date of purchase, and shall be payable in cash. If any Excess Proceeds remain after consummation of an Offer to Purchase, the Issuer may use such Excess Proceeds for any purpose not otherwise prohibited by this Indenture. If the aggregate principal amount of Securities and such other pari passu Indebtedness tendered into such Offer to Purchase exceeds the amount of Excess Proceeds, the Trustee shall select the Securities and such other pari passu Indebtedness to be purchased on a pro rata basis based on the principal 57 amount of Securities and such other pari passu Indebtedness tendered. Upon completion of each Offer to Purchase required by this Section 4.14, the amount of Excess Proceeds shall be reset at zero.
(e) The Issuer shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with each repurchase of Securities required by this Section 4.14. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.14 or the definition of the Offer to Purchase, the Issuer shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the provisions of this Section 4.14 or such definition by virtue of such conflict.
SECTION 4.15. Additional Amounts. (a) All payments of principal of, premium, if any, Liquidated Damages, if any, and interest on each Security will be made free and clear of, and without withholding or deduction for, any present or future taxes, duties, assessments or governmental charges of whatever nature (collectively, "Taxes") imposed, levied, collected, withheld or assessed by or within any jurisdiction in which the Issuer is then incorporated (or the jurisdiction of incorporation of any successor of the Issuer) or any other jurisdiction in which the Issuer (or such successor) is resident for tax purposes or any political subdivision or taxing authority thereof or therein (hereinafter, a "Relevant Jurisdiction"), unless such withholding or deduction is required by law or by regulation or governmental policy having the force of law. In the event that any such withholding or deduction in respect of principal, premium, if any, Liquidated Damages, if any, or interest is so required, the Issuer, or any successor, shall pay such additional amounts ("Additional Amounts") as will result in receipt by each Holder of a Security of such gross amount as would have been received by such Holder or the beneficial owner with respect to such Security, as applicable, had no such withholding or deduction (including any withholding or deduction applicable to Additional Amounts payable) been required, except that no Additional Amounts will be payable for or on account of:
(1) Taxes that would not have been imposed but for
(A) the existence of any present or former connection between such Holder or such beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder of, or 58 possessor of a power over, such Holder, if such Holder is an estate, trust, partnership or corporation) and the Relevant Jurisdiction, including such Holder (or such fiduciary, settlor, beneficiary, member, shareholder or possessor) being or having been a national, domiciliary or resident of or treated as a resident thereof or being or having been present or engaged in a trade or business therein or having had a permanent establishment therein; or
(B) Section 881(c)(3)(A) of the Code (or any successor provision);
(2) any estate, inheritance, gift, sale, transfer or similar tax, assessment or other governmental charge;
(3) any Tax that is imposed or withheld by reason of the failure of the Holder or beneficial owner of a Security to timely comply with a request of the Issuer, addressed to the Holder (A) to provide reasonably required or requested information concerning the nationality, residence or identity of the Holder or such beneficial owner or (B) to make any reasonably required or requested declaration, filing or claim or satisfy any reasonably required or requested information or reporting requirement, which, in the case of (A) or (B), is required or imposed by statute, treaty, regulation or administrative practice of the taxing jurisdiction as a precondition to exemption from all or part of such Tax; provided, however, that (i) providing information required by Internal Revenue Service Forms W-8, 1001 and 4224 and any successors thereto and (ii) the execution and delivery of such forms is deemed to be reasonably required or requested; or
(4) any combination of (1), (2) and (3); nor shall Additional Amounts be paid with respect to payment of the principal of or any premium or interest on any such Security, to any Holder (including any fiduciary or partnership) to the extent that the beneficial owner would not have been entitled to such Additional Amounts had it been the Holder of the Security.
(b) Where required by applicable law, the Issuer or any Paying Agent, as the case may be, shall also (1) make such withholding or deduction in respect of any Taxes and (2) remit the full amount withheld or deducted to the 59 relevant authority in accordance with applicable law. The Issuer shall furnish to each Holder of Securities, within 30 days after the date the payment of any Taxes is due pursuant to applicable law, certified copies of tax receipts satisfactory to the Trustee evidencing such payment by the Issuer.
(c) Whenever there is mentioned in any context the payment of principal of or any premium or interest on, or in respect of, a Security, or the net proceeds received from the Issuer on the sale or exchange of any Security, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Section 4.15 to the extent that, in such context, Additional Amounts are, were, or would be payable in respect thereof pursuant to this Section 4.15.
(d) The Issuer shall pay any present or future stamp, court or documentary taxes or any other excise or property taxes, charges, or similar levies that arise in any jurisdiction from the execution, delivery, enforcement or registration of the Securities or any other document or instrument relating thereto, or the receipt of any payments with respect to the Securities, excluding such taxes, charges, or similar levies imposed by any jurisdiction outside of any jurisdiction in which the Issuer or the Paying Agent is located or incorporated (except those resulting from or required to be paid in connection with, the enforcement of the Securities or any other such document or instrument following the occurrence of any Event of Default with respect to the Securities), and shall indemnify the Holders for any such taxes paid by such Holders.
(e) The foregoing obligations shall survive any termination, defeasance or discharge of this Indenture.
SECTION 4.16. (a) Compliance Certificate; Statement by Officers as to Default. The Issuer shall deliver to the Trustee within 120 days after the end of each fiscal year of the Issuer an Officers' Certificate, one of the signers of which shall be the principal executive, principal financial or principal accounting officer of the Issuer, stating that in the course of the performance by the signers of their duties as Officers of the Issuer they would normally have knowledge of any Default and whether or not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Issuer are taking or propose to take with respect thereto. The Issuer also shall comply with TIA ss. 314(a)(4). 60
(b) The Issuer shall deliver to the Trustee, as soon as possible and in any event within five days after the Issuer becomes aware of the occurrence of any Event of Default or an event which, with notice or the lapse of time or both, would constitute an Event of Default, an Officers' Certificate setting forth the details of such Event of Default or Default and the action which the Issuer proposes to take with respect thereto.
SECTION 4.17. Further Instruments and Acts. Upon request of the Trustee, the Issuer will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture.
ARTICLE 5
Merger, Consolidation or Sale of Assets
SECTION 5.01. When Issuer May Merge, Consolidate or Sell Assets. (a) The Issuer shall not, directly or indirectly: (x) consolidate or merge with or into another Person (whether or not the Issuer is the surviving corporation); or (y) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Issuer and its Restricted Subsidiaries, taken as a whole, in one or more related transactions, to another Person, unless:
(1) either: (A) the Issuer is the surviving corporation; or (B) the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of Bermuda, the United States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of the Issuer under the Securities and this Indenture pursuant to agreements reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default exists; and 61
(4) the Issuer or the Person formed by or surviving any such consolidation or merger or to which such sale, assignment, transfer, conveyance or other disposition shall have been made (if other than the Issuer):
(A) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Issuer immediately preceding the transaction; and
(B) will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four-quarter period or balance sheet date, as applicable, be permitted to incur at least $1.00 of additional Indebtedness pursuant to at least one of the tests set forth in the proviso to paragraph (a) of Section 4.05.
(b) In addition, the Issuer shall not, directly or indirectly, lease all or substantially all of its properties or assets in one or more related transactions, to any other Person.
(c) When a successor corporation, trustee, paying agent or registrar assumes all of the obligations of its predecessor under the Securities and this Indenture, the predecessor shall be released from those obligations.
(d) This Section 5.01 shall not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Issuer and any of its Restricted Subsidiaries.
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of Default" occurs if:
(1) the Issuer defaults in any payment of interest or Liquidated Damages (if any) on any Security when the same becomes due and payable, and such default continues for a period of 30 days; 62
(2) the Issuer defaults in the payment of the principal of, or premium, if any, on any Security when the same becomes due and payable at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise;
(3) the Issuer fails to comply with Section 5.01;
(4) the Issuer fails to comply Section 4.04, Section 4.05, Section 4.13 or Section 4.14 and such failure continues for 30 days after the notice specified below;
(5) the Issuer or any of its Restricted Subsidiaries fails to comply with any of their agreements in the Securities or this Indenture (other than those referred to in clause (1), (2), (3) or (4) above) and such failure continues for 60 days after the notice specified below;
(6) the Issuer or any of its Restricted Subsidiaries defaults under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Issuer or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the Issue Date, if such default:
(A) is caused by a failure to pay principal at maturity of such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default"); or
(B) results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $25 million or more;
(7) any judgment or decree for the payment of money in excess of $25 million or its foreign currency equivalent at the time is entered against the Issuer or any of its Subsidiaries, remains outstanding for a period of 60 days following the entry of such judgment or decree and is not discharged, waived or the 63 execution thereof stayed within 10 days after the notice specified below;
(8) the Issuer or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an involuntary case;
(C) consents to the appointment of a Custodian of it or for any substantial part of its property; or
(D) makes a general assignment for the bene fit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; or
(9) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Issuer or any Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Issuer or any Significant Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Issuer or any Significant Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days.
The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body.
The term "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. 64
A Default under clauses (4), (5), or (7) is not an Event of Default until the Trustee or the holders of at least 25% in principal amount of the outstanding Securities notify the Issuer of the Default and the Issuer does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default".
The Issuer shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default under clause (6) and any event which with the giving of notice or the lapse of time would become an Event of Default under clause (4), (5) or (7), its status and what action the Issuer is taking or proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(8) or (9) with respect to the Issuer, any Subsidiary that is a Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary) occurs and is continuing, the Trustee by notice to the Issuer, or the Holders of at least 25% in principal amount of the Securities by notice to the Issuer and the Trustee, may declare the principal of and accrued but unpaid interest and Liquidated Damages (if any) on all the Securities to be due and payable. Upon such a declaration, such principal, interest and Liquidated Damages (if any) shall be due and payable immediately. If an Event of Default specified in Section 6.01(8) or (9) with respect to the Issuer occurs, the principal of and interest and Liquidated Damages (if any) on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in principal amount of the Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpay ment of principal or interest and Liquidated Damages (if any) that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest and Liquidated Damages (if any) on the Securities 65 or to enforce the performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default and its consequences except (1) a Default in the payment of the principal of or interest and Liquidated Damages (if any) on a Security or (2) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Holder affected. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority in principal amount of the Securities may direct the time, method and place of conducting any proceed ing for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to reasonable indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action.
SECTION 6.06. Limitation on Suits. Except to enforce the right to receive payment of principal, premium (if any) or interest and Liquidated Damages (if any) when due, no Holder may pursue any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; 66
(2) the Holders of at least 25% in principal amount of the Securities make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Securities do not give the Trustee a direction inconsistent with the request during such 60-day period.
A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder.
SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Inden ture, the right of any Holder to receive payment of princi pal of and interest and Liquidated Damages (if any) on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuer for the whole amount then due and owing (together with interest on any unpaid interest and Liquidated Damages (if any) to the extent lawful) and the amounts provided for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Issuer, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the 67
Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disburse ments and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07.
SECTION 6.10. Priorities. If the Trustee col lects any money or property pursuant to this Article 6, it shall pay out the money or property in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Holders for amounts due and unpaid on the Securities for principal, interest and Liquidated Damages (if any), ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, interest and Liquidated Damages (if any), respectively; and
THIRD: to the Issuer.
The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section. At least 15 days before such record date, the Issuer shall mail to each Holder and the Trustee a notice that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Inden ture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including rea sonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Issuer (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatso ever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may 68 lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the require ments of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein).
(c) The Trustee may not be relieved from liabil ity for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b) of this Section 7.01;
(2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer 69 unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01.
(e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuer.
(f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 7.01 and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may conclusively rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opin ion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it 70 believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute wilful misconduct or negligence.
(e) The Trustee may consult with counsel of its selection, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Trust Officer has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the principal corporate trust office of the Trustee, and such notice references the Securities and this Indenture.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Secur ities, it shall not be accountable for the Issuer's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Issuer in this Inde nture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing and if it is actually known to a Trust Officer of the Trustee, the Trustee shall mail to each Holder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest and Liquidated Damages (if any) on any Security (including payments pursuant to the mandatory redemption provisions of such Security, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. 71
SECTION 7.06. Reports by Trustee to Holders. If required by TIA ss. 313(a), as promptly as practicable after each May 15 beginning with the May 15, 1999, and in any event prior to July 15 in each year, the Trustee shall mail to each Holder a brief report dated as of May 15 that complies with such TIA ss. 313(a). The Trustee also shall comply with TIA ss. 313(b).
A copy of each report at the time of its mailing to Holders shall be filed with the Commission and each stock exchange (if any) on which the Securities are listed. The Issuer agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Issuer shall pay to the Trustee from time to time such compensation as shall be agreed in writing between the Issuer and the Trustee for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reim burse the Trustee upon request for all out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Issuer shall fully indemnify the Trustee and any predecessor Trustee against any and all loss, damage, claim, liability or reasonable expense (including reasonable attorneys' fees and expenses and taxes other than taxes based upon the income of the Trustee) incurred by it in connection with the acceptance or administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Issuer promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Issuer shall not relieve the Issuer of its obligations hereunder. The Issuer shall defend the claim and the Trustee may have separate counsel and the Issuer shall pay the reasonable fees and expenses of such counsel. The Issuer need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own wilful misconduct, negligence or bad faith.
To secure the Issuer's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest and Liquidated Damages (if any) on particular Securities. 72
The Issuer's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(8) or (9) with respect to the Issuer, the expenses are intended to constitute expenses of administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign at any time by so notifying the Issuer. The Holders of a majority in principal amount of the Secur ities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Issuer shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Issuer or by the Holders of a majority in principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Issuer shall promptly appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Securities may petition, at the expense of the Issuer, any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 73
Notwithstanding the replacement of the Trustee pursuant to this Section, the Issuer's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust busi ness or assets to, another corporation or banking associa tion, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA ss. 310(a). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIAss. 310(b); provided, however, that there shall be excluded from the operation of TIAss. 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Issuer are out standing if the requirements for such exclusion set forth in TIAss. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Issuer. The Trustee shall comply with TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated. 74
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a) When (1) the Issuer delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07) for cancelation or (2) all outstanding Securities have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 hereof and the Issuer irrevocably deposits with the Trustee funds suffi cient to pay at maturity or upon redemption all outstanding Securities, including interest and Liquidated Damages (if any) thereon to maturity or such redemption date (other than Securities replaced pursuant to Section 2.07), and if in either case the Issuer pays all other sums payable hereunder by the Issuer, then this Indenture shall, subject to Section 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer.
(b) Subject to Sections 8.01(c) and 8.02, the Issuer at any time may terminate (1) all of its obligations under the Securities and this Indenture ("legal defeasance option") or (2) its obligations under Sections 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13 and 4.14 and the operation of Sections 6.01(4), 6.01(5) (with respect to breaches of Article IV), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in the case of Sections 6.01(8) and (9), with respect only to Significant Subsidiaries) and the limitations contained in clause (4) of paragraph (a) of Section 5.01 ("covenant defeasance option"). The Issuer may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option.
If the Issuer exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default with respect thereto. If the Issuer exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(4), 6.01(5) (with respect to breaches of Article IV), 6.01(6), 6.01(7), 6.01(8) or 6.01(9) (but, in the case of Sections 6.01(8) and (9), with respect only to Significant Subsidiaries) or because of the failure of the Issuer to comply with clause (4) of paragraph (a) of Section 5.01. 75
Upon satisfaction of the conditions set forth herein and upon request of the Issuer, the Trustee shall acknowledge in writing the discharge of those obligations that the Issuer terminates.
(c) Notwithstanding paragraphs (a) and (b) of this Section 8.01, the Issuer's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 4.02, 4.15, 7.07 and 7.08 and in this Article 8 shall survive until the Securities have been paid in full. Thereafter, the Issuer's obligations in Sections 7.07, 8.04 and 8.05 shall survive such satisfaction and discharge.
SECTION 8.02. Conditions to Defeasance. The Issuer may exercise its legal defeasance option or its covenant defeasance option only if:
(1) the Issuer irrevocably deposits in trust with the Trustee money or U.S. Government Obligations for the payment of principal of and interest and Liquidated Damages (if any) on the Securities to maturity or redemption, as the case may be;
(2) the Issuer delivers to the Trustee a cer tificate from a internationally recognized firm of independent public accountants expressing their opinion that the payments of principal and interest and Liquidated Damages (if any) when due and without reinvestment on the deposited U.S. Government Obliga tions plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest and Liquidated Damages (if any) when due on all the Secur ities to maturity or redemption, as the case may be;
(3) no Default shall have occurred and be continuing on the date of the deposit (other than a Default resulting from the borrowing of funds to be applied to such deposit) and 91 days pass after the deposit is made and during the 91-day period no Default specified in Sections 6.01(8) or 6.01(9) with respect to the Issuer occurs which is continuing at the end of the period;
(4) the deposit will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than this Indenture) to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound; 76
(5) the Issuer delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940;
(6) in the case of the legal defeasance option, the Issuer shall have delivered to the Trustee an Opinion of Counsel confirming that (A) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling, or (B) since the Issue Date there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Securities will not recognize income, gain or loss for United States Federal income tax purposes as a result of such defeasance and will be subject to United States Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Issuer shall have delivered to the Trustee an Opinion of Counsel confirming that the Holders of the outstanding Securities will not recognize income, gain or loss for United States Federal income tax purposes as a result of such covenant defeasance and will be subject to United States Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred;
(8) in the case of the legal defeasance option or the covenant defeasance option, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the Issuer's jurisdiction of incorporation confirming that the Holders of the outstanding Securities will not recognize income, gain or loss for income tax purposes in such jurisdiction as a result of such legal defeasance or covenant defeasance and will be subject to income tax in such jurisdiction on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance or covenant defeasance had not occurred;
(9) the Issuer delivers to the Trustee an Opinion of Counsel to the effect that, assuming no intervening bankruptcy of the Issuer between the date of deposit and the 91st day following the deposit and, assuming that no Holder is an "insider" of the Issuer under 77 applicable bankruptcy law, after the 91st day following the deposit, the transfer of the trust funds will not be characterizable as a preference under Section 547 of the Bankruptcy Law;
(10) the Issuer delivers to the Trustee an Officers' Certificate stating that the deposit was not made by the Issuer with the intent of preferring the Holders of Securities over the other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; and
(11) the Issuer delivers to the Trustee an Offi cers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with.
Before or after a deposit, the Issuer may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obliga tions deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest and Liquidated Damages (if any) on the Securities.
SECTION 8.04. Repayment to Issuer. The Trustee and the Paying Agent shall promptly turn over to the Issuer upon written request any excess money or securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Issuer upon request any money held by them for the payment of principal or interest and Liquidated Damages (if any) that remains unclaimed for two years, and, thereafter, Holders entitled to the money must look to the Issuer for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The Issuer shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the princi pal and interest received on such U.S. Government Obliga tions. 78
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restrain ing or otherwise prohibiting such application, the Issuer's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the Issuer has made any payment of interest and Liquidated Damages (if any) on or principal of any Securities because of the reinstatement of their obligations, the Issuer shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders. The Issuer and the Trustee may amend this Indenture or the Securities without notice to or consent of any Holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Sec tion 163(f) of the Code or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code;
(4) to provide for the issuance of additional Securities in accordance with the provisions set forth in this Indenture;
(5) to comply with any requirements of the Commission in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; or 79
(6) to make any change that would provide any additional rights or benefits to the Holders of Securities or that does not adversely affect the legal rights under this Indenture of any such Holder.
After an amendment under this Section becomes effective, the Issuer shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section.
SECTION 9.02. With Consent of Holders. The Issuer and the Trustee may amend this Indenture or the Securities without notice to any Holder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, the Securities). However, without the consent of each Holder affected thereby, an amendment may not:
(1) reduce the principal amount of Securities whose Holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest or Liquidated Damages (if any) on any Security;
(3) reduce the principal of or extend the Stated Maturity of any Security or alter the provisions with respect to the redemption of the Securities (other than provisions relating to the covenants set forth in Sections 4.13 and 4.14);
(4) reduce the premium payable upon the redemption of any Security or change the time at which any Secur ity may be redeemed in accordance with Article 3;
(5) make any Security payable in money other than that stated in the Securities;
(6) waive a Default in the payment of principal of, or interest, Liquidated Damages or premium, if any, on the Securities (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount of the Securities and a waiver of the Payment Default that resulted from such acceleration); 80
(7) waive a redemption payment with respect to any Security (other than a payment required by the covenants set forth in Sections 4.13 and 4.14); or
(8) modify the rights of Holders to receive Additional Amounts; or
(9) make any change in Section 6.04 or 6.07 or the second sentence of this Section.
It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Issuer shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subse quent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subse quent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall bind every Holder. An amendment or waiver becomes effective upon the execution of such amendment or waiver by the Trustee.
The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. 81
No such consent shall be valid or effective for more than 120 days after such record date.
SECTION 9.05. Notation on or Exchange of Securi ties. If an amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In sign ing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture.
SECTION 9.07. Payments for Consent. The Issuer shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Securities for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders of Securities that consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement.
ARTICLE 10
Miscellaneous
SECTION 10.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or con flicts with another provision which is required to be included in this Indenture by the TIA, the required provi sion shall control. 82
SECTION 10.02. Notices. Any notice or communica tion shall be in writing and delivered in person or mailed by first-class mail addressed as follows:
if to the Issuer:
Loral Space & Communications Ltd. 600 Third Avenue New York, NY 10016 95164-0670 Attention: Eric J. Zahler Facsimile: (212) 338-5350
if to the Trustee:
The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attention: Corporate Trust Administration Facsimile: (212) 815-5915
The Issuer or the Trustee by notice to the other may designate additional or different addresses for subse quent notices or communications.
Any notice or communication mailed to a Holder shall be mailed to the Holder at the Holder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.
SECTION 10.03. Communication by Holders with Other Holders. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Issuer, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c).
SECTION 10.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Issuer to the Trustee to take or refrain from taking any action under this Indenture, the Issuer shall furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in 83 the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with.
SECTION 10.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion has read such covenant or condi tion;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opin ion of such individual, such covenant or condition has been complied with.
SECTION 10.06. When Securities Disregarded. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Issuer or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which a Trust Officer of the Trustee actually knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination.
SECTION 10.07. Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. 84
SECTION 10.08. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institu tions are not required to be open in the State of New York. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest and Liquidated Damages (if any) shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected.
SECTION 10.09. Governing Law. This Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby.
SECTION 10.10. No Recourse Against Others. No past, present or future director, officer, partner (including any general partner) employee, incorporator or stockholder, as such, of the Issuer shall have any liability for any obligations of the Issuer under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities.
SECTION 10.11. Successors. All agreements of the Issuer in this Indenture and the Securities shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successors.
SECTION 10.12. Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. 85
SECTION 10.13. Table of Contents; Headings. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof.
SECTION 10.14. Jurisdiction; Consent to Service of Process. THE ISSUER HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURTS LOCATED IN THE CITY OF NEW YORK FOR ANY LAWSUITS, CLAIMS OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND AGREES NOT TO COMMENCE ANY SUCH LAWSUIT, CLAIM OR OTHER PROCEEDING EXCEPT IN SUCH COURTS. THE ISSUER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY LAWSUIT, CLAIM, OR OTHER PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURTS LOCATED IN THE CITY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH LAWSUIT, CLAIM OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE ISSUER HAS APPOINTED ERIC J. ZAHLER AT 600 THIRD AVENUE, NEW YORK, NEW YORK 10016, U.S.A. (HEREINAFTER REFERRED TO IN SUCH CAPACITY AS THE "PROCESS AGENT"), AS ITS AUTHORIZED AGENT UPON WHOM PROCESS MAY BE SERVED IN ANY SUCH SUIT OR PROCEEDING. THE ISSUER REPRESENTS TO THE TRUSTEE THAT IT HAS NOTIFIED THE PROCESS AGENT OF SUCH DESIGNATION AND APPOINTMENT AND THAT THE PROCESS AGENT HAS ACCEPTED THE SAME IN WRITING. THE ISSUER HAS AUTHORIZED AND DIRECTED THE PROCESS AGENT TO ACCEPT SUCH SERVICE. IF THE PROCESS AGENT SHALL CEASE TO ACT AS THE ISSUER'S AGENT FOR SERVICE OF PROCESS, THE ISSUER SHALL APPOINT WITHOUT DELAY ANOTHER SUCH AGENT AND NOTIFY THE TRUSTEE OF SUCH APPOINTMENT. THE ISSUER FURTHER AGREES THAT SERVICE OF PROCESS UPON THE PROCESS AGENT AND WRITTEN NOTICE OF SAID SERVICE TO THE ISSUER MAILED BY FIRST CLASS MAIL OR DELIVERED TO THE PROCESS AGENT SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON IT IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT THE TRUSTEE'S RIGHT OR THE RIGHT OF ANY PERSON CONTROLLING THE TRUSTEE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. THE ISSUER AGREES THAT A FINAL ACTION IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER LAWFUL MANNER. 86
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above.
LORAL SPACE & COMMUNICATIONS LTD.
by /s/ Richard Townsend ------Name: Title:
THE BANK OF NEW YORK, as Trustee
by /s/ Mary La Gumina ------Name: Mary La Gumina Title:Assistant Vice President
CONFORMED AS AMENDED
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
GLOBALSTAR, L.P.
Dated as of
January 26, 1999 TABLE OF CONTENTS
Page ----
ARTICLE I. ORGANIZATIONAL MATTERS
SECTION 1.1. Continuation...... 2 SECTION 1.2. Name...... 2 SECTION 1.3. Registered Office; Principal Office...... 3 SECTION 1.4. Power of Attorney...... 3 SECTION 1.5. Term...... 5 SECTION 1.6. Title to Partnership Property...... 5 SECTION 1.7. Effectiveness of Partnership Agreement...... 5
ARTICLE II. DEFINITIONS
SECTION 2.1. Definitions...... 5
ARTICLE III. PURPOSE
SECTION 3.1. Purpose...... 25
ARTICLE IV. CAPITAL CONTRIBUTIONS
SECTION 4.1. General Partners...... 26 SECTION 4.2. Limited Partners...... 27 SECTION 4.3. Additional Contribution...... 27 SECTION 4.4. Additional Limited Partners...... 27 SECTION 4.5. Capital Accounts...... 27 SECTION 4.6. Interest...... 29 SECTION 4.7. No Withdrawal...... 29 SECTION 4.8. Loans...... 29 SECTION 4.9. Preemptive Rights...... 29 SECTION 4.10. Sale of Partnership Interests and Partnership Securities...... 31 SECTION 4.11. Business Plans...... 32 SECTION 4.12. Limitation on a Limited Partner's Ownership...... 34
ARTICLE V. ALLOCATIONS, DISTRIBUTIONS AND SERVICE PROVIDER AGREEMENTS
SECTION 5.1. Allocations Generally...... 34 SECTION 5.2. Regulatory Allocations...... 36 SECTION 5.3. Other Allocations When Book Value Differs from Tax Basis...... 39 SECTION 5.4. Special Allocation of Foreign Taxes...... 39 SECTION 5.5. Distributions...... 40 SECTION 5.6. Service Provider Agreements...... 43 SECTION 5.7. Terms of PPIs...... 43 SECTION 5.8. Guaranteed Payments...... 43 SECTION 5.9. Allocations Relating to Issue of Partnership Interests...... 44
ARTICLE VI. MANAGEMENT AND OPERATION OF BUSINESS
SECTION 6.1. Management...... 44 SECTION 6.2. Limitations on Authority of Committee and the General Partners...... 49 SECTION 6.3. Change of Control and Reduction in Interest...... 53 SECTION 6.4. Certificate of Limited Partnership...... 54 SECTION 6.5. Reliance by Third Parties...... 55 SECTION 6.6. Compensation, Expenses and Reimbursement of General Partners...... 56 SECTION 6.7. Outside Activities...... 57 SECTION 6.8. Partnership Funds...... 58 SECTION 6.9. Loans from the General Partners...... 58 SECTION 6.10. Indemnification of Partners...... 59 SECTION 6.11. Liability of General Partners...... 61 SECTION 6.12. Other Matters Concerning the General Partners...... 62 SECTION 6.13. Conversion to Corporate Form...... 63 SECTION 6.14. FCC Compliance...... 64
ARTICLE VII. RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
SECTION 7.1. Limitation of Liability...... 64 SECTION 7.2. Management of Business...... 64
ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1. Records and Accounting...... 65 SECTION 8.2. Fiscal Year...... 65 SECTION 8.3. Reports and Annual Meeting...... 65 SECTION 8.4. Disclosure to Limited Partners...... 66 SECTION 8.5. Determination of Book Value of Partnership Assets...... 67
ARTICLE IX. TAX MATTERS
SECTION 9.1. Preparation of Tax Returns...... 69 SECTION 9.2. Tax Elections...... 69 SECTION 9.3. Tax Controversies...... 69 SECTION 9.4. Taxation as a Partnership...... 70
(ii) ARTICLE X. TRANSFER OF INTERESTS
SECTION 10.1. Transfer...... 70 SECTION 10.2. Transfer of Interests of General Partners...... 71 SECTION 10.3. Transfer of Interests of Limited Partners...... 73 SECTION 10.4. Certain Transfers...... 76
ARTICLE XI. ADMISSION OF SUBSTITUTE PARTNERS
SECTION 11.1. Admission of Successor Limited Partner...... 77 SECTION 11.2. Admission of Successor General Partner...... 78 SECTION 11.3. Amendment of Agreement and of Certificate of Limited Partnership...... 78
ARTICLE XII. WITHDRAWAL OR REMOVAL
SECTION 12.1. Withdrawal or Removal of the General Partners...... 79 SECTION 12.2. Right of the Managing General Partner to Become a Limited Partner...... 81 SECTION 12.3. Withdrawal of Limited Partner...... 81
ARTICLE XIII. DISSOLUTION AND LIQUIDATION
SECTION 13.1. Dissolution...... 81 SECTION 13.2. Continuation of the Business of the Partnership after Dissolution...... 82 SECTION 13.3. Winding Up and Liquidation...... 83 SECTION 13.4. Cancellation of Certificate of Limited Partnership...... 85 SECTION 13.5. Return of Capital...... 86 SECTION 13.6. Waiver of Partition...... 86 SECTION 13.7. Deficit Upon Liquidation...... 86
ARTICLE XIV. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 14.1. Amendments to be Adopted Without Consent of the Partners...... 86 SECTION 14.2. Amendment Procedures...... 87
ARTICLE XV. GENERAL PROVISIONS
SECTION 15.1. Addresses and Notices...... 87 SECTION 15.2. Titles and Captions...... 88 SECTION 15.3. Pronouns and Plurals...... 88 SECTION 15.4. Further Action...... 88 SECTION 15.5. Binding Effect...... 89 SECTION 15.6. Integration...... 89
(iii) SECTION 15.7. Creditors...... 89 SECTION 15.8. Waiver...... 89 SECTION 15.9. Counterparts...... 89 SECTION 15.10. Dispute Resolution...... 89 SECTION 15.11. Applicable Law...... 91 SECTION 15.12. Confidentiality...... 91 SECTION 15.13. Invalidity of Provisions...... 94
SCHEDULE A -- Schedule of Partners SCHEDULE B -- Related Party Transactions SCHEDULE C -- Provisions Relating to Preferred Partnership Interests
(iv) AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF GLOBALSTAR, L.P.
This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is entered into and shall be effective as of the 26th day of January, 1999, by and among Loral/QUALCOMM Satellite Services, L.P., a Delaware limited partnership ("LQSS" or the "Managing General Partner"), Globalstar Telecommunications Limited, a company organized under the laws of Bermuda ("GTL", together with LQSS, the "General Partners"), and all of the limited partners set forth on the signature page hereto (collectively referred to herein as the "Limited Partners"), pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act"), on the following terms and conditions:
WHEREAS, LQSS formed Globalstar, L.P. (the "Partnership"), a Delaware limited partnership, pursuant to that certain Certificate of Limited Partnership of Globalstar, L.P., filed November 19, 1993, with the Secretary of State of the State of Delaware;
WHEREAS, the Limited Partners (other than Finmeccanica S.p.A. and TeleSat Limited) or their predecessors were admitted into the Partnership on March 23, 1994, pursuant to that certain Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of March 23, 1994, by and among LQSS and the Limited Partners (the "Original Partnership Agreement");
WHEREAS, GTL had filed a registration statement on Form S-1, No. 33-86808, pursuant to which it made offerings (the "GTL Initial Offerings") of shares of its common stock;
WHEREAS, in contemplation of the GTL Initial Offerings, the Partnership had pursuant to Section 4.10 of the Original Partnership Agreement, effected a recapitalization in November 1994 to provide for a 6-for-1 split of its Partnership Interests (as defined below);
WHEREAS, Finmeccanica S.p.A. ("Finmeccanica") was admitted into the Partnership as a Limited Partner and GTL was admitted into the Partnership as a General Partner on December 31, 1994 and the Original Partnership Agreement was amended and restated on December 31, 1994 (the "Amended and Restated Partnership Agreement") to provide for such admission, the contribution of the proceeds from the GTL Initial Offerings to the Partnership and the creation of a committee (the "Committee") comprised of representatives of LQSS and GTL to manage the Partnership;
WHEREAS, GTL made an offering (the "CPEO Offering") of 6 1/2% Convertible Preferred Equivalent Obligations due 2006 (the "CPEOs") on March 6, 1996 and in connection therewith the Amended and Restated Partnership Agreement was amended;
WHEREAS, TeleSat Limited was admitted as a partner on April 8, 1998 and in connection therewith the Amended and Restated Partnership Agreement was further amended;
WHEREAS, on January 26, 1999, GTL made an offering (the "Preferred Stock Offering") of 8% convertible redeemable preferred Stock due 2011 and in connection therewith the Amended and Restated Partnership Agreement was further amended; and
NOW, THEREFORE, the Partners, in consideration of the premises and their mutual agreements as hereinafter set forth, do hereby agree to amend and restate the Amended and Restated Partnership Agreement as follows:
ARTICLE I. ORGANIZATIONAL MATTERS
SECTION 1.1. Continuation. Subject to the provisions of this Agreement, the Partnership hereby continues as a limited partnership pursuant to the provisions of the Delaware Act. The rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by this Agreement and the Delaware Act.
SECTION 1.2. Name. The name of the Partnership shall be, and the business of the Partnership shall be conducted under the name of, "Globalstar, L.P." The Partnership's business may be conducted under any other name or names deemed advisable by the Committee, including the name of a General Partner or any Affiliate (as defined below) of a General Partner. The Committee, upon the Consent of the Partners (as defined below), may change the name of the Partnership at any time and from time to time. Notice will be given to the Limited Partners within ten (10) days after any change in the name of the Partnership.
SECTION 1.3. Registered Office; Principal Office. The registered office of the Partnership in the State of Delaware shall be located at c/o Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, and the registered agent for
-2- service of process on the Partnership at such registered office shall be Corporation Trust Company. The principal office of the Partnership shall be 3200 Zanker Road, San Jose, CA 95164, or such other place as the Partnership may from time to time designate to the Partners. Notice will be given to the Limited Partners within ten (10) days after any change in the principal office of the Partnership. The Partnership may maintain offices at such other place as it deems advisable unless such offices create undue adverse tax consequences for the Partners.
SECTION 1.4. Power of Attorney. (a) Each Limited Partner hereby irrevocably appoints and empowers each General Partner and each of the General Partner's authorized officers and attorneys-in-fact with full power of substitution as its true and lawful agent and attorney-in-fact (the "Attorney"), with full power and authority in its name, place and stead, for so long as such Attorney is a General Partner or an authorized officer or attorney-in-fact of a General Partner, to:
(i) make, execute, acknowledge, publish and file in the appropriate public offices (A) any duly approved amendments to this Agreement or to the Certificate of Limited Partnership pursuant to the Delaware Act and to the laws of any state in which such documents are required to be filed; (B) any certificates, instruments or documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; (C) any other instrument which may be required to be filed by the Partnership under the laws of any state or other jurisdiction or by any governmental agency, or which the Committee deems advisable to file; (D) any documents which may be required to effect the continuation of the Partnership, the admission, withdrawal or substitution of any Partner pursuant to Article XI or Article XII hereof, the dissolution and termination of the Partnership pursuant to the terms of this Agreement, or the surrender of any rights or the assumption of any additional responsibilities by the General Partners or the Committee; and (E) any document which may be required to effect an amendment to this Agreement to correct any mistake, omission or inconsistency, or to cure any ambiguity herein, to the extent such amendment is permitted by Section 14.1 hereof; and
(ii) sign, execute, swear to and acknowledge all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, to make, evidence, give, confirm or ratify any vote, consent,
-3- approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement and/or appropriate or necessary to effectuate the terms or intent of this Agreement; provided, however, that when the consent or approval of the Partners is required under the terms of this Agreement, an Attorney may exercise the power of attorney made in this subsection (ii) only after the necessary consent or approval has been received.
(b) To the maximum extent permitted by applicable law, the foregoing grant of authority (i) is a special power of attorney, coupled with an interest, and it shall survive the death, incompetency, disability, liquidation, dissolution, bankruptcy or termination of any Partner and shall extend to such Partner's heirs, successors, assigns and personal representatives; (ii) may be exercised by an Attorney for each and every Limited Partner acting as attorney-in-fact for each and every Limited Partner; and (iii) shall survive the assignment by any Limited Partner of all or any portion of its Partnership Interest and shall be fully binding upon such assignee but not on the assignor. Each Limited Partner hereby agrees to be bound by any representations made by an Attorney acting in good faith pursuant to such power of attorney in furtherance of the Partnership's business. Each Limited Partner shall execute and deliver to either General Partner, within fifteen (15) days after receipt of a request therefor, such further designations, powers of attorney and other instruments as the Committee deems necessary to effectuate this Agreement and the purposes of the Partnership.
SECTION 1.5. Term. The Partnership commenced upon the completion of filing for record of the Certificate of Limited Partnership for the Partnership in accordance with the Delaware Act and shall continue in existence until the earlier termination of the Partnership in accordance with the provisions of Article XIII hereof.
SECTION 1.6. Title to Partnership Property. All property owned by the Partnership, whether real or personal, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of such property. The Partnership shall hold all of its assets in its own name; provided, however, that it may hold marketable securities in street name.
SECTION 1.7. Effectiveness of Partnership Agreement. This Agreement shall become effective as of the date hereof.
-4- ARTICLE II. DEFINITIONS
SECTION 2.1. Definitions. Any capitalized terms used herein and not otherwise defined shall have the meaning ascribed to such term in this Article II. For purposes of this Agreement, the following terms shall have the following meanings:
"Accounting Period" means a period beginning on the first day after the end of the prior Accounting Period and ending on the earlier of (i) the end of the Partnership's fiscal year, (ii) the end of the Partnership's tax year, (iii) the day prior to the day on which there is a material adjustment to the Book Values of the Partnership's assets under Section 8.5(c), or (iv) such other date as determined by the Committee.
"Additional Closing" means any closing, following the Initial Closing, at which Additional Partnership Interests are issued.
"Additional Limited Partner" shall mean the Limited Partners admitted to the Partnership pursuant to Section 4.4.
"Additional Partnership Interests" means any Partnership Interests issued by the Partnership after the GTL Effective Date. "Adjusted Capital Account" means, for any Partner, its Capital Account balance (after deducting the amount of expected distributions of Distributable Cash Flow and Distributable Capital Proceeds on hand on the date as of which the computation is made) plus (a) its share of Partnership Minimum Gain, (b) its share of Partner Minimum Gain and (c) the amount, if any, by which a deficit Capital Account balance exceeds the sum of (a) and (b) and which, due to an unpaid Capital Commitment, a Partner is obligated to restore (or is treated as obligated to restore under Treasury Regulation Section 1.704-1(b)(2)(ii)(c)).
"Adjusted Income" means the excess, if any, of the sum of (a) Operating Income plus (b) Capital Transaction Gain plus (c) the deductions for depreciation and amortization taken into account in computing Operating Loss over the sum of (d) Operating Loss and (e) Capital Transaction Loss. All the elements of Adjusted Income are reduced by the amounts thereof allocated under Sections 5.2, 5.4 and Section 8.5(c).
"Affiliate" means any Person that directly or indirectly controls, is controlled by, or is under common control
-5- with the Person in question, provided that (i) in the case of Hyundai/DACOM, such term shall refer to any of Hyundai Electronics Industries Co., Ltd. ("Hyundai"), DACOM Corporation ("Dacom") or an Affiliate of Hyundai or Dacom, (ii) in the case of TE.SA.M. ("TESAM"), such term shall refer to any of Alcatel, NV, Alcatel France, France Telecom or any Persons controlled, directly or indirectly, by any of them, (iii) in the case of Finmeccanica, the term "Affiliate" shall only include any other Person controlled by Finmeccanica, (iv) in the case of Loral SpaceCom or LQSS, GTL shall not be deemed to be an Affiliate of Loral SpaceCom or LQSS with respect to any matter brought before the Partners for a vote in accordance with the terms of this Agreement when the vote of GTL with respect to the transaction in question is determined by directors who are not employed by, or otherwise affiliated with Loral SpaceCom and (v) in the case of TeleSat, the term "Affiliate" shall include only ChinaSat, CTHKG and any Persons controlled by ChinaSat or CTHKG. Upon a GTL Change of Control or Reduction in Interest as described in Section 6.3, the exception with respect to GTL set forth in the preceding sentence shall not apply in determining whether GTL is an Affiliate of Loral SpaceCom or LQSS. As used in this definition of "Affiliate," the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. The terms "controlled" and "common control" shall have correlative meanings.
"Affiliate Successor" has the meaning specified in Section 10.2 hereto.
"Agreement" means this Amended and Restated Agreement of Limited Partnership, as it may be amended or supplemented from time to time.
"Annual Budget" has the meaning specified in Section 4.11 hereto.
"Authorized Partnership Interests" means the sum of (i) 55,448,837 Partnership Interests, (ii) 4,769,231 Partnership Interests, (iii) the number of Ordinary Partnership Interests issuable upon exercise of the warrants issuable to certain Partners or Affiliates thereof and to GTL in connection with the guarantee of the Partnership's obligations under the Globalstar Credit Agreement, (iv) the number of Preferred Partnership Interests issuable to GTL in connection with GTL's offering of 8% convertible redeemable preferred stock of GTL due 2011, including as a result of the exercise by the purchasers thereof of the option to purchase additional shares thereof under the purchase
-6- agreement relating thereto and (v) the number of Ordinary Partnership Interests issuable upon conversion of the PPIs or in satisfaction of any distribution, make-whole or redemption payment thereon; provided that any greater number of Authorized Partnership Interests may be authorized from time to time with the Consent of the Partners.
"Average Market Value" means the arithmetic average of the Current Market Value of the GTL Common Stock for the ten trading days ending on the fifth business day prior to (i) in the case of a payment of a Scheduled Distribution, the record date for the corresponding dividend payment on the Preferred Stock and (ii) in the case of any other payment, the date of such payment.
"Baseline Business Plan" means (i) as to the first generation satellite constellation, the Original Business Plan, insofar as it pertains to that generation, (ii) as to the second generation satellite constellation, the Original Business Plan, but only if the actual total revenues and net income of the Partnership for the 12-month period prior to the month in which a proposed Baseline Business Plan would otherwise be required to be submitted to the Partners pursuant to Section 4.11(b) equal or exceed the projected amounts thereof for such period set forth in the Original Business Plan or, if such 12-month period is not set forth separately therein, the projected amount for such 12-month period implicit in the annual projected amounts set forth therein, (iii) as to the second generation satellite constellation if clause (ii) does not apply, and for all subsequent generations of satellite constellations, a new Baseline Business Plan adopted in accordance with Section 4.11(b) for such generation and all previous generations still in operation, or (iv) as to any generation satellite constellation, a business plan adopted in accordance with Section 4.11(b) expressly intended as a superseding replacement for any of the foregoing.
"Book Value" has the meaning determined under Section 8.5.
"Business Day" means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States shall not be regarded as a Business Day.
"Business Plan" means a business plan prepared in accordance with Section 4.11, with only such amendments and modifications thereto adopted from time to time by the Committee as are not inconsistent with the provisions of Sections 4.11, 5.5(c) and 6.2.
-7- "CSO" means Council of Service Operators as defined in the Service Provider Agreements.
"CTHKG" means China Telecom (Hong Kong) Group Limited.
"Capital Account" means each capital account maintained pursuant to Section 4.5 hereof.
"Capital Commitment" means the aggregate Capital Contribution which a Partner has made and is committed to make pursuant to a Subscription Agreement for the acquisition of Partnership Interests from the Partnership.
"Capital Contribution" means any cash or property which a Partner contributes to the Partnership pursuant to Sections 4.1, 4.2, 4.4 or 4.10.
"Capital Transaction" means a sale or disposition of all, or a substantial part, of the Partnership's property in one transaction or in a series of transactions pursuant to the same plan. The term includes a borrowing effected by the Partnership to obtain proceeds for distribution to Partners and a transfer of Partnership assets to a corporation pursuant to Section 6.13, but does not include the rights granted to a Service Provider under a Service Provider Agreement or other dispositions in the ordinary course of a continuing business.
"Capital Transaction Gain" means the gross income and gain realized by the Partnership for federal income tax purposes on a Capital Transaction, plus (a) income and gain of the Partnership exempt from tax, described in Code Section 705(a)(1)(B) and realized by the Partnership on a Capital Transaction, (b) on a distribution of a substantial part of the Partnership's property (other than cash and cash equivalents) to Partners, the excess, if any, of the fair market value of the distributed property over its Book Value and (c) the amount of any increase in the Book Value of Partnership property pursuant to Section 8.5(c). The term does not include COD Income or Operating Income. In Computing Capital Transaction Gain, items of income and gain relating to Partnership assets shall be computed based upon the Book Values of the Partnership's assets rather than upon the assets' adjusted basis for federal income tax purposes.
"Capital Transaction Loss" means the deductions and loss realized by the Partnership for federal income tax purposes on a Capital Transaction, plus (a) deduction and loss of the Partnership described in Code Section 705(a)(2)(B) and realized by the Partnership on a Capital Transaction, (b) on a distribution of
-8- a substantial part of the Partnership's property (other than cash and cash equivalents) to Partners, the excess, if any, of the Book Value of the distributed property over its fair market value and (c) the amount of any decrease in the Book Value of Partnership property pursuant to Section 8.5(c). The term does not include Operating Loss. In Computing Capital Transaction Loss, items of deduction and loss relating to Partnership assets shall be computed based upon the Book Values of the Partnership's assets rather than upon the assets' adjusted basis for federal income tax purposes.
"Certificate of Limited Partnership" means the Certificate of Limited Partnership of Globalstar, L.P. filed with the Secretary of State of the State of Delaware on November 19, 1993, as amended on December 31, 1994 pursuant to the Delaware Act, as it may be further amended from time to time.
"ChinaSat" means China Telecommunications Broadcast Satellite Corporation, an independent legal entity organized under the laws of the People's Republic of China.
"ChinaSat Option" means the option granted to CTHKG by the Partnership in consideration for ChinaSat entering into the ChinaSat Service Provider Agreement to purchase, subject to the satisfaction of certain conditions, an additional 937,500 Ordinary Partnership Interests at an aggregate purchase price of $18.75 million.
"ChinaSat Service Provider Agreement" means the Founding Service Provider Agreement, dated as of September 17, 1996, by and between ChinaSat and the Partnership.
"COD Income" means income realized by the Partnership on the cancellation of recourse indebtedness under federal income tax principles whether or not the income is excluded from taxable income under Section 108 of the Code or under common law principles of federal income taxation. For this purpose, indebtedness is recourse if it is treated as recourse for purposes of the Treasury Regulations under Code Section 704 (b).
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" has the meaning specified in the recitals.
"Communications Act" means the Communications Act of 1934, as amended.
-9- "Confidential Information" has the meaning specified in Section 15.12.
"Consent of Disinterested Partners" means the votes at a Representatives Meeting held in accordance with Section 6.2(g) representing a majority of the Partnership Interests present and qualified to vote at a meeting or represented by a qualifying proxy or written consent. Partnership Interests held on behalf of any Delinquent Partner or any Partner or Partners having a direct or indirect financial interest in the transaction in question shall not be qualified to vote. For these purposes, it is to be specifically noted that without limiting the foregoing, that (i) the Partnership Interests held by LQSS will be deemed to be owned and voted by the Upper Tier Partner having the right to direct the vote thereof pursuant to the LQSS Partnership Agreement, (ii) in respect of contracts to supply goods or services to the Partnership (including employment agreements) or other such related matters, Loral SpaceCom and its Affiliates, SS/L and the strategic equity investors in SS/L (as hereinafter described in Section 6.2(a)) and their respective Affiliates shall be deemed to have a direct or indirect financial interest in any transaction to which any of them is a party, and (iii) Loral SpaceCom and its Affiliates, SS/L and Qualcomm Incorporated ("Qualcomm") and their respective Affiliates shall be deemed to have a direct or indirect financial interest in any transaction or event to which any of Loral SpaceCom, SS/L or Qualcomm is a party.
"Consent of the Partners" means, as to any action or proposed action by the Partnership, approval of such action by a majority of votes cast at a Representatives Meeting held in accordance with Section 6.2(g), unless 9,000,000 (adjusted to reflect any recapitalizations of the Partnership in the nature of a subdivision or combination of Partnership Interests into a greater or lesser number thereof but not adjusted to reflect dilution caused simply by the issuance of additional Partnership Interests) or more qualifying votes are cast against such action, in which event the Consent of the Partners will be deemed denied, provided that neither any single Limited Partner, any limited partner in any Upper Tier Partnership nor GTL shall be entitled to cast more than 6,000,000 qualifying votes against any such action, regardless of the number of Partnership Interests it holds, and provided further that no more than 3,000,000 qualifying votes shall be cast by GTL in respect of partnership interests acquired using the proceeds of the GTL Offerings or pursuant to the exercise of Exchange Rights. Solely for purposes of determining the number of qualifying votes a Partner who has exercised its Exchange Right in whole or in part, may cast against an action as set forth above, a Partner
-10 - shall be deemed to continue to own the number of Partnership Interests equal to the amount of GTL Common Stock acquired by such Partner pursuant to its Exchange Right and which have not theretofore been disposed of.
"Consumer Price Index" has the meaning of "Index" specified in Article 5.4 of the Service Provider Agreements.
"Conversion Ratio" has the meaning ascribed to such term in Section 3.1 of Schedule C to this Agreement.
"Current Market Value" means the average of the high and low sales prices of the GTL Common Stock as reported on the Nasdaq National Market or any national securities exchange upon which the GTL Common Stock is then listed for the Trading Day in question.
"Debt Securities" means notes, bonds, debentures, loans, capitalized lease obligations and any other debt obligation issued by the Partnership.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such Act.
"Delinquent Partner" means a Partner who has failed to pay any installment of its Remaining Contribution when due, and such delinquency has not been cured.
"Descriptive Memorandum" has the meaning specified in Section 3.1.
"Distributable Capital Proceeds" means the amount received by the Partnership on a Capital Transaction (including amounts realized on an installment obligation received in a Capital Transaction) minus the costs of that transaction and the amount of any proceeds applied by the Partnership, in its reasonable discretion, towards Partnership expenditures or reserves for Partnership purposes other than distributions to Partners.
"Distributable Cash Flow" means the amount by which the sum of (i) the Partnership's receipts (from all sources including borrowings and Capital Contributions, but excluding Distributable Capital Proceeds) and (ii) the amounts released from reserves by the Partnership exceeds the sum of (iii) the Partnership's cash expenditures (including debt service on Partnership borrowings) and (iv) any increase in reserves that the Partnership, in
-11 - accordance with Section 5.5, determined to be necessary or appropriate for accrued or anticipated Partnership liabilities or expenditures.
"Distribution Arrearages" means the amount of Scheduled Distributions that the Partnership has elected to defer that remain unpaid.
"Distribution Make-Whole Payment" means the payment due to GTL with respect to the PPIs called for redemption pursuant to a Provisional Redemption, which payment shall be equal to the sum of (i) the present value of the aggregate amount of Scheduled Distributions thereafter payable on such PPIs during the Distribution Make-Whole Period, which shall be calculated using the bond equivalent yield on U.S. Treasury notes or bills having a remaining term nearest in length to that of the Distribution Make-Whole Period as of the Notice Date plus (ii) the amount of any accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the Provisional Redemption Date.
"Distribution Make-Whole Period" means the period of time from the Provisional Redemption Date through February 15, 2002.
"Effective Date" means December 31, 1994.
"Equity Rights" has the meaning specified in Section 6.13(a).
"Exchange and Registration Rights Agreement" means the Exchange and Registration Rights Agreement among Globalstar, GTL, LQSS and the Limited Partner signatories thereto.
"Exchange Right" means the right of LQSS and the Limited Partners signatories thereto to exchange Partnership Interests for shares of GTL Common Stock pursuant to the Exchange and Registration Rights Agreement.
"FCC" means the U.S. Federal Communications Commission.
"FCC Applications" means the applications relating to the Globalstar System dated June 3, 1991, bearing the file numbers 19 DSS P91C48 and CSS 91 014.
"Fiscal Year" has the meaning specified in Section 8.2.
-12 - "Foreign Taxing Jurisdiction" means a jurisdiction outside the United States that imposes a tax upon the Partnership or a subsidiary of the Partnership.
"GAAP" has the meaning specified in Section 5.5(c).
"GTL" has the meaning specified in the recitals.
"GTL Change of Control" has the meaning specified in Section 6.3.
"GTL Common Stock" means the common stock, par value $1.00 per share, of GTL.
"GTL Conversion Price" shall mean the conversion price of the Preferred Stock, adjusted upon the occurrence of certain dilutive events as set forth in the Preferred Stock Schedule.
"GTL Dividend Payment Notice" means a public announcement by GTL as to whether or not a dividend will be paid and, if a dividend is to be paid, whether GTL is paying the dividend in (A) cash, (B) GTL Common Stock or (C) through any combination of the foregoing. Such Notice shall be delivered on the tenth Business Day prior to the record date relating to such dividend.
"GTL Effective Date" means the date on which GTL Offerings were consummated and GTL purchased Partnership Interests in connection therewith.
"GTL Independent Directors" means the directors of GTL who are not employed by, or otherwise affiliated with Loral SpaceCom, a Strategic Partner, or any of their respective Affiliates, and who are GTL's representatives on the Committee.
"GTL Offerings" has the meaning specified in the recitals.
"GTL Registration Default" means the occurrence of any of the following: (i) GTL fails to file the Shelf Registration Statement on or prior to the 90th day after the consummation of the Preferred Stock Offering, (ii) the Shelf Registration Statement is not declared effective by the Securities and Exchange Commission on or prior to the 210th day after the consummation of the Preferred Stock Offering or (iii) the Shelf Registration Statement is declared effective but thereafter ceases to be effective or usable during the period in which GTL is required to maintain the effectiveness of the Shelf
-13 - Registration Statement, for any period of ten consecutive days or for any 20 days in any 180-day period in connection with resales of Transfer Restricted Securities (provided, that GTL will have the option of suspending the effectiveness of the Shelf Registration Statement, without becoming obligated to pay Preferred Stock Liquidated Damages for periods of up to a total of 60 days in any calendar year if the Board of Directors of GTL determines that compliance with the disclosure obligations necessary to maintain the effectiveness of the Shelf Registration Statement at such time could reasonably be expected to have an adverse effect on GTL or a pending corporate transaction).
"GTL Response Redemption Notice" means written notice delivered to the holders of the Preferred Stock notifying them of, among other things, the redemption and whether GTL is paying the redemption price of and Scheduled Distributions (including any applicable Distribution Make-Whole Payment) on such Preferred Stock (i) in cash, (ii) in GTL Common Stock or (iii) through any combination of the foregoing. Such Notice shall be delivered not fewer than 30 days nor more than 60 days before the applicable redemption date.
"General Partner" means LQSS or GTL or both, as the context may require, or any successor general partners admitted as such.
"Global Service Date" has the meaning specified in the Service Provider Agreements.
"Globalstar Credit Agreement" means that certain Credit Agreement dated as of December 15, 1995, among the Partnership, Chemical Bank and the banks signatories thereto.
"Globalstar Distribution Payment Notice" means written notice delivered to GTL by the Partnership notifying GTL of (i) whether the Partnership has elected to defer the applicable Scheduled Distribution pursuant to the provisions of this Agreement and (ii) if it has not elected to defer such Scheduled Distribution, whether it will pay such Scheduled Distribution (A) in cash, (B) by delivery of Ordinary Partnership Interests or (C) through any combination of the foregoing. Such Notice shall be delivered at least 15 Business Days prior to the record date corresponding to the applicable Scheduled Distribution Payment Date.
"Globalstar Redemption Notice" means written notice delivered to GTL by the Partnership notifying GTL of (i) the Partnership's election to redeem any Preferred Partnership
-14 - Interests pursuant to the provisions of this Agreement and (ii) whether it will make such redemption (A) in cash, (B) by delivery of Ordinary Partnership Interests or (C) through any combination of the foregoing. Such Notice shall be delivered at least 20 Business Days prior to the applicable Redemption Date and shall contain the information required by Section 2.3 of Schedule C to this Agreement.
"Globalstar System" has the meaning specified in Section 3.1.
"Governing Documents" has the meaning specified in Section 6.13(b).
"Indebtedness" means the principal amount of all secured or unsecured indebtedness for borrowed money of the Partnership, the amount of all guarantees of such indebtedness, the amount of the purchase price in any sale and leaseback transaction accounted for as a capital lease under GAAP, and any interest-bearing vendor financing treated as debt under GAAP.
"Initial Closing" means the closing at which GTL was first admitted to the Partnership pursuant to Section 4.1(c) hereof.
"Initial Purchasers" means the initial purchasers of the CPEOs set forth in the Purchase Agreement.
"In-Service Year" means a period of twelve consecutive calendar months, beginning on the Global Service Date, or beginning on any anniversary of such date.
"Joint Venture Company" has the meaning specified in the Service Provider Agreements.
"Limited Partners" means all of the limited partners listed on the signature page hereto and any Additional Limited Partners admitted as such pursuant to Section 4.4 hereof, or any successor limited partners admitted as such pursuant to the terms of this Agreement.
"Liquidation Preference" means the $50 liquidation preference of each share of Preferred Stock.
"Liquidator" has the meaning specified in Section 13.3.
"Loral SpaceCom" means, if prior to April 22, 1996, Loral Corporation, a New York corporation, and if thereafter, Loral Space & Communications Ltd, a Bermuda company.
-15 - "Losses" has the meaning specified in Section 6.10.
"LQP" means Loral/QUALCOMM Partnership, L.P., the general partner of LQSS.
"LQSS" means Loral/QUALCOMM Satellite Services, L.P. or an Affiliate thereof.
"LQSS Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership of LQSS, dated March 23, 1994, as modified, supplemented or amended in accordance with the terms thereof.
"Majority in Interest of the Partners" means, as to any action or proposed action by the Partnership, approval of such action by a majority of votes cast at a Representatives Meeting held in accordance with Section 6.2(g).
"Managing General Partner" means LQSS or any successor to LQSS continuing the business of the Partnership as a managing general partner.
"Mandatory Redemption Date" means February 15, 2011; provided, however, that, if such date shall not be a Business Day, then the Mandatory Redemption Date shall be the next Business Day.
"Minimum Gain" has the meaning specified in Treasury Regulation Section 1.704-2(b)(2) for "partnership minimum gain".
"Mutual Non-Disclosure Agreement" has the meaning specified in Section 15.6.
"Nonperformance" means the substantial and continuing failure by a General Partner to perform its material obligations under the Agreement and/or such continued negligence or misconduct by the General Partner resulting in a material adverse effect upon the assets or business of the Partnership that is not otherwise cured by the General Partner and/or knowing breach of specific provisions of this Agreement and/or fraud or willful misconduct on the part of the General Partner.
"Notice Date" means the date of mailing of a notice of provisional redemption of Preferred Stock by GTL to the holders of Preferred Stock.
"Offerees" has the meaning specified in Section 10.3.
-16 - "Offering Memorandum" means the final offering memorandum, dated January 21, 1999, relating to the Preferred Stock.
"Operating Expenses" means operating expenses of the Partnership, excluding only Project related items as detailed in the Sources and Uses of Funds Statement of the Original Business Plan and the compensation referred to in Section 6.6.
"Operating Income" means the gross income and gains of the Partnership for federal income tax purposes plus, (a) income of the Partnership exempt from taxation and described in Code Section 705(a)(1)(B) and (b) the excess, if any, of the fair market value of distributed property (other than distributed property taken into account in computing Capital Transaction Gain or Capital Transaction Loss) over its Book Value. The term does not include COD Income or Capital Transaction Gain. In computing Operating Income, items of income and gain relating to Partnership assets shall be computed based upon the Book Values of the Partnership's assets rather than upon the assets' adjusted basis for federal income tax purposes.
"Operating Loss" means the deductions and losses of the Partnership for federal income tax purposes, plus (a) items of expenditure described in Code Section 705(a)(2)(B), (b) the amount referred to in Section 4.1(b)(iii) and (c) the excess, if any, of the Book Value of distributed property (other than distributed property taken into account in computing Capital Transaction Gain or Capital Transaction Loss) over its fair market value. The term does not include Capital Transaction Loss. In computing Operating Loss, items of deduction and loss relating to the Partnership's assets shall be computed based upon the Book Values of the Partnership's assets rather than upon the assets' adjusted basis for federal income tax purposes.
"Optional Redemption" has the meaning specified in Section 2.7 of Schedule C to this Agreement.
"Optional Redemption Date" means the Redemption Date for an Optional Redemption as specified in Section 2.7 of Schedule C to this Agreement.
"Ordinary Partnership Interests" or "OPIs" means partnership interests, general or limited, as the case may be, in the Partnership, which interests are not entitled to the preferential allocation of profits and losses set forth in Section 5.1(a).
-17 - "Original Business Plan" means the business plan of the Partnership for the construction, launch and operation of the first and second generations of satellite constellations (including forecasts of operating expenses, capital expenditures, revenues, cash balances (including cash balances set aside in reserve for capital expenditures) and financial structure (i.e. debt and equity capital requirements)), dated March 15, 1994, as restated to the same or a greater level of detail (with a full reconciliation, but not otherwise modified or amended) consistent with GAAP, and including a capital expenditure budget consistent therewith prepared on a cash basis.
"Outstanding" when used with respect to PPIs means, as of the date of determination, all PPIs issued pursuant to this Agreement except PPIs theretofore canceled by the Partnership or delivered to the Partnership for cancellation, pursuant to redemption or conversion.
"Partner" means the General Partners or the Limited Partners, or both, as the context may require.
"Partner Minimum Gain" means "partner nonrecourse debt minimum gain" as defined in Treasury Regulation Section 1.704-2(i)(2).
"Partnership" means the limited partnership established by this Agreement.
"Partnership Agreement" or this "Agreement" means this Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., as the same may be modified, supplemented, or amended in accordance with the terms hereof.
"Partnership Interest" means an interest (whether ordinary or preferred as the context may require) in the Partnership of a General Partner, a Limited Partner, or both, as the context may require, provided, however, that with respect to matters relating to the voting of Partnership Interests, except as provided in Section 13.2, the term shall refer only to Ordinary Partnership Interests. The Partners' respective equity interests in the Partnership are represented by the Partnership Interests they hold, as set forth on Schedule A of this Agreement.
"Percentage Interest" means the ratio, expressed as a percentage, that the number of Ordinary Partnership Interests held by a Partner bears to the total number of Ordinary Partnership Interests outstanding.
-18 - "Person" means an individual or a corporation, partnership, trust, unincorporated organization, association or other entity.
"Preemptive Securities" has the meaning specified in Section 4.9.
"Preferred Partnership Interests" or "PPIs" means general partnership interests in the Partnership, the capital contributions for which are set forth in Section 4.1(d) and for which separate Capital Accounts will be maintained and that have the right to convert into Ordinary Partnership Interests as set forth in Article III of Schedule C hereto, the right to distributions set forth in Section 5.5(a) and the right to allocations set forth in Section 5.1(a) and that are subject to redemption under Article II of Schedule C hereto.
"Preferred Stock" means the 8% Convertible Redeemable Preferred Stock of GTL due 2011.
"Preferred Stock Effective Date" means the date on which the Preferred Stock is issued and GTL contributes to the Partnership the net proceeds from the sale of such Preferred Stock.
"Preferred Stock Liquidated Damages" means an amount accruing at a rate of 0.50% per annum of the Liquidation Preference of each share of the Preferred Stock constituting Transfer Restricted Securities, which shall accrue from the date of the GTL Registration Default to and including the 30th day following such GTL Registration Default and increase by 0.50% per annum for each subsequent 30 day period; provided, however, that such Preferred Stock Liquidated Damages may not accrue at any time at a rate greater than 2.00% per annum of the Liquidation Preference of the Preferred Stock constituting Transfer Restricted Securities.
"Preferred Stock Representative" has the meaning set forth in Section 4.3 of Schedule C to this Agreement.
"Preferred Stock Schedule" means the schedule to the Bye-Laws of GTL setting forth the terms of the Preferred Stock.
"Preliminary Service Date" has the meaning specified in the Service Provider Agreement.
"Project" means each of the following: for each generation of satellites, each line item detailed in the Sources
-19 - and Uses of Funds Statement of the Original Business Plan under the Use of Funds
Heading, except those under S/T Operations).
"Provisional Redemption" has the meaning specified in Section 2.6 of Schedule C to this Agreement.
"Provisional Redemption Date" means the Redemption Date for a Provisional Redemption as specified in Section 2.6 of Schedule C to this Agreement.
"Purchase Agreement" means that certain Purchase Agreement, dated February 29, 1996, among GTL, the Partnership and Lehman Brothers Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Unterberg Harris as the Initial Purchasers.
"Qualcomm" means QUALCOMM Incorporated.
"Redemption Date", when used with respect to any PPI to be redeemed, means the date fixed for such redemption by or pursuant to this Agreement and includes the Provisional Redemption Date, the Optional Redemption Date and Mandatory Redemption Date, as the case may be.
"Redemption Price", when used with respect to any PPI to be redeemed, means the price at which it is to be redeemed pursuant to this Agreement.
"Regular Record Date" for the distribution payable on any Scheduled Distribution Payment Date means February 1, May 1, August 1 and November 1 (whether or not a Business Day), as the case may be, next preceding such Scheduled Distribution Payment Date.
"Remaining Contribution" has the meaning specified in Section 4.5(c) hereof.
"Representatives Meeting" has the meaning specified in Section 6.2(g).
"SS/L" means Space Systems/Loral, Inc., a Delaware corporation.
"Sale Notice" has the meaning specified in Section 4.9.
"Scheduled Distribution" means the distribution payable on a Scheduled Distribution Date by the Partnership in respect of the PPIs, which payment, subject to Section 5.5(d), may be deferred by the Committee in its sole discretion.
-20 - "Scheduled Distribution Payment Date" means February 15, May 15, August 15, and November 15, commencing May 15, 1999; provided, however, that if such date shall not be a Business Day, then the applicable payment date shall be the next Business Day.
"Section 704(c) Asset" has the meaning specified in Section 5.3.
"Securities Act" means the Securities Act of 1933, as from time to time amended, and any successor to such statute.
"Service Provider" has the meaning specified in the Service Provider Agreement.
"Service Provider Agreement" means each of the agreements between the Partnership and a Partner or its Affiliate or Joint Venture Company, pursuant to which such Person provides to its subscribers the services of the Globalstar System.
"Shelf Registration Statement" means a shelf registration statement filed by GTL with the Securities and Exchange Commission to cover resales of Transfer Restricted Securities by holders thereof (other than Loral) who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement.
"Significant Variance" means, as applicable:
(i) a cumulative adverse variance (net of any favorable variances) in capital expenditures for any Project:
(x) in the case of any Business Plan, as measured over such Project's planned remaining life from the beginning of such Business Plan plus the actual capital expenditures from the beginning of such Project until the beginning of the period to which such Business Plan relates;
(y) in the case of any Annual Budget, as measured by the actual capital expenditure from the beginning of such Project until the beginning of the year to which such Annual Budget relates plus the amount of such expenditure as projected in such Annual Budget; compared in each case with the then current Baseline Business Plan, which exceeds 10% of the total cumulative capital
-21 - expenditure for such Project over such Project's planned life as shown in such Baseline Business Plan; or
(ii) an adverse variance in total Operating Expenses in any fiscal year that exceeds 10% of the amount set forth in the then current Baseline Business Plan for such year. provided that the amount of each Significant Variance will be subject to adjustment to account for increases in the Consumer Price Index which are in excess of the inflation assumptions, if any, used in the preparation of the applicable Baseline Business Plan, it being understood and agreed that the Original Business Plan used a 4% per annum inflation assumption, compounded annually and such increases for inflation will apply to expenses or expenditures for Projects set forth in the then current Baseline Business Plan which are fixed by contractual terms from and after the date of the applicable contracts only to the extent provided for in such contracts.
"Similar Satellite Service" has the meaning specified in the Service Provider Agreement.
"Stated Value" means the $50 face amount of each PPI.
"Strategic Partners" means the limited partners in any of Globalstar, LQSS or LQP.
"Subscription Agreement" means the agreement entered into by each General Partner and each Limited Partner (or the assignor that assigned its Partnership Interests to such Limited Partner) prior to becoming a Partner.
"System Specification" means the specifications for the Globalstar System dated February 1, 1994, No. LQSS/SS/94-0001, heretofore delivered to the Partners.
"TeleSat" means TeleSat Limited, a company organized under the International Business Companies Ordinance of the British Virgin Islands.
"Trading Day" means (a) if the GTL Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which such GTL Common Stock actually trades on the New York Stock Exchange or another national securities exchange, (b) if the GTL Common Stock is quoted on the Nasdaq National Market, a day on which the GTL Common Stock actually trades or (c) if the GTL Common Stock is
-22 - not so listed, admitted for trading or quoted, any Business Day on which the GTL Common Stock actually trades.
"Transfer Restricted Securities" means each share of Preferred Stock and each share of Common Stock issuable upon conversion of the Preferred Stock or in satisfaction of any dividend or other payment on the Preferred Stock and any securities into which such shares of Preferred Stock or Common Stock shall be converted or into which they shall be changed by operation of law or otherwise until (a) the date on which such security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (b) the date on which such security is distributed to the public pursuant to Rule 144 under the Securities Act or may be distributed to the public pursuant to Rule 144(k) under the Securities Act.
"Transferor" has the meaning specified in Section 10.3.
"Trigger Percentages" means the percentages set forth in Section 2.6 of Schedule C to this Agreement that triggers the Partnership's option to redeem the PPIs pursuant to a Provisional Redemption.
"Upper Tier Partner" means any Partner in either LQSS or LQP.
"Upper Tier Partnership" means LQP or LQSS.
"Usage Fees" has the meaning specified in the Service Provider Agreements.
"Voting Rights Triggering Event" means the accumulation of accrued and unpaid dividends on the outstanding Preferred Stock in an amount equal to six quarterly dividends (whether or not consecutive).
ARTICLE III. PURPOSE
SECTION 3.1. Purpose. The purpose and business of the Partnership shall be:
(a) to develop, design, deploy, own and operate a worldwide low-earth orbit satellite-based digital telecommunication system (the "Globalstar System") which is more fully described in the Globalstar Descriptive Memorandum, dated March 1993, as supplemented by the Supplement thereto, dated
-23 - March 1994 (the "Descriptive Memorandum") and to engage in the business of providing satellite communications and communications related services, including but not limited to voice, data, paging and geolocation services, and search and rescue, disaster relief and environmental and industrial monitoring and control services through the Globalstar System to Service Providers;
(b) to acquire, hold, own, operate, lease, manage, maintain, improve, repair, replace, reconstruct, sell or otherwise dispose of and use the assets of the Partnership; and
(c) to enter into any lawful transaction and engage in any lawful activity incidental to or in furtherance of the foregoing purposes.
ARTICLE IV. CAPITAL CONTRIBUTIONS
SECTION 4.1. General Partners. (a) LQSS has made, or will make, at the times and in the amounts set forth in its Subscription Agreement, cash Capital Contributions to the Partnership in the amount set forth in Schedule A hereto in return for 18,000,000 Ordinary Partnership Interests.
(b) The amount of cash LQSS is required to contribute pursuant to Section 4.1(a) shall be reduced by the amount of expenditures designated by LQSS and paid or incurred strictly on the Partnership's behalf after December 31, 1992 and prior to March 23, 1994, provided that any property or rights produced by such expenditures shall be contributed to the Partnership. Credit will only be given for expenditures for preexisting goodwill and intangibles of LQSS and its Affiliates if such goodwill or intangibles are purchased from parties other than LQSS, Upper Tier Partners or their Affiliates or created in connection with the business to be conducted by the Partnership. The amount of this reduction shall be allocated by the Partnership on its books and records to (i) the right (which LQSS shall cause to be transferred to the Partnership) to cause LQP to utilize the FCC Applications and, when granted, the FCC licenses, to operate the Globalstar System, exclusively through, and for the exclusive benefit of, the Partnership, (ii) any other property or rights contributed to the Partnership under this Section 4.1(b) and (iii) other expenditures described in this Section 4.1(b) that did not produce property to be contributed to the Partnership under this Section. Nothing in this provision shall alter the ownership of intellectual property as provided in the Contract for Development of Globalstar Ground
-24 - Communication Segment Equipment between Globalstar and Qualcomm dated March 18, 1994.
(c) GTL has made cash Capital Contributions to the Partnership in the amount of $186 million in return for 10,000,000 Ordinary Partnership Interests.
(d) On the Preferred Stock Effective Date, GTL will contribute the net proceeds of the Preferred Stock Offering to the Partnership as described in the Offering Memorandum in return for PPIs with an aggregate Stated Value equal to the aggregate Liquidation Preference of the Preferred Stock issued by GTL in the Preferred Stock Offering. The Stated Value of each PPI shall be $50. The aggregate contribution and Stated Value of the PPIs shall be set forth in Schedule A. If, on or after the Preferred Stock Effective Date, the option granted to the purchasers thereof to purchase additional shares of Preferred Stock is exercised (as described in the Offering Memorandum), in full or in part, then GTL shall contribute the additional net proceeds from the exercise of such option to the Partnership in return for additional PPIs which shall be reflected in a similar manner in Schedule A.
SECTION 4.2. Limited Partners. Each Limited Partner has made, or will make at the times and in the amounts set forth in its Subscription Agreement, cash Capital Contributions to the Partnership in the amount set forth on Schedule A hereto in return for the number of Ordinary Partnership Interests set forth on such Schedule A. The total number of such Partnership Interests is 19,937,500.
SECTION 4.3. Additional Contribution. No Partner is required to make any additional Capital Contribution to the Partnership beyond its capital commitment set forth in Sections 4.1 and 4.2 above.
SECTION 4.4. Additional Limited Partners. Subject to Sections 4.9 and 4.10, the Partnership is hereby authorized to offer Additional Partnership Interests, and to admit as Limited Partners those Persons who subscribe to purchase Additional Partnership Interests and who are acceptable to the Committee. At each Additional Closing, the Capital Contributions of those Persons then being admitted as Additional Limited Partners shall be transferred to the Partnership, which amounts shall be credited to their respective Capital Accounts pursuant to Section 4.5 hereof. Upon acceptance by the Committee of the subscription agreement of a Person subscribing to Additional Partnership Interests, the schedule of Partners as set forth on Schedule A
-25 - hereto shall be amended to reflect such Person's name and Capital Contribution and such Person will be admitted as an Additional Limited Partner.
SECTION 4.5. Capital Accounts. (a) The amount of cash contributed to the Partnership by the Partner, and, in addition in the case of LQSS, the Book Value of any property contributed and the amount referred to in Section 4.1(b)(iii) and, in the case of TeleSat, (i) the amount of the bonus in the Capital Account balance that it received for ChinaSat entering into the ChinaSat Service Provider Agreement and (ii) the excess, if any, of the amount credited to the capital accounts for Ordinary Partnership Interests acquired by TeleSat upon its exercise of the ChinaSat Option over the exercise price. The amounts described in this clause (i) and (ii) for purposes of Schedule A and this Agreement shall be considered part of TeleSat's Capital Contribution.
(b) A transferee of a Partnership Interest (i) will succeed to the portion of the Capital Account of the Partners transferring such Partnership Interest which relates to the Partnership Interest transferred and (ii) will receive distributions whose Regular Record Date is after the effective date of such transfer.
(c) If the Partnership distributes OPIs with respect to PPIs under Section 5.5(a)(iii), a portion of the Adjusted Capital Account for such PPIs will be transferred to such OPIs. The transferred amount shall be equal to the lesser of: (i) the amount of the cash distribution obligation on the PPIs discharged by the distribution of such OPIs, (ii) the excess, if any, of the prior allocations of Adjusted Income to such PPIs under Sections 5.1(a)(i) and (iii) over the sum of the prior allocations of Loss to such PPIs under Section 5.1(c)(iii), prior and current distributions on such PPIs under Section 5.5(a)(ii) not paid in OPIs and the initial Adjusted Capital Accounts of OPIs previously issued in payment of distributions under Section 5.5(a)(ii) or (iii) an amount per distributed OPI equal to the Adjusted Capital Account for outstanding OPI with the highest Adjusted Capital Account. Any excess of (ii) over the lesser of (i) or (iii), shall be transferred among the Partnership Interests as provided in Subsection (e).
(d) If the Partnership distributes OPIs in connection with a redemption or conversion of PPIs under Article II or III of Schedule C hereto, the Adjusted Capital Account of the redeemed or converted PPIs (after reduction for any cash or the fair market value of other property paid by the Partnership as
-26 - part of the redemption or conversion) shall be transferred to such distributed OPIs; provided, however, that the amount transferred shall not exceed an amount per distributed OPI equal to the Adjusted Capital Account for the outstanding OPI with the highest Adjusted Capital Account. Any portion of the Adjusted Capital Account of the redeemed or converted PPI that cannot be transferred to the distributed OPIs, shall be transferred among the Partnership Interests as provided in Subsection (e).
(e) The excess amounts described in Subsections (c) and (d) shall be transferred first to the PPIs as if it were Adjusted Income to the extent provided for in the allocation of Adjusted Income under Section 5.1(a), then under Section 5.1(b) and then to all OPIs (including the OPIs being distributed) in accordance with their Percentage Interests.
SECTION 4.6. Interest. No interest shall be paid by the Partnership on Capital Contributions, on balances in Partners' Capital Accounts or on any other funds distributed or distributable under this Agreement.
SECTION 4.7. No Withdrawal. No Partner shall have the right to the withdrawal or reduction of any part of its Capital Contribution. It is the intent of the Partners that no distribution to the Limited Partners of cash pursuant to Section 5.5 shall be deemed a return or withdrawal of capital, even if such return or distribution represents, for federal income tax purposes or otherwise (in whole or in part), a distribution of depreciation or any other non-cash item accounted for as a loss or deduction from or offset to the Partnership's income, and that the Limited Partners shall not be obligated to pay any such amount to, or for the account of, the Partnership or any creditor of the Partnership; provided, however, that if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to make any such payment, such obligation shall be the obligation of such Limited Partner and not of the General Partners.
SECTION 4.8. Loans. Loans by a Partner to the Partnership shall not be considered Capital Contributions.
SECTION 4.9. Preemptive Rights. The Partnership hereby grants to the Partners a preemptive right, in accordance with the procedures set forth in this Section 4.9, with respect to the issuance and sale by the Partnership of Additional Partnership Interests or Debt Securities (each referred to hereinafter as "Preemptive Securities"); provided, however, the Partners shall have no preemptive rights with respect to
-27 - Preemptive Securities issued pursuant to Section 4.10(a)(i) in connection with the execution of a Service Provider Agreement or pursuant to or in connection with an underwritten public offering.
(a) At least 30 days prior to the sale of Preemptive Securities to which this preemptive right applies, the Partnership shall deliver a written notice (a "Sale Notice") to each Partner setting forth (i) the number of Preemptive Securities to be sold, (ii) the price for which and other terms and conditions upon which such Preemptive Securities are to be sold, and (iii) all written information distributed to offerees of such Preemptive Securities, together with the following irrevocable offer from the Partnership: to issue and sell to each Partner, at the same price per Preemptive Security and on the same other terms and conditions set forth in the Sale Notice: (i) in the case of Additional Partnership Interests, the number of Additional Partnership Interests which shall equal the sum of (A) the product of the total number of Additional Partnership Interests set forth in the Sale Notice multiplied by the Partner's Percentage Interest, calculated at the time of the Sale Notice and (B) such Partner's pro rata share (calculated as set forth above) of any such Additional Partnership Interests offered to, but not purchased by, other Partners and (ii) in the case of Debt Securities, the sum of (I) the total principal amount of Debt Securities being issued multiplied by such Partner's Percentage Interest and (II) such Partner's pro rata share (calculated as set forth above) of any such Debt Securities offered to, but not purchased by, other Partners.
(b) The Partners shall have absolute discretion to accept or decline such offers. If a Partner wishes to accept any of the offers made pursuant to this Section 4.9, it shall give the Partnership irrevocable written notice of its election to accept such offer within 15 days of its receipt of the applicable Sale Notice (which notice may specify acceptance of all securities offered in the Sale Notice, or acceptance of up to a number or principal amount thereof as specified therein) and the closing thereunder shall occur five days thereafter (or, if not a Business Day, on the next Business Day thereafter) at the offices of the Partnership or at such other time and place as the parties shall agree. Promptly after expiration of the acceptance period, the Partnership will give accepting Partners notice of the actual
-28 - number of Preemptive Securities to be purchased by them pursuant to the Sale Notice.
(c) In connection with any proposed or contemplated sale of Preemptive Securities, upon the request of the Partnership, each Partner shall indicate to the Partnership its good faith intentions (which indications shall not be binding) with respect to whether or not it will exercise the preemptive rights described herein.
SECTION 4.10. Sale of Partnership Interests and Partnership Securities. (a) Subject to the provisions of Section 4.9 and this Section 4.10, the Partnership may, upon the determination of the Committee, issue or sell, on such terms as the Committee deems appropriate and in the best interests of the Partnership:
(i) Additional Partnership Interests to Additional Limited Partners or Partners from time to time or to other Persons and to admit them to the Partnership as Additional Limited Partners pursuant to Section 4.4 hereof, without being required to obtain the approval of the Limited Partners or any other persons who may acquire an interest in the Partnership Interests, provided, that such Additional Partnership Interests may not be issued at a price that is less than $12.50 per Partnership Interest without the Consent of the Partners, provided further that no additional Partner shall be admitted to the Partnership without the Consent of the Partners, which consent shall not be unreasonably withheld. In addition, if any Partner shall have specified to the Partnership on or prior to March 31, 1994 the names of any third parties, no such third party, nor any of its Affiliates, will be admitted as an Additional Limited Partner without the prior, written consent of the specifying Partner.
(ii) Subject to Sections 4.9 and 4.10(b) hereof, any other type of security of the Partnership from time to time to Partners or other persons on terms and conditions established in the sole and complete discretion of the Committee, all without the approval of the Partners or any other person who may acquire any other type of security of the Partnership, including, without limitation, unsecured and secured debt obligations of the Partnership, debt obligations of the Partnership convertible into any class or series of Partnership Interests that may be issued by the Partnership, options, rights or warrants to purchase any such class or series of Partnership Interests or any
-29 - combination of any of the foregoing. The Partnership is also authorized to enter into sale and leaseback transactions with respect to all or any part of the assets of the Partnership. Subject to subsection (b) below, there shall be no limit on the number of Partnership Interests or other securities that may be so issued, and except as set forth in Section 4.10(a)(i) hereto, the Committee shall have the sole and complete discretion in determining the consideration and terms and conditions with respect to any future issuance of Partnership Interests or other securities.
(b) The Partnership shall not at any time issue or reserve for issuance Additional Partnership Interests or other equity interests if, immediately after such issuance, the number of Partnership Interests outstanding or reserved for issuance would exceed the Authorized Partnership Interests.
(c) The Partnership shall not incur any Indebtedness if, immediately after the incurrence thereof, the Partnership's outstanding Indebtedness would exceed 110% of the maximum amount of debt obligations contemplated over the life of the then current Baseline Business Plan.
SECTION 4.11. Business Plans. (a) The Committee shall annually prepare a Business Plan which contains the following elements: (i) a budget for the forthcoming financial year on a quarterly basis (the "Annual Budget") substantially in the same level of detail as the then current Baseline Business Plan and (ii) for the design and operational lifetime of each generation of satellites at the time under active development or design, or currently in orbit:
(A) Schedules of estimated capital expenditures for each year, segregated by Project and showing the estimated cost for each year until completion of the Project;
(B) Schedules of sources and uses of funds for each such year;
(C) a projected income and expense statement for each such year; and
(D) projected year-end balance sheet for each such year.
Unless it shall have first obtained the Consent of the Partners, the Committee shall not adopt or otherwise approve any
-30 - Business Plan or Annual Budget containing any Significant Variance from the then-current Baseline Business Plan, provided that where Consent of the Partners is obtained with respect to any Significant Variance, further Consent of the Partners will be required for any subsequent unfavorable variance from the amounts so approved. Where any Business Plan and/or any Annual Budget contains more than one Significant Variance, then a separate Consent of the Partners shall be sought for each such Significant Variance. The Business Plan and the Annual Budget will not otherwise require the approval of the Partners. Except as otherwise provided in this Agreement, the General Partners will not be liable to the Partnership or any Limited Partner solely for any failure to achieve any Business Plan or Annual Budget, or any element thereof which does not amount to Nonperformance.
(b) At least 90 days prior to the beginning of the year in which expenditures (excluding cumulative expenditures of $1,500,000 or less pertaining to the preparation of the new Baseline Business Plan) relating to a new generation of satellites are anticipated (except, insofar as the second generation is concerned, in the case that the Original Business Plan is in effect as the Baseline Business Plan therefor), the Committee will submit to the Partners for their approval a proposed new Baseline Business Plan for the Partnership covering the period through the expected useful life of such next generation which, if approved with the consent of a Majority in Interest of the Partners, will constitute a new Baseline Business Plan, provided that, for purposes of such approval, the votes of the Managing General Partner will be cast in favor of such approval if the proposed Baseline Business Plan in question meets the return on investment criteria set forth in Section 6.2(f), and, unless GTL is the Managing General Partner, the vote of GTL will be determined by the GTL Independent Directors. In the event a proposed Baseline Business Plan is submitted for such a vote and is not so approved, no Limited Partner voting against such approval or any of its Affiliates or Joint Venture Companies will have rights under Article 6.1 of the applicable Founding Service Provider Agreement (as such term is defined in the Service Provider Agreements) to purchase the assets of the Partnership.
SECTION 4.12. Limitation on a Limited Partner's Ownership. No individual Limited Partner (other than a corporation formed solely for the purpose of holding Partnership Interests, all of whose shares are offered to the public in an underwritten public offering) may acquire more than 20% of the Partnership Interests in the Partnership without the consent of the Committee and the Consent of the Disinterested Partners.
-31 - ARTICLE V. ALLOCATIONS, DISTRIBUTIONS AND SERVICE PROVIDER AGREEMENTS
SECTION 5.1. Allocations Generally. After the allocations in Sections 5.2 and 5.4 at the end of each Accounting Period, Adjusted Income, Operating Income, Operating Loss, Capital Transaction Gain and Capital Transaction Loss will be allocated as follows:
(a) Allocation of Adjusted Income to PPIs. Adjusted Income will be allocated to the Capital Account maintained for the outstanding PPIs:
(i) in the amount equal to the excess of prior allocations of Operating Loss and Capital Transaction Loss to currently outstanding PPIs under subsections (c)(iii) over prior allocations to them under this subsection (a)(i);
(ii) then in the amount necessary to bring the Capital Account of each outstanding PPI to $50;
(iii) then in an amount equal to a cumulative 8% per annum return on the Stated Value of each outstanding PPI; this return shall be computed on the basis of a 360-day year with twelve 30-day months;
(iv) then in an amount equal to the excess of (x) the cumulative United States federal, state and local income taxes imposed on the cumulative excess of the amounts of income allocated to PPIs under this Agreement (including allocations under this Subsection (a)(iv) and Subsection (a) (v) that are subject to tax by those jurisdictions over the amounts of tax losses allocated to the PPIs pursuant to this Agreement that, under the laws of the particular jurisdiction, could be carried back or carried over to offset such taxable income by a Bermuda company holding the PPIs that was not engaged in business in the United States otherwise than by being a Partner in the Partnership over (y) prior allocations under this Section 5.1(a)(iv); and
(v) then in an amount equal to the excess of the sum of (x) the cumulative amounts of branch profits taxes that were imposed on the holder of each outstanding PPI under Section 884 of the Code for prior and current actual or deemed distributions with respect to such interest and (y) the branch profits tax that will be imposed on the holder of such interest under Code section 884 upon the future actual
-32 - or deemed distribution of taxable amounts allocated to such interests under this Agreement (including allocations under Subsection (a)(iv) (excluding allocations for federal income taxes) and this Subsection (a)(v)) over (z) prior allocations under this Section 5.1(a)(v).
(b) Allocation of Adjusted Income to OPIs. Adjusted Income will then be allocated to OPIs that were issued under Section 5.5(a)(iii), Section 1.2(b) of Schedule C or Article III of Schedule C, in proportion to, and to the extent that, the Adjusted Capital Account for each such OPI is less than the Adjusted Capital Account for the outstanding OPI with the highest Adjusted Capital Account.
(c) Operating Loss and Capital Transaction Loss. Operating Loss in excess of any remaining Operating Income after the allocations set forth above and then Capital Transaction Loss in excess of any remaining Capital Transaction Gain after the allocations set forth above shall be allocated:
(i) among the Partners holding OPIs in accordance with their Percentage Interests until the Adjusted Capital Account for the OPIs of such a Partner is reduced to zero;
(ii) then, among such Partners in proportion to, and to the extent of, their Adjusted Capital Accounts for their OPIs;
(iii) then, to the holders of outstanding PPIs in proportion to, and to the extent of, the Adjusted Capital Accounts for their PPIs; and
(iv) then, among the General Partners in proportion to their Percentage Interests.
(d) Operating Income. Any Operating Income remaining after the allocations set forth above in excess of Operating Loss will be allocated among the Partners holding Ordinary Partnership Interests in proportion to, and to the extent of, distributions to be made with respect to such OPIs under Section 5.5(b), then in proportion to, and to the extent of, negative Adjusted Capital Account balances for one or more OPIs, and then in accordance with Percentage Interests.
(e) Capital Transaction Gain. Any Capital Transaction Gain remaining after the allocations set forth above in excess of Capital Transaction Loss will be allocated among the Partners holding OPIs (other than a Delinquent Partner);
-33 - (i) In proportion to, and to the extent of, negative Adjusted Capital Account balances for one or more OPIs; and
(ii) Then, in accordance with Percentage Interests.
SECTION 5.2. Regulatory Allocations.
(a) Partnership Nonrecourse Deductions. Operating Loss and Capital Transaction Loss attributable (under Treasury Regulation Section 1.704-2 (c)) to "partnership nonrecourse liabilities" (within the meaning of Treasury Regulation Section 1.704-2(b)(3)) shall be allocated among the Partners in accordance with Percentage Interests. As the allocation of partnership nonrecourse deductions will increase the potential minimum gain chargeback under Section 5.2(d), an allocation of partnership nonrecourse deductions under this provision will not reduce a Partner's Adjusted Capital Account.
(b) Partner Nonrecourse Deductions. Operating Loss and Capital Transaction Loss attributable (under Treasury Regulation Section 1.704-2(i) (2)) to "partner nonrecourse debt" (within the meaning of Treasury Regulation Section 1.704-2(b)(4)) shall be allocated, in accordance with Treasury Regulation Section 1.704-2(i)(1), to the Partner who bears the economic risk of loss with respect to the debt to which the Loss is attributable. As the allocation of partner nonrecourse deductions will increase the potential minimum gain chargeback under Section 5.2(e), an allocation of partner nonrecourse deductions under this provision will not reduce a Partner's Adjusted Capital Account.
(c) COD Income. COD Income shall be allocated among the Partners in proportion to the deemed distribution each is deemed to receive pursuant to Code Section 752(b) with respect to the canceled debt.
(d) Minimum Gain Chargeback. If, in any year there is a net decrease in Minimum Gain (other than a decrease attributable to a "book up" in the Book Value of the Partnership's assets, a decrease offset by an increase in Partner Minimum Gain or any other decrease for which a minimum gain chargeback is not required under Treasury Regulation Section 1.704-2(f)), then each Partner will be allocated Capital Transaction Gain and Operating Income equal to that Partner's share of the net decrease in minimum gain for the year, as determined by Treasury Regulation Section 1.704-2(g)(2). The items of Capital Transaction Gain and Operating Income to be allocated under this section are determined under Treasury
-34 - Regulation Section 1.704-2(j)(2). In the event there is insufficient Capital Transaction Gain and Operating Income for the year to fully chargeback each Partner's share of the decrease in Minimum Gain, then the chargeback for the year shall be in proportion to each Partner's share of the decrease and any decrease that has not been charged back shall be carried over and be treated as a decrease in Minimum Gain in the following year. This subsection is intended to comply with the minimum gain chargeback requirement of Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.
(e) Partner Minimum Gain Chargeback. If, in any year there is a net decrease in Partner Minimum Gain (other than a decrease attributable to a "book up" in the Book Value of the Partnership's assets, a decrease offset by an increase in Minimum Gain or any other decrease for which a Partner Minimum Gain chargeback is not required under Treasury Regulation Section 1.704-2(i)(4)), then, after the allocation set forth above in Section 5.2(d), each Partner will be allocated Capital Transaction Gain and Operating Income equal to that Partner's share of the net decrease in Partner Minimum Gain for the year, as determined by Treasury Regulation Section 1.704-2(i)(5). The items of Capital Transaction Gain and Operating Income to be allocated under this section are determined under Treasury Regulation Section 1.704-2(j)(2). In the event there is insufficient Capital Transaction Gain and Operating Income for the year to fully chargeback each Partner's share of the decrease in Partner Minimum Gain, then the chargeback for the year shall be in proportion to each Partner's share of the decrease and any decrease that has not been charged back shall be carried over and be treated as a decrease in Partner Minimum Gain in the following year. This subsection is intended to comply with the requirement of Treasury Regulation Section 1.704-2(i)(4) that there be a chargeback of partner nonrecourse debt minimum gain and shall be interpreted consistently therewith.
(f) Qualified Income Offset. In the event any Partner received any adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) that was not reasonably expected at the end of the preceding year and that causes, or increases, a deficit in the Partner's Capital Account, Capital Transaction Gain and Operating Income (composed of a pro rata portion of each element remaining after the allocations in earlier subsections of this section) shall be allocated to that Partner in an amount and manner sufficient to eliminate any portion of the deficit balance in the Partner's Capital Account that is attributable to the adjustment, allocation, or distribution referred to above. If there is
-35 - insufficient Capital Transaction Gain and Operating Income in any year to make the allocation called for under this subsection, then the shortfall shall be carried over to subsequent years and will be treated as items to be offset in those years. Allocations under this subsection will only be made to the extent that a Partner has a deficit in his Capital Account after all other allocations provided in Article V have been tentatively made as if this subsection were not in the Agreement. For purposes of this subsection, a Partner's Capital Account balance shall be (a) increased by (i) its share of Minimum Gain plus (ii) its share of Partner Minimum Gain plus (iii) the amount, if any, by which its deficit Capital Account balance exceeds the sum of (i) and (ii) and which the Partner is obligated to restore (or is treated as obligated to restore under Treasury Regulation Section 1.704-1(b)(2)(ii)(c)) and (b) decreased by (i) the amount of expected distributions in the next year from the current year's earnings plus (ii) to the extent not previously taken into account, the items described in Treasury Regulation Section 1.704 -1(b)(2)(ii)(d) (4), (5) and (6).
SECTION 5.3. Other Allocations When Book Value Differs from Tax Basis. When the Book Value of a Partnership asset is different from its adjusted tax basis for income tax purposes, then, solely for federal, state and local income tax purposes and not for purposes of computing Capital Accounts, income, gain, loss, deduction and credit with respect to such assets ("Section 704(c) Assets") shall be allocated among the Partners to take this difference into account in accordance with the principles of Code Section 704(c), as set forth in the Treasury Regulation thereunder. In addition, under the principles of Treasury Regulation Section 1.704-3(b)(2) Example 2(ii)(C), in order to prevent the shifting of tax consequences with respect to built-in gain or built-in loss prior to the contribution or revaluation of an item of Section 704(c) Property, tax gain on the sale of that Section 704(c) Property shall be allocated among the Partners to offset the ceiling rule limitation of Treasury Regulation
Section 1.704-3(b)(1).
SECTION 5.4. Special Allocation of Foreign Taxes. If a Foreign Taxing Jurisdiction imposes a tax upon the Partnership, upon a subsidiary of the Partnership or upon payments to one of the foregoing and such tax is not borne by a third party as a result of a "gross up" provision, tax indemnity or otherwise, then, to the extent that such tax would not have been imposed on income allocated with respect to an Ordinary Partnership Interest if any Partner holding such Partnership Interests or a direct or indirect partner in such Partner were subject only to United
-36 - States income taxes on the income or payments subject to tax by the Foreign Taxing Jurisdiction:
(a) the amount of such tax shall be charged against the Capital Account of such Partner for such Ordinary Partnership Interest and shall reduce the amounts distributable to it under Section 5.5;
(b) the amounts distributable to each Partner under Section 5.5 shall be increased by an amount equal to the Partner's Percentage Interest times the aggregate amounts specially allocated to all Partners under subsection (a) above; and
(c) the Partnership shall use its best efforts to provide documentation to assist a Partner in recovering from a Foreign Taxing Jurisdiction any applicable tax credit for taxes incurred by that Partner with respect to Globalstar income or allocated to that Partner under this Agreement.
SECTION 5.5. Distributions.
(a) Distributions to Holders of PPIs.
(i) The Partnership shall distribute pro rata on the PPIs an amount such that the cumulative distributions under this Subsection (a)(i) equal the sum of (x) the cumulative United States federal, state and local income taxes imposed on the cumulative excess of the amounts of income allocated to the PPIs under this Agreement that are subject to tax by those jurisdictions over the amounts of tax losses allocated to the PPIs pursuant to this Agreement that, under the laws of the particular jurisdiction, could be carried back or carried over to offset such taxable income by a Bermuda company holding the PPIs that was not engaged in business in the United States otherwise than by being a Partner in the Partnership and (y) the cumulative branch profits taxes imposed with respect to PPIs under Section 884 of the Code. Distributions under this Subsection (a)(i) shall be made prior to the time that the holder of the PPI is required to make payments to the relevant taxing authority.
(ii) Then, on each Scheduled Distribution Payment Date (or, if not a Business Day, the next succeeding Business Day), Distributable Cash Flow and Distributable Capital Proceeds shall be distributed to the holder of each outstanding PPI, until cumulative distributions under this Subsection (a)(ii) give each such holder a cumulative return
-37 - in an amount equal to a cumulative 8% per annum return on the Stated Value of each outstanding PPI; this return shall be computed on the basis of a 360-day year with twelve 30-day months.
(iii) The Committee may determine to pay all or any portion of the amount of the distributions described above in OPIs, under the procedures set forth in Section 1.2 of Schedule C hereto. Cash distributions under this Section (a) shall first be made from Distributable Cash Flow and then from Distributable Capital Proceeds.
(iv) Each holder of a PPI must receive the amount described in Subsection (a)(i) prior to, or contemporaneously with, any distributions with respect to the OPIs and, except for distributions to permit the payment of taxes imposed on the Partners by the jurisdictions in which the Partnership does business, each holder of a PPI must receive the amount described in Subsection (a)(ii) prior to, or contemporaneously with, any other distributions with respect to the OPIs.
(b) Distributions of Remaining Distributable Capital Cash Flow. Distributions of any remaining Distributable Cash Flow shall be made among the Partners holding OPIs in accordance with their Percentage Interests.
(c) Distributions of Remaining Distributable Capital Proceeds. Distributions of any Distributable Capital Proceeds remaining after the distributions set forth above shall be made after making the allocations under Article V through the date of distribution among the Partners holding OPIs in accordance with their Percentage Interests until the Adjusted Capital Account of a Partner with respect to its OPIs is reduced to zero and then in proportion to, and to the extent of, any positive Adjusted Capital Account balances for OPIs held by the other Partners and then, in accordance with Percentage Interests.
(d) Reserves. For any year, the Partnership shall distribute all Distributable Cash Flow, provided that, except as contemplated in the following sentence, without the Consent of the Partners, the Partnership will not establish any reserves more than 10% in excess of the amount of reserves for expenditures contemplated by the Business Plan currently in effect for such period unless the establishment of reserves in a greater amount is required in accordance with generally accepted accounting principles in the United States ("GAAP"), as confirmed in writing by the Partnership's independent accountants, the
-38 - Partnership specifies in writing to the Partners the contingency for which such reserve is required and undertakes to release the reserve at such time as it is no longer required in respect of such contingency. If the Partnership shall seek to establish reserves at a level that exceeds either the 10% or the GAAP level described above and such reserves shall not have been approved by the Consent of the Partners ("Excess Reserve"), the Partnership may require, as a condition to the distribution of such Excess Reserve, the indemnification of the Partnership by each of the Partners for their share of such Excess Reserve by an 18-month surety bond or other instrument or security reasonably acceptable to the Partnership. In order to trigger such indemnification, the Partnership must (1) have itemized the liabilities which prompted its call for the Excess Reserve and (2) existing reserves must be exhausted. Only then and only to the extent necessary may such indemnification be called upon. In any event, the period of such indemnification or the term of any surety bond purchased pursuant to this Section shall not exceed eighteen months.
(e) Prohibited Distributions. No distribution shall be made to a Partner with respect to either a PPI or an OPI under this Section or a payment or redemption under Article I and II of Schedule C hereto, if such distribution or payment would reduce the Adjusted Capital Account for such Partnership Interest to less than zero or such distribution is otherwise prohibited by the Globalstar Credit Agreement or any other applicable indenture or credit agreement that the Partnership may enter into from time to time.
(g) Withholding Taxes. Each Partner authorizes the Partnership to withhold and pay over any withholding or other tax payable by the Partnership as a result of such Partner holding an interest in the Partnership. Such amounts, if withheld from distributions to a Partner, shall be treated as a distribution to the Partner and a payment of the withheld tax by such Partner to the appropriate taxing authorities. In the event that current distributions to GTL or any Limited Partner are not sufficient to cover the withheld tax, the amount withheld in excess of the amount covered by distributions to such Partner shall be a loan to such Partner with respect to whom such withholding has been undertaken and such Partner hereby grants the Partnership a security interest in its entire interest in the Partnership at the time any such loan is made to it to secure the repayment of such loan. Such loans shall bear interest at the rate publicly announced by Chemical Bank from time to time in New York City as its prime rate, shall be compounded monthly, and shall be payable on demand. The Partnership may apply future distributions to
-39 - such Partner against amounts due under the loan. In the event that such excess amounts are withheld on behalf of the Managing General Partner and current distributions to the Managing General Partner are not sufficient to cover the withheld tax, the Managing General Partner shall promptly reimburse the Partnership for the amount of such excess.
In the event that the Internal Revenue Service shall determine that the amount of taxes that should have been withheld with respect to a Partner is in excess of the amount withheld by the Partnership, that Partner shall indemnify the Partnership for the amount of any such shortfall.
SECTION 5.6. Service Provider Agreements. For federal income tax purposes, each Partner will report as its initial tax basis in the rights it acquires under its Service Provider Agreement the Partnership's basis in such rights. The transfer of rights to the Partner shall not be treated as a distribution under Article V and future transactions between the Partnership and that Partner under the Service Provider Agreement shall be treated for purposes of Articles IV and V as if occurring between the Partnership and the Partner acting other than in its capacity as a partner.
SECTION 5.7. Terms of PPIs. The PPIs shall have the additional terms set forth in Schedule C hereto.
SECTION 5.8. Guaranteed Payments. If, as of any Scheduled Distribution Payment Date, there shall have been a GTL Registration Default that remains uncured or a GTL Registration Default that has been cured but with respect to which there remains accrued but unpaid Preferred Stock Liquidated Damages, then, not later than such Scheduled Distribution Payment Date, the Partnership shall pay to GTL an amount that, after United States withholding taxes and branch profits taxes, if any, imposed with respect to such payment, shall equal to the accrued but unpaid Preferred Stock Liquidated Damages. Amounts paid pursuant to this Section 5.8 are intended to constitute guaranteed payments within the meaning of Section 707(c) of the Code and shall not be treated as distributions for purposes of computing GTL's Capital Account.
SECTION 5.9. Allocations Relating to Issue of Partnership Interests. Upon the issue of PPIs, Adjusted Income, Capital Transaction Gain, Capital Transaction Loss, Operating Income, Operating Loss and COD Income will be allocated on a closing of the books method as of the last day of the month in which the PPIs were issued. In all other cases, the allocations
-40 - shall be made using reasonable methods and/or conventions that are permitted under Section 706(d) of the Code as determined by the Managing General Partner.
ARTICLE VI. MANAGEMENT AND OPERATION OF BUSINESS
SECTION 6.1. Management. (a) The Partnership will be managed by the General Partners through the Committee, which will consist of five to seven members, as determined by LQSS. GTL will appoint two members to the Committee and the remaining members will be appointed by LQSS. The members serve on the Committee at the discretion of the General Partner appointing them to the Committee and may be removed and replaced at any time by such General Partner, provided that in the case of GTL's representatives to the Committee, GTL must at all times appoint as representatives GTL Independent Directors. The Committee will be responsible for managing the affairs of Globalstar. The Committee shall have complete and exclusive discretion in the management and control of the affairs and business of the Partnership and shall possess all powers necessary, convenient or appropriate to carrying out the purposes and business of the Partnership; provided however, that the day to day activities of the Partnership will be managed by its officers, subject to the supervision of the Committee. Regular meetings of the Committee shall be held each quarter. Action by the Committee may be taken only with a concurrence of a majority of the members, whether present in person at a meeting or by written consent; provided however, that written notice of any proposed action by the Committee shall be given to all members prior to the taking of any such action, unless waived by any such member. Notwithstanding the foregoing, and any other provision contained in this Agreement, all matters relating to the FCC Applications, compliance with the Communications Act, and all compliance and regulatory matters related thereto will be under the exclusive control of LQP, acting in its capacity as the sole general partner of LQSS. As provided in Section 4.1(b), LQP will use the FCC Applications and any license granted thereunder for the exclusive benefit of the Partnership.
(b) The General Partners shall, through their appointed representatives on the Committee, use their best efforts to carry out the purposes of the Partnership through implementation of the Business Plan and shall devote to the management of the business and affairs of the Partnership such time as shall be required for the operation thereof. Without limiting the generality of the foregoing, the General Partners,
-41 - through their appointed representatives on the Committee, shall be responsible for arranging for the development, design, launch and placement in service of the Globalstar satellite constellation and operations control centers and for ensuring that the Globalstar System will function substantially as anticipated. The General Partners shall be under a fiduciary duty and obligation to conduct the affairs of the Partnership in the best interests of the Partnership and of the Limited Partners, including the safekeeping of all Partnership fund and assets (whether or not in the immediate possession or control of the General Partners) and the use thereof for the exclusive benefit of the Partnership and shall not permit the Partnership to enter into any transactions with any interested Partner on terms less favorable to the Partnership than those which would have been achievable in a transaction negotiated on an arm's length basis. Without delegating the substance of their responsibilities and obligations hereunder, the General Partners may, subject to the provisions of Section 6.2(a), contract or otherwise deal with any Person, including employees of Affiliates of the General Partners, to perform any acts or services for the Partnership as such General Partners shall approve. Notwithstanding any such delegation, the General Partners shall remain liable to the extent provided herein for any action or omission of any such delegee. Any such delegee having access to confidential information shall be deemed to be bound by a confidentiality agreement containing substantially the same terms as Section 15.12 hereof. Without limitation on any power that may be conferred upon it hereunder or by law, and except as hereinafter stated and subject to the limitations in Sections 6.1(a) and 6.2, the Committee shall have the power to authorize the Partnership to:
(i) make and enter into such contracts and incur expenses on behalf of the Partnership, as the Committee deems necessary or appropriate for the efficient conduct and operation of the Partnership's business;
(ii) compromise, submit to arbitration, sue on or defend all claims in favor of or against the Partnership; commence or defend litigation that pertains to the Partnership or any Partnership assets, and arrange for the settlement of any pending or threatened litigation, by or against the Partnership, through compromise, arbitration or otherwise;
(iii) make and revoke any election permitted the Partnership by any taxing authority (having due regard for
-42 - the interests of any Partners that may be adversely affected thereby);
(iv) do all acts the Committee deems necessary or appropriate for the protection and preservation of the Partnership's assets;
(v) make distributions and allocations to the Partners in accordance with Article V hereof;
(vi) designate such officers of the Partnership as authorized signatories with the authority to execute on behalf of the Partnership, any documents or instruments of any kind that the Committee may deem appropriate or advisable to carry out the purposes of the Partnership taking into consideration the terms and conditions of such document or instrument;
(vii) prepare, execute and file federal, state and local income tax returns and pay any taxes on behalf of the Partnership and the Partners;
(viii) make all payments required of the Partnership under the terms of this Agreement, including such payments, fees and reimbursements as the General Partners, or any of their respective Affiliates, may be entitled to receive under the terms of this Agreement;
(ix) contest any determination by the Internal Revenue Service which the Committee deems to be adverse to the best interests of the Partnership;
(x) invest Partnership funds on a temporary basis pending distribution in such investments (other than investments in Affiliates of a General Partner) as the Committee determines appropriate, provided that the Committee shall not invest Partnership funds in such a manner that the Partnership will be considered to be holding itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities or will otherwise be deemed to be an investment company under the Investment Company Act of 1940, as amended;
(xi) employ Persons (including any Affiliate of a General Partner) for the operation and management of the Partnership and engage such other experts and advisers as the Committee may deem necessary or advisable, in each case, on such terms and for such compensation as the Committee may
-43 - determine, (subject, as applicable, to the requirements of Sections 6.1(d), 6.1(e) and 6.2(a));
(xii) borrow money on behalf of the Partnership as the Committee deems necessary or appropriate and in the best interests of the Partnership and make, accept, endorse and execute promissory notes, drafts, bills of exchange and other instruments and evidences of indebtedness in connection therewith and secure the payment of any such Partnership indebtedness by mortgage, pledge or assignment of or security interest in all or any part of the property then owned or thereafter acquired by the Partnership, (subject, as applicable, to the requirements of Sections 4.9 and 4.10); and
(xiii) call a meeting of Partners from time to time as the Committee deems necessary or advisable.
(c) The Committee may delegate any of such foregoing powers and any additional powers conferred upon it under this Agreement or by law to officers of the Partnership; provided however, that transactions involving amounts in excess of $100,000, other than transactions in the ordinary course of business or actions taken to implement any Business Plan previously approved by the Committee, shall require the prior approval of the Committee. Subject to the foregoing provision, the Partners hereby agree that each such authorized officer of the Partnership is authorized to execute, deliver and perform any agreements, acts, transactions and matters in connection with the exercise of power hereunder on behalf of the Partnership without any further act, approval or vote of the Partners or the Partnership, except in connection with acts otherwise prohibited by this Agreement, the Delaware Act or any applicable law, rule or regulation.
(d) The Committee will ensure that the business of the Partnership is conducted under the supervision of a qualified senior executive who shall serve on a full-time basis as the President of Globalstar (with or without the title of Chief Executive Officer) (the "President"). In the event that the President is to be replaced, the Committee will as promptly as practicable seek a qualified replacement, and, prior to offering the position formally to any candidate, will present such candidate, his or her qualifications and proposed compensation and employee benefits arrangements to the Partners, and shall not make any such offer without the Consent of the Partners, provided, that, pending receipt of such consent, and following any failure to obtain the Consent of the Partners to the appointment of any
-44 - candidate for the office of President, the Committee may appoint as interim President an officer or employee of the Partnership (other than any such officer or employee previously rejected by the Partners as President). The Committee shall diligently and in good faith seek out a suitable candidate for such office and shall present such a candidate to the Partners at a Representatives Meeting within two months of such appointment. Prior to terminating the employment of the President, the Committee will call a Representatives Meeting to explain the reasons for such action and to consult with the representatives of the Limited Partners, unless the Committee certifies to the Limited Partners in writing that immediate action is necessary, specifying the exigent circumstances in question.
(e) In addition to the limitations set forth in Section 6.1(d) above, the Committee will not dismiss any officer of the Partnership with a rank of senior vice president or above or appoint any person to serve as an officer of the Partnership with a rank of senior vice president or above, without the consent of at least one GTL Independent Director. If the GTL Independent Directors shall have vetoed the appointment of the Committee's candidate for a position as set forth above, and upon submission by the Committee of a second candidate for such position, shall have also vetoed such candidate, then, notwithstanding the lack of approval by a GTL Independent Director, the Committee shall be authorized to appoint its second candidate to serve in the designated office if it shall have submitted such candidate to the Limited Partners and such selection shall have received the Consent of the Partners. Pending the receipt of the consent required under this Section 6.1(e), the Committee may appoint a person to serve as interim officer of the Partnership (other than any such person previously rejected by the GTL Independent Directors).
SECTION 6.2. Limitations on Authority of Committee and the General Partners. (a) Notwithstanding anything herein to the contrary, the Partnership shall not, after the date hereof, sign or enter into any agreement or agreements between the Partnership and any Partner, any Upper Tier Partner, any direct or indirect corporate parent thereof, any strategic equity investor in SS/L (consisting as of December 31, 1994 of Aerospatiale Societe Nationale Industrielle, Alcatel Espace, Finmeccanica and Daimler-Benz Aerospace AG) or any of their respective Affiliates which, in the aggregate, involve payments or receipts in excess of $1,000,000 unless the terms and conditions thereof have been approved with the Consent of the Disinterested Partners. The Partnership hereby warrants that it has not entered into any such contracts during the period from
-45 - March 23, 1994 to December 31, 1994, except for the agreements itemized in the Subscription Agreements and those contracts set forth on Schedule B hereto, which are hereby authorized and approved and, if required, are consented to. The Partnership shall report to the Partners no less frequently than annually on the terms and conditions of any such contracts that would, but for the $1,000,000 limitation referred to above, require such approval.
(b) Notwithstanding anything herein to the contrary, the Partnership shall not undertake any of the actions specified in this Section 6.2(b) without the Consent of the Partners and in the case of clauses (i) through (vi), will not bring such actions before a vote of the Partners without the consent of at least one GTL Independent Director:
(i) Make any material amendments or modifications to this Agreement, except as otherwise provided in Section 14.1;
(ii) Approve any business plan of the Partnership that would result in any material change in the purpose of the Partnership as set forth in this Agreement or otherwise change the Partnership's business so that it varies materially from the business set forth in this Agreement;
(iii) Acquire (x) a controlling interest in, or a majority of the voting stock or equity of, any corporation or other entity or (y) any other assets not in the ordinary course of business of the Partnership, in either case if the aggregate fair market value thereof is greater than $10 million;
(iv) Sell, lease (as lessor), exchange or otherwise dispose of material assets of the Partnership (other than to a Person controlled by the Partnership); provided, however that in the event of a sale of all or substantially all of the assets of the Partnership (other than to a Person controlled by the Partnership), the Partnership shall distribute the proceeds of such sale to the Partners as soon as practicable thereafter;
(v) Except as provided in Section 6.13 hereof, cause or permit the dissolution and/or liquidation of the Partnership;
(vi) Take any action for the (A) commencement of a voluntary case under any applicable bankruptcy, insolvency
-46 - or similar law now or hereafter in effect, (B) consent to the entry of any order for relief in an involuntary case under any such law to the extent that the giving or withholding of such consent is within the Partnership's discretion, (C) consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of it or of any substantial part of its property or (D) making by it of a general assignment for the benefit of creditors;
(vii) Initiate or settle any litigation, arbitration or other proceeding if such litigation, arbitration or other proceeding is against, or names as an adverse party, a Partner;
(viii) Enter into any material business outside the scope contemplated in this Agreement;
(ix) Commence any litigation or arbitration that pertains to the Partnership or any Partnership assets, or arrange for the settlement of any pending or threatened litigation, by or against the Partnership, through compromise, arbitration or otherwise if the damages claimed for such lawsuit or arbitration shall exceed $100,000; or
(x) Adopt any modification to the System Specification that would change any major parameter by more than 10% of the amount set forth in the System Specification or otherwise result in a material adverse effect on any Service Provider and the Partnership shall give the Limited Partners reasonable notice of any such proposed modification.
(c) Notwithstanding the foregoing, in the event that any of the decisions set forth in paragraph (b) above would result in the Partnership being engaged in a business entirely unrelated to that disclosed in the Descriptive Memorandum, such actions shall require the prior, written consent of all the Partners.
(d) Unless it shall have received the prior consent of the affected Partner or Partners, the Partnership shall not enter into contracts or agreements with any Person or Persons which conflict with or prejudice in any material respect the rights of any Partner under (i) the provisions of this Agreement or (ii) any contract or agreement between the Partnership and a Partner or its Affiliates except as otherwise disclosed in the Subscription Agreement. LQSS warrants that neither it nor the Partnership has entered into any such contract or agreement as of December 31, 1994 without such consent.
-47 - (e) The Partnership shall submit to the Partners for their review and comment the material elements of its proposed launch strategy for the Globalstar System, including the selection of launch vehicles, cost, and risk allocation (including issues of space risk management and related insurance coverage and self-insurance), and shall consider in good faith any alternative launch strategies proposed by any Partner. If the Partnership's proposed strategy does not obtain the Consent of the Partners, the Partnership shall promptly undertake a detailed review of such strategy, especially addressing any particular issues identified by the dissenting Partner representatives, and analyze any alternative launch strategies proposed by any of them, and shall not undertake any material commitments with respect to its launch strategy until it has made a written report to the Partners of the results of such review, and called a Representatives Meeting to discuss such report.
(f) Any decision on the part of the Committee not to undertake either action set forth below shall require the consent of a Majority in Interest of the Partners: (i) construction and launch of additional first-generation satellites, or in the event a second or subsequent generation constellation has been launched, additional second generation or subsequent generation satellites, as the case may be, that can be financed by the Partnership without additional Capital Contributions from its Partners, if such satellites are anticipated to produce a compound return on investment of 25% per annum or more or (ii) the design, development, construction and launch of a second or subsequent generation satellite constellation that can be financed by the Partnership without additional Capital Contributions from its Partners if such system is anticipated to produce a rate of return on investment greater than the rates applicable to 30-year U.S. Treasury obligations.
The Partnership shall give each Partner prompt written notice of any decision not to launch a second or subsequent generation of satellites at least 48 months in advance of the termination or significant degradation of service from the satellite constellation then in operation, and will discuss any such decision with the CSO within a period of two months after such notification.
(g) The Partnership shall give notice of a proposed action calling for the Consent of the Partners, the Consent of the Disinterested Partners, or the consent of a Majority in Interest of the Partners or such other matters requiring the action of Partners as set forth herein or pursuant to the Subscription Agreements. The Partnership shall give such notice to each of the
-48 - Partners in the manner set forth in Section 15.1 hereto as soon as practicable but in no event less than 15 days prior to the date called for a meeting of senior management representatives (the "Representatives") of the Partners (a "Representatives Meeting") regarding such proposal.
The quorum for a Representatives Meeting shall be as follows: (x) with respect to a matter requiring the Consent of the Partners or a Majority in Interest of the Partners, Representatives present in person, by proxy or written consent, representing a majority of the Partnership Interests outstanding and (y) with respect to a matter requiring Consent of the Disinterested Partners, Representatives present in person, by proxy or written consent, representing a majority of the Partnership Interests outstanding held by the disinterested Partners. Each Partner (in the case of a matter requiring the Consent of the Partners or the consent of a Majority in Interest of the Partners) or each disinterested Partner (in the case of a matter requiring the Consent of the Disinterested Partners) (and in all cases other than a Delinquent Partner), shall have the right to designate one Representative to attend each Representatives Meeting, who will have the right to cast at the meeting a number of votes equal to the number of Partnership Interests such Partner holds, provided that LQSS shall in all instances vote in accordance with Section 6.4 of the LQSS Partnership Agreement, or, in lieu of voting in such a manner, may assign any Upper Tier Partner the right to designate a Representative to cast at the Representatives Meeting a number of votes equal to the number of Partnership Interests LQSS's Representative is required to cast on its behalf in accordance with such Section 6.4, provided, however, that in no event shall such votes exceed the total number of Partnership Interests held by LQSS. In the event of such an assignment, the Upper Tier Partners' Representatives shall have the same right to attend and vote at Partners' meetings as Representatives of Partners in the Partnership.
SECTION 6.3. Change of Control and Reduction in Interest. (i) For purposes of this Section 6.3, "GTL Change of Control" shall mean an event or series of events not approved either by the Managing General Partner or by the Consent of the Partners, at a time when GTL owns less than 50% of the Partnership Interests outstanding, by which (i) any "person" or "group" (as such terms are defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 30% of the GTL Common Stock then outstanding, (ii) GTL consolidates with
-49 - or merges into another corporation or conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates with or merges into GTL, in either event pursuant to a transaction in which the outstanding GTL Common Stock is changed into or exchanged for cash, securities or other property, other than any transaction (A) between GTL and either Loral SpaceCom, an Affiliate of Loral SpaceCom or a wholly-owned subsidiary of Loral SpaceCom or (B) after which the shareholders who beneficially owned GTL Common Stock immediately before such transaction beneficially own at least 50% of the outstanding voting stock of the surviving entity and no Person beneficially owns more than 30% of the outstanding voting stock of the surviving entity, (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of GTL (together with any new directors whose election by the Board of Directors or whose nomination for election was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office, or (iv) GTL makes on any day any distribution or distributions of cash, property or securities (other than regular dividends, common stock or rights to acquire common stock) to its shareholders, or purchases or otherwise acquires GTL Common Stock, and the sum of the fair market value of such distribution or purchase, plus the fair market value of all other such distributions and purchases which have occurred during the preceding twelve months, exceeds 30% of the fair market value of GTL Common Stock outstanding.
(b) A "Reduction in Interest" shall have occurred upon the sale or other disposition of Partnership Interests by GTL after which GTL's Percentage Interest is reduced to less than 5% and such reduction was not previously approved either by the Managing General Partner or by the Consent of the Partners.
(c) Upon a GTL Change of Control or a Reduction in Interest, GTL will become a Limited Partner and will lose all of its rights as a General Partner under this Agreement, including the right to appoint representatives to serve on the Committee and, through the GTL Independent Directors, to veto certain actions of the Partnership. The Committee will thereby dissolve and all actions previously authorized to be taken by the Committee will thereupon be taken by the Managing General Partner as the sole General Partner. In addition, upon a GTL Change of Control or a Reduction in Interest, any PPIs then held by GTL would automatically
-50 - convert into preferred limited partnership interests and any OPIs then held by GTL would automatically convert into limited OPIs. GTL's preferred limited partnership interests will have the same terms as the PPIs except that they will convert into, and payments of any OPIs with respect thereto, would be made in limited OPIs rather than general OPIs.
SECTION 6.4. Certificate of Limited Partnership. The Partnership has filed the Certificate of Limited Partnership with the Secretary of State of the State of Delaware as required by the Delaware Act and shall file such other certificates or documents as may be deemed by the Partnership to be reasonable and necessary or appropriate for the formation or qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business. To the extent that the Committee in its discretion determines such action to be reasonable and necessary or appropriate and to the extent consistent with this Agreement, the Committee shall file amendments to the Certificate of Limited Partnership and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware or any other state in which the Partnership may elect to do business.
SECTION 6.5. Reliance by Third Parties. Notwithstanding any other provision of this Agreement to the contrary, no lender or purchaser, including any purchaser of property from the Partnership or any other Person dealing with the Partnership, shall be required to look to the application of proceeds hereunder or to verify any representation by the Managing General Partner as to the extent of the interest in the assets of the Partnership that the Managing General Partner is entitled to encumber, sell or otherwise use, and any such lender or purchaser shall be entitled to rely exclusively on the representations of the Managing General Partner as to its authority to enter into such financing or sale arrangements and shall be entitled to deal with the Managing General Partner as if it were the sole party in interest therein, both legally and beneficially. In no event shall any Person dealing with the Managing General Partner or the Managing General Partner's representative with respect to any business or property of the Partnership be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of the Managing General Partner or the Managing General Partner's representative; and every contract, agreement, deed, mortgage, security agreement, promissory note or other instrument or document executed by the Managing General Partner or the Managing
-51 - General Partner's representative with respect to any business or property of the Partnership shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and/or delivery thereof this Agreement was in full force and effect, (b) such instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Partnership, and (c) the Managing General Partner or the Managing General Partner's representative was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Partnership.
SECTION 6.6. Compensation, Expenses and Reimbursement of General Partners. (a) Commencing from and after the time in which Globalstar receives revenue from Usage Fees, the Partnership shall pay to the Managing General Partner in cash for each quarter during the period the Partnership is in existence, as payment in connection with services rendered by the Managing General Partner, compensation equal to 2.5% of the Partnership's gross operating revenue up to $500 million per annum, based upon revenues through the end of the quarter in question plus 3.5% of the Partnership's gross operating revenue in excess of $500 million per annum (the "Management Fee"). All quarterly payments are subject to adjustment based on year-end audit. The Management Fee shall be paid quarterly during each In-Service Year, provided that for any In-Service Year in which there is a net loss to the Partnership computed under GAAP, the Management Fee shall be reduced by 50% and the Managing General Partner will reimburse the Partnership for Management Fee payments, if any, received in any prior quarter of such In- Service Year, sufficient to reduce its Management Fee by 50%. To the extent the year-to-date result through the first, second or third quarter of an In-Service Year is a net loss, no Management Fee will be paid with respect to such quarter to the extent it would (together with any Management Fee payments with respect to any earlier quarter in such In-Service Year) exceed 50% of the Management Fee otherwise payable (but for such net loss). No further Management Fee payments shall be required to be paid after the date that distribution of all of the Partnership's assets to the Partners has been completed. In any quarter in which the Partnership would report negative cash flow from operations if the Management Fee for such quarter is paid in full in cash, payment of the Management Fee (or such lesser portion thereof as shall equal the amount of such negative cash flow) shall be deferred with interest at a rate equal to 4% per annum and shall be payable at such time as the Partnership shall have sufficient cash flow. No
-52 - Management Fee or other compensation shall be owing to GTL in connection with its services as a General Partner.
(b) All expenses incurred in connection with the organization of the Partnership (other than expenses borne by LQSS or any Upper Tier Partner for which capital contribution credit is received pursuant to Section 4.1) will be borne by the Partnership and, to the extent not otherwise allocated by Article V, charged to the Partners' Capital Accounts according to their Percentage Interests. Such expenses, including legal and investment banking fees, are approximately $3,728,000.
(c) The General Partners shall be reimbursed on a monthly basis for all fair and reasonable expenses they incur or make on behalf of the Partnership (including amounts paid to any Person to perform services for the Partnership or the General Partners or who is an employee of the Partnership or the General Partners). Such reimbursement shall be in addition to any reimbursement to a General Partner as a result of indemnification pursuant to Section 6.10 hereof, but shall only be in respect of reasonable out-of-pocket expenses incurred solely on behalf of Globalstar, and shall not include any amounts in respect of compensation of persons who are officers, directors or employees of GTL, the Upper Tier Partners or their Affiliates or any other corporate overhead of such persons.
SECTION 6.7. Outside Activities. (a) Subject to Section 6.7(b), each Partner agrees, subject to the requirements of applicable law, that the Partners and their respective subsidiaries, partners, associates, employees, Affiliates and agents may engage in other business activities or possess interests in other business activities of every kind and description, independently or with others, except that no Partner or any of its subsidiaries or Affiliates shall possess an interest, directly or indirectly, in any business activity operating Similar Satellite Service until the earlier of (i) the third anniversary of the date such Partner (including its Affiliates) ceases to be a Partner of the Partnership, (ii) the beginning of the third In-Service Year and (iii) the date 183 days following the date that such Partner (including its Affiliates) ceases to be or have equity interest in a Service Provider; provided, however, that (i) a passive investment representing not more than 5% of the equity securities of a company in direct competition with the Partnership whose equity securities are listed on a nationally recognized securities exchange or (ii) the sale or provision of goods or services (except as may otherwise be specifically agreed to between the Partnership and the Partner) in the ordinary course of business
-53 - of a Partner or its Affiliates shall not violate this provision. For purposes of this Section 6.7, governmental and military systems and satellite systems such as OmniTRACS or Euteltracs, and, insofar as France Telecom is concerned, intergovernmental systems, such as INMARSAT and EUTELSAT, and their respective logical extensions, shall not be considered Similar Satellite Service. This paragraph may not be amended without the consent of TESAM. ChinaSat and its Affiliates, as Chinese government entities, shall not be subject to this Section 6.7(a).
(b) The General Partners shall not engage in any business other than management of the business and affairs of the Partnership, and shall not own any assets other than Partnership Interests, Partnership capital contributions and distributions, and related assets, without the Consent of the Disinterested Partners.
(c) The General Partners shall not, and shall not permit any of their respective Affiliates, including SS/L, to, act as prime contractor or systems integrator for any Similar Satellite Service.
SECTION 6.8. Partnership Funds. The funds of the Partnership shall be deposited in such account or accounts as are designated by the Partnership and shall not be commingled with any other funds. All withdrawals from or charges against such accounts shall be made by duly authorized officers or agents of the Partnership. Funds of the Partnership may be invested as determined by the Committee, except in connection with acts otherwise prohibited by this Agreement.
SECTION 6.9. Loans from the General Partners. A General Partner or any Affiliate of the General Partner may lend to the Partnership funds needed by the Partnership for such periods of time as the General Partner may determine; provided, however, that such loan is approved in advance with the Consent of the Disinterested Partners. The Partnership shall reimburse the General Partner or its Affiliate, as the case may be, for any additional costs incurred by the General Partner or such Affiliate in connection with the borrowing of funds obtained by the General Partner or such Affiliate and loaned to the Partnership.
SECTION 6.10. Indemnification of Partners. (a) The Partnership shall indemnify and hold harmless the Partners, the Upper Tier Partners, their respective Affiliates, and all of their respective officers, directors, partners, controlling shareholders, employees, and agents (individually, an
-54 - "Indemnitee"), from and against any and all losses, claims, demands, costs, damages, liabilities, joint and several, expenses of any nature (including attorneys' fees and disbursements), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which an Indemnitee may be involved, or threatened to be involved, as a party or otherwise ("Losses"), arising out of or incidental to the business of the Partnership, regardless of whether an Indemnitee continues to be a Partner, an Affiliate, or an officer, director, partner, controlling shareholder, employee, or agent of a Partner or of an Affiliate at the time any such Loss is paid or incurred, if the Indemnitee's conduct did not constitute actual fraud, gross negligence, knowing breach of specific provisions of this Agreement or willful or wanton misconduct. The termination of any action, suit, or proceeding by settlement or upon a plea of nolo contendere, or its equivalent, shall not, in and of itself, create a presumption or otherwise constitute evidence that the Indemnitee's actions constituted actual fraud, gross negligence or willful or wanton misconduct.
(b) Expenses (including legal fees and expenses) incurred in defending any proceeding subject to subsection (a) of this Section 6.10 shall be paid by the Partnership in advance of the final disposition of such proceeding upon receipt of an undertaking (which need not be secured) by or on behalf of the Indemnitee to repay such amount if it shall ultimately be determined, by a court of competent jurisdiction or otherwise, that the Indemnitee is not entitled to be indemnified by the Partnership as authorized hereunder.
(c) The indemnification provided by this Section 6.10 shall be in addition to any other rights to which each Indemnitee may be entitled under any agreement or vote of the Partners, as a matter of law or otherwise, both as to action in the Indemnitee's capacity as a Partner or as a partner, controlling shareholder, officer, director, employee or agent of a Partner, or as to action in the Indemnitee's capacity as a Person serving at the request of the Partnership as set forth above, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns, administrators and personal representatives of the Indemnitee. Such indemnification, however, shall only apply to Losses incurred by virtue of the Indemnitee's status as a Partner, the Upper Tier Partner, Affiliate or officer, director, partner, controlling shareholder, employee or agent thereof, and not as to Losses incurred in other capacities (for example, by virtue of being a Service Provider or otherwise contracting with the Partnership).
-55 - (d) The Partnership may purchase and maintain insurance on behalf of any one or more Indemnitees and other such Persons as the Partnership shall determine against any liability which may be asserted against or expense which may be incurred by such Person in connection with the Partnership's activities, whether or not the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.
(e) Any indemnification hereunder shall be satisfied only out of the assets of the Partnership and no Partner shall be subject to personal liability by reason of these indemnification provisions.
(f) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.10 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.
(g) The provisions of this Section 6.10 are for the benefit of the Indemnitees and the heirs, successors, assigns, administrators and personal representatives of the Indemnitees and shall not be deemed to create any rights for the benefit of any other Persons.
(h) Any Person that proposes to assert the right to be indemnified under this Article VI shall, promptly after receipt of notice of any action which is subject to indemnification hereunder, notify the Partnership of the commencement of such action, enclosing a copy of all papers served. The failure so to notify the Partnership of any such action shall not relieve it from any liability that it may have to any indemnified party hereunder, unless such party is prejudiced thereby. In case any such action shall be brought and notice given to the Partnership of the commencement thereof, the Partnership shall be entitled to participate in, and to assume the defense thereof, with counsel reasonably satisfactory to the indemnified party, and after notice from the Partnership to such indemnified party of its election so to assume the defense thereof, the Partnership shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party at the request of the Partnership in connection with the defense thereof. The indemnified party shall have the right to employ separate counsel and to participate in (but not control) any such action, but the fees and expenses of such counsel shall be the expense of such indemnified party unless (i) the employment of
-56 - counsel by such indemnified party has been authorized by the Partnership, (ii) the employment of separate counsel is necessitated by a conflicting interest among indemnified parties, or (iii) the Partnership shall not in fact have employed counsel to assume the defense of such action. In each such case, the fees and expenses of counsel shall be at the expense of the Partnership. The Partnership shall not be liable for any settlement of any action or claims effected without its written consent unless the Partnership has failed to assume the defense of any such action or claims.
SECTION 6.11. Liability of General Partners. (a) The General Partners, the Upper Tier Partners and their respective Affiliates and all officers, directors, partners, controlling shareholders, employees and agents of the General Partners, the Upper Tier Partner and their respective Affiliates shall not be liable to the Partnership or to the Limited Partners for any losses sustained or liabilities incurred as a result of any act or omission of the General Partners, their Affiliates or any such officers, directors, partners, controlling shareholders, employees or agents if (i) the General Partner, such Affiliate, or such officer, director, partner, controlling shareholder, employee or agent acted in good faith and in a manner it or he reasonably believed to be in, or not opposed to, the best interests of the Partnership, and (ii) the conduct of the General Partner, such Affiliate or such officer, director, partner, shareholder, employee or agent did not constitute gross negligence or Nonperformance. For purposes of this Agreement, any act or omission, if done or omitted to be done in reliance upon the advice of legal counsel or public accountants (the "Professionals") selected with reasonable care, will be conclusively presumed to have been done or omitted to be done in good faith and not to constitute willful or wanton misconduct, gross negligence or Nonperformance; provided, however, that the reliance was reasonable and the General Partner had disclosed all relevant facts to the Professionals.
(b) Each General Partner shall fully indemnify and hold harmless the Limited Partners and their Affiliates and their respective partners, officers, directors, employees and agents to the fullest extent permitted by law from and against any and all losses, claims, demands, costs, damages, liabilities (joint or several), expenses of any nature (including attorney's fees and disbursements), judgments, fines, settlements and other amounts including, but not limited to, those arising directly or indirectly from or relating to any civil, criminal, administrative or investigative proceeding, arising out of or incidental to conduct by such General Partner or one of its Affiliates with
-57 - respect to the business or activities of or relating to the Partnership which constituted bad faith, gross negligence or Nonperformance. The obligations of a General Partner under this Section 6.11 shall extend only to its own acts or omissions or acts or omissions by one of its Affiliates and not with respect to acts or omissions of the other General Partner or its Affiliates. For purposes of the preceding sentence, actions by the Committee shall be deemed to be actions of LQSS only. GTL shall not be deemed to be an Affiliate of LQSS and LQSS shall not be deemed to be an Affiliate of GTL, for purposes of this Section 6.11(b) with respect to any action determined solely by directors who are not employed by, or otherwise affiliated with Loral SpaceCom.
SECTION 6.12. Other Matters Concerning the General Partners. (a) Each General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.
(b) A General Partner may consult with legal counsel, Service Providers, and other consultants and advisers selected by it, and any advice of such Person as to matters which the General Partner believes to be within such Person's professional experience shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by the General Partner hereunder in good faith and in accordance with such advice. Any such Person receiving confidential information shall be deemed to be bound by a confidentiality agreement containing substantially the same terms as Section 15.12 hereof.
SECTION 6.13. Conversion to Corporate Form. (a) In the event that the Committee shall determine that it is desirable or helpful for the business of the Partnership to be conducted in a corporate rather than in a partnership form, the Committee may incorporate the Partnership or take such other action as it may deem advisable in light of such changed conditions, including, without limitation, dissolving the Partnership, provided that, the Committee may not incorporate the Partnership without the Consent of the Partners. In connection with any such incorporation of the Partnership, the Partners shall receive, in exchange for their Partnership Interests, shares of capital stock of such corporation having the same relative rights and preferences as to dividends and distributions and the same voting and transfer rights, subject in each case to any modifications required solely as a result of the conversion to corporate form (all such rights and preferences being referred to, collectively,
-58 - as "Equity Rights"), as are set forth in this Agreement as among the holders of interests in the Partnership.
(b) Prior to taking any such action to incorporate the Partnership, the Committee shall submit to the Partners the proposed forms of a certificate or articles of incorporation, by-laws, shareholders' agreement and any other governing documents proposed to be established for such corporation (the "Governing Documents"). If Limited Partners holding Partnership Interests representing at least 20% (or 15% in the event GTL becomes a Limited Partner pursuant to Section 6.3 hereof) of the total number of outstanding Partnership Interests held by all Limited Partners (not including any Partnership Interest held by LQSS or its Affiliates) notify the Committee within 15 days of the date the proposed forms of Governing Documents are submitted to the Limited Partners that they have concluded in good faith that, based upon such Governing Documents, the shares of capital stock of such corporation proposed to be issued to them in exchange for such Partnership Interests do not have the same Equity Rights as are set forth in this Agreement, the Committee and such Limited Partners shall negotiate in good faith to resolve any differences with respect thereto. If the Committee and such Limited Partners do not resolve such differences, the Committee may appoint an investment banking firm of internationally recognized standing reasonably acceptable to such Limited Partners to advise the Partnership as to such dispute, and the conclusion of such firm shall be binding on the parties, and any modification recommended by such investment banking firm in the Equity Rights shall be incorporated into the Governing Documents. Nothing contained herein shall be construed to give the Limited Partners any right to cause the business of the Partnership to be conducted in corporate form or to limit the right of the Committee to elect, at any time, to continue such business as a partnership.
SECTION 6.14. FCC Compliance. The Partners hereby understand, agree and acknowledge that the rights described in Section 4.1(b)(i) of this Agreement are subject to the Communications Act, and the rules and regulations promulgated thereunder.
ARTICLE VII. RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
SECTION 7.1. Limitation of Liability. No Limited Partner shall be personally liable for any debts, liabilities or obligations of the Partnership, whether to the Partnership, to the General Partners, or to creditors of the Partnership, beyond
-59 - the amount contributed by such Limited Partner to the capital of the Partnership and such Limited Partner's share of the accumulated but undistributed profits of the Partnership and the amount of any distribution (including the return of any Capital Contribution) made to such Limited Partner that must be returned to the Partnership pursuant to applicable state law. The General Partners shall use reasonable efforts, in the conduct of the Partnership's business, to put all Persons with whom the Partnership does business on notice that the Limited Partners and their Affiliates are not liable for Partnership obligations, and all material agreements to which the Partnership is a party shall include a statement to the effect that the Partnership is a limited partnership organized under the laws of Delaware.
SECTION 7.2. Management of Business. The Limited Partners shall not take part in the operation, management or control (within the meaning of the Delaware Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. No Limited Partner has the right to require the partition of Partnership property or compel any sale or appraisal of Partnership assets or sale of a deceased Partner's interest therein.
ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1. Records and Accounting. The Partnership shall keep or cause to be kept appropriate books and records with respect to the Partnership's business, which books shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, books of account and records of Partnership proceedings, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so kept are convertible into clearly legible written form within a reasonable period of time. The records and books of account of the Partnership will be audited as of the end of each Fiscal Year by Deloitte & Touche LLP ("Deloitte & Touche"). In the event the Partnership shall seek to replace Deloitte & Touche, the Partnership shall select as Deloitte & Touche's successor independent certified public accountants of recognized international standing (other than the principal auditors of Loral SpaceCom or Qualcomm), provided that such choice may be disapproved once, but only once, by a vote requiring the Consent of the Partners, and thereafter such accountants may be selected
-60 - by the Partnership in its sole discretion (other than the principal auditors of Loral SpaceCom or of Qualcomm).
SECTION 8.2. Fiscal Year. The fiscal year (the "Fiscal Year") of the Partnership shall be the calendar year, unless otherwise determined by the Partnership in its sole discretion.
SECTION 8.3. Reports and Annual Meeting. (a) As soon as practicable, but in no event later than 90 days after the close of each fiscal year, the Partnership shall deliver to the Partners reports containing financial statements of the Partnership for the fiscal year, presented in accordance with GAAP, including a balance sheet, a statement of income, a statement of Partners' equity and a statement of changes in cash flow, such statements to be audited by the firm of independent certified public accountants selected in accordance with Section 8.1.
(b) As soon as practicable, but in no event later than 45 days after the close of each calendar quarter, including the last calendar quarter of each fiscal year, the Partnership shall deliver to the Partners a quarterly report containing a balance sheet and statements of income and changes in financial position for such calendar quarter.
(c) In addition to any meetings of the Partners called pursuant to Section 6.1(b)(xiii) or any Representatives Meeting called pursuant to Section 6.2(g), the Partnership shall hold an annual meeting of the Partners ("Annual Meeting") on fifteen (15) days prior written notice to the Partners, such Annual Meeting to be held no sooner than thirty (30) days and no later than sixty (60) days after delivery to the Partners of the annual financial statements for the preceding fiscal year pursuant to Section 8.3(a). At the Annual Meeting, officers of the Partnership will review the operations of the Partnership during the preceding year, discuss the plans and operating budget for the current year and any amendments to the Business Plan and answer whatever questions may be raised by representatives of the Partners at the Annual Meeting.
SECTION 8.4. Disclosure to Limited Partners. (a) The Limited Partners shall have full access to all financial and other information directly related to the business and affairs of the Partnership. In particular, the following will be open for examination, by any Limited Partner or his duly authorized representatives:
-61 - (i) books and records pertaining to the Partnership's business showing all of its assets and liabilities, receipts and disbursements, realized profits and losses, and all transactions (including all contracts and commitments) entered into by the Partnership;
(ii) a current list of the full name and last known mailing address of each Partner set out in alphabetical order, together with a list showing the Capital Contributions and Capital Account of each Partner;
(iii) a copy of the Certificate of Limited Partnership and all amendments to it, together with executed copies of any powers of attorney pursuant to which the Certificate and any amendments to it have been executed;
(iv) copies of all the Partnership's U.S. Federal, state, local and foreign income tax returns and reports, if any; and
(v) copies of this Agreement as may be amended from time to time.
(b) The Partnership shall make available, on a reasonable basis, its financial officers and auditors to the Limited Partners for consultation and to respond to questions of the Limited Partners relating to the financial condition of the Partnership. The Partnership will prepare and mail to each Limited Partner promptly upon the request of any Limited Partner such further information concerning the business, affairs and financial conditions of the Partnership, as any Limited Partner may reasonably request.
(c) Notwithstanding the provisions set forth in this Section 8.4, the Partnership may keep confidential from the Limited Partners for a period of time deemed reasonable by it information (excluding any matters required to be disclosed pursuant to Section 8.3 or clause (ii)-(v) of Section 8.4) to the extent the Partnership, in good faith, determines (i) that disclosure is not in the best interests of the Partnership, (ii) that disclosure could damage the Partnership or its business or (iii) that the Partnership is required by law or by a third party to keep the information confidential.
SECTION 8.5. Determination of Book Value of Partnership Assets. (a) Except as set forth below, Book Value of any Partnership asset is its adjusted basis for federal income tax purposes.
-62 - (a) The initial Book Value of any assets contributed by a Partner to the Partnership shall be the gross fair market value of such assets. The Book Value of property and property rights contributed by LQSS and described in Section 4.1(b)(i) and (ii) shall be the amount allocated to them pursuant to Section 4.1(b).
(b) The Book Values of all of the Partnership's assets shall be adjusted by the Partnership to equal their respective gross fair market values as of the following times: (a) the admission of a new Partner to the Partnership or acquisition by an existing Partner of an additional interest in the Partnership from the Partnership (including the acquisition of PPIs as set forth in Section 4.1(d)); (b) the distribution by the Partnership of money or property to a withdrawing, retiring or continuing Partner in consideration for the retirement of all or a portion of such Partner's interest in the Partnership; and (c) the termination of the Partnership for Federal income tax purposes pursuant to section 708(b)(1)(B) of the Code; provided, however, that no adjustment shall be made upon the issue of an OPI pursuant to Section 5.5(a)(iii) or Section 1.2(b) of Schedule C. The Partnership will not be required to make an adjustment upon the exercise of a warrant to acquire an OPI or upon a conversion of a PPI pursuant to Article III of Schedule C until the sum of the cumulative face amount of PPIs converted and the exercise price of warrants exercised since the last adjustment exceeds $15,000,000. In such case, the Partnership shall make at least one adjustment during the year and, if no other adjustment event occurs during the year and after the $15,000,000 threshold was reached, a required adjustment shall be made as of the date of the last PPI conversion or warrant exercise during the year. Upon a conversion of a PPI and an adjustment to the Book Values of Partnership assets under this Section, any resulting Capital Transaction Loss shall be first allocated to holders of OPIs whose Adjusted Capital Accounts are higher than the Adjusted Capital Accounts of the OPIs acquired on exercise of a warrant or on conversion in amounts and proportions to reduce the differences between such Adjusted Capital Accounts and any resulting Capital Transaction Gain shall first be allocated to the Capital Account of the OPIs acquired on exercise of a warrant and on conversion in an amount to reduce or eliminate the amount by which the Adjusted Capital Accounts for such OPIs are less than the Capital Account for the outstanding OPI with the highest Adjusted Capital Account. Any remaining Capital Transaction Gain or Loss shall be allocated under Section 5.1. The Partnership will promptly report any such adjustment to the Partners.
-63 - ARTICLE IX. TAX MATTERS
SECTION 9.1. Preparation of Tax Returns. (a) The Partnership shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items necessary for federal and state income tax purposes. The Partnership shall use all reasonable efforts to furnish to the Partners within 90 days of the close of the taxable year the tax information reasonably required for federal, state and foreign income tax reporting purposes. Subject to the provisions of Section 9.2, the classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes, to the extent permitted by applicable law. The taxable year of the Partnership shall be the calendar year, unless otherwise required by the federal income tax laws and the Treasury Regulations thereunder or unless otherwise determined by the Partnership.
(b) The Partnership will prepare the state and local tax returns for those non-U.S. Limited Partners who are not otherwise engaged in business in the United States.
SECTION 9.2. Tax Elections. Except as otherwise provided herein, the Partnership shall, in its sole discretion, determine whether to make any available election, including but not limited to an election under Code Section 709 to amortize organization and start-up expenditures over a sixty month period, and an election under Code Section 754 to adjust the bases of Partnership property with respect to the Partnership or with respect to a transferee Partner. In the event a Section 754 election is made, the Partnership may in its sole discretion charge transferees for the additional costs incurred in preparing their tax information under such election.
SECTION 9.3. Tax Controversies. Subject to the provisions hereof, the Managing General Partner is designated the Tax Matters Partner (as defined in Section 6231 of the Code), and is authorized and required to represent the Partnership (at the Partnership's expense) in connection with all examinations of the Partnership's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. The Partners agree to cooperate with the Managing General Partner and to do or refrain from doing any or all things reasonably required by the Managing General Partner to conduct such proceedings, provided that the foregoing shall not be
-64 - construed to prevent a Partner from taking steps reasonably necessary to protect and defend its own interests.
SECTION 9.4. Taxation as a Partnership. No election shall be made by the Partnership or any Partner for the Partnership to be excluded from the application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of the Code or from any similar provisions of any state tax laws.
ARTICLE X. TRANSFER OF INTERESTS
SECTION 10.1. Transfer. (a) The term "transfer," when used in this Article X with respect to a Partnership Interest, includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition; provided however, that an exchange of Partnership Interests by LQSS or the Limited Partners pursuant to the terms of the Exchange and Registration Rights Agreement shall not, other than with respect to Section 10.4(c) hereof, be deemed to be a "transfer" for purposes of this Article X.
(b) Any Partnership Interest may be transferred, in whole or in part, provided that such transfer shall be made, where applicable, in accordance with the terms and conditions set forth in this Article X. Any transfer or purported transfer of any Partnership Interest not made in accordance with this Article X shall be null and void.
(c) Notwithstanding anything contained herein to the contrary, no transfer of a Partnership Interest may be made if such transfer (i) would violate the then applicable federal or state securities laws or rules and regulations of the Securities and Exchange Commission, state securities commissions, the Communications Act, or rules and regulations of the FCC and any other government agencies with jurisdiction over such transfer or (ii) would affect the Partnership's existence or qualification under the Delaware Act. In the event a transfer of a Partnership Interest is otherwise permitted hereunder, notwithstanding any provision hereof, no Partner shall transfer all or any portion of such Partner's Partnership Interest unless and until such Partner, upon the request of the Partnership, delivers to the Partnership an opinion of counsel, addressed to the Partnership, reasonably satisfactory to the Partnership, to the effect that (1) such Partnership Interest has been registered under the Securities Act and any applicable state securities laws, or that the proposed transfer of such Partnership Interest is exempt from any
-65 - registration requirements imposed by such laws and that the proposed transfer does not violate any other applicable requirements of federal or state securities laws and (2) that such transfer will not adversely affect the tax status of the Partnership. Such opinion shall not be deemed delivered until the Partnership confirms to such Partner that such opinion is acceptable, which confirmation will not be unreasonably withheld.
(d) For so long as the Exchange Right is in effect, each of the Partners hereby agrees that it will not (i) make a public offering of its Partnership Interests, or (ii) transfer any of their Partnership Interests to a Person, other than to GTL, if (x) such Partnership Interests would constitute all or substantially all of the assets of such transferee and (y) the purpose of the transfer is to enable the transferee Person make a public offering of its equity interests.
SECTION 10.2. Transfer of Interests of General Partners. (a) Subject to Section 12.1 hereof, a General Partner shall not transfer all or any part of its Partnership Interests without the Consent of the Disinterested Partners; provided, that a transfer by GTL is further subject to the provisions of Section 6.3 hereof. A General Partner may transfer any or all of its Partnership Interests to an Affiliate of the General Partner ("Affiliate Successor") without such approval; provided however, that in the case of GTL, GTL may transfer only to an Affiliate that is 100% owned by GTL and any such transfer shall be subject to the consent of the Managing General Partner, which consent may be granted or withheld in the Managing General Partner's sole discretion. Such transfer to an Affiliate Successor shall not relieve the General Partner of any of its obligations hereunder unless the Affiliate Successor has been adjudged by the Consent of the Disinterested Partners (which consent shall not be unreasonably withheld) to be a Person that has at least such comparable financial strength and technical and managerial capabilities and know-how sufficient for it to perform its duties and obligations hereunder. The Partners hereby consent to any such approved transfer or any transfer to an Affiliate Successor, subject to the provisos set forth above. The Affiliate Successor of a General Partner pursuant to this Section 10.2 shall be admitted to the Partnership as General Partner immediately prior to the effective date of transfer of the General Partner's Partnership Interests and the Affiliate Successor shall continue the business and operations of the Partnership without dissolution provided that prior to such effective date the Affiliate Successor shall have furnished to (a) the Partnership (i) acceptance in form satisfactory to counsel to the Partnership of all the terms and conditions of this Agreement and (ii) such
-66 - other documents or instruments as may be required by such counsel in order to effect such transfer and (b) to the other Partners an opinion of counsel to the effect that such transfer will not adversely affect the tax status of the Partnership. Such opinion will not be deemed furnished until approved by the Consent of the Partners, which consent will not be unreasonably withheld. The transferring General Partner hereby further agrees to hold the Partnership and each other Partner wholly and completely harmless from any cost, liability or damage (including, without limitation, liabilities for income taxes and costs of enforcing this indemnity) incurred by any of such indemnified Persons as a result of a transfer or attempted transfer by it in violation of this Agreement. (a) Notwithstanding anything to the contrary contained herein, a General Partner will not take any action which would constitute or result in the transfer of control of the Partnership if such transfer would require, under existing law (including, without limitation, the written rules and regulations promulgated by the FCC), the prior approval of the FCC, without first obtaining such approval of the FCC.
(b) A General Partner shall diligently prosecute its application for approval of the transfer identified in Section 10.2(b) hereof and shall immediately provide to the FCC all information requested by the FCC in connection with the application.
(c) Prior to the FCC's grant of the approval of the transfer application identified in Section 10.2(b) hereof, a General Partner seeking to transfer its Partnership Interests shall continue to act in a manner consistent with the provisions of Article VI of this Agreement.
(d) Any transfer by GTL, other than to an Affiliate, shall be further subject to a right of first offer as set forth in Section 10.3(b) hereof fully as though it were a Limited Partner.
SECTION 10.3. Transfer of Interests of Limited Partners.
(a) Restrictions on Transfers. Except as expressly permitted or required by this Agreement or by the Limited Partner's Subscription Agreement, absent a Change of Control, as defined below, no Limited Partner shall transfer all or any portion of its Partnership Interests or any rights therein within the three year period following March 23, 1994 without the consent of the General Partners acting through the Committee
-67 - (which consent shall not be unreasonably withheld or delayed), and provided that if such consent is given, any such transfer shall be subject to Section 10.3(b) and (c) hereof; provided, however, that a Limited Partner may transfer any or all of its Partnership Interests to an Affiliate of such Limited Partner without such approval. Any transfer or attempted transfer by any Limited Partner in violation of the preceding sentence shall be null and void and of no effect whatsoever. Each Limited Partner hereby acknowledges the reasonableness of the restrictions on transfer imposed by this Agreement in view of the Partnership purposes and the relationship of the Partners. Accordingly, the restrictions on transfer contained herein shall be specifically enforceable. Each Limited Partner hereby further agrees to hold the Partnership and each Partner (and each Partner's successors and assigns) wholly and completely harmless from any cost, liability, or damage (including, without limitation, liabilities for income taxes and costs of enforcing this indemnity) incurred by any of such indemnified Persons as a result of a transfer or an attempted transfer in violation of this Agreement. As used in this Section 10.3, a "Change of Control" shall be deemed to have occurred if (i) any person or group (as defined in Section 13(d)(3) of the Exchange Act) shall have acquired ownership of a majority of the voting stock of Loral SpaceCom, or (ii) Loral SpaceCom shall no longer be in control, directly or indirectly, of LQSS.
(b) Rights of First Offer. Except as expressly permitted or required by this Agreement or by the Limited Partner's Subscription Agreement, absent a Change of Control, no Limited Partner shall transfer any or all of its Partnership Interests unless the Limited Partner desiring to make the transfer (the "Transferor") shall have first made the offers to sell to the other Partners and, as hereinafter provided, to the Partnership (the "Offerees") and such offers shall not have been accepted.
(i) Copies of the Transferor's offer (the "Offer Notice") shall be given to the Offerees and shall consist of an offer to sell to the Offerees such number of Partnership Interests (the "Offered Interests") then proposed to be transferred by the Transferor, at a cash price designated by the Transferor ("Stated Price"), upon only customary terms and conditions, representations, warranties, covenants and conditions.
(ii) Within 15 days after the receipt of the offer described in Section 10.3(b)(i) above, each Partner Offeree may, at its option, by written notice elect to purchase some
-68 - or all the Offered Interests, as specified in such notice, provided that in the event of an oversubscription, purchases will be pro rated according to the relative Percentage Interest of all Partners Offerees electing to exercise their rights of first offer, subject to the 20% ownership limitation set forth in Section 4.12 hereof. The Partner Offerees shall exercise such option by giving notice thereof to the Transferor within such 15-day period. The Partnership will promptly inform each Partner Offeree in the event that fewer than all of the Offered Interests are subscribed for, and each Partner Offeree may, within 48 hours thereafter, increase the amount of its requested maximum subscription.
(iii) Within 10 days after the expiration of the Partners' exercise period set forth in Section 10.3(b)(ii), if the Partners choose not to exercise all their rights of first offer under Section 10.3(b)(ii), the Partnership may, at its option, with the Consent of the Partners, elect to purchase some or all of the remaining Offered Interests, unless it shall have refused a request to waive the provisions of Section 4.12 with respect to a proposed purchase by one or more Limited Partners pursuant to Section 10.3(b)(ii) above. The Partnership shall exercise such option by giving notice thereof to the Transferor within such 10-day period.
(iv) If the Transferor's offer shall not be fully subscribed by the Partners and/or the Partnership at the end of the twenty-five day period described above, the Transferor shall terminate its offer to the Offerees on the twenty-sixth day after receipt by the Offerees of the Transferor's Offer Notice (the "Termination Date") and the Transferor shall be free to solicit offers for its Offered Interests from third parties for a period of three months following the Termination Date; provided, however, that the Transferor shall not offer the Offered Interests at a price that is less than 95% of the Stated Price, and provided further that if the sale to the third party is other than entirely for cash on terms described in clause (a) above, the Transferor shall certify to each of the other Partners as to the cash value of any noncash consideration. In the event that the Transferor shall have offered the Offered Interests to third parties at a price that is less than 95% of the Stated Price or the three month period shall have lapsed and no bona fide sale of the Offered Interests shall have been made by the Transferor to a third party, the restrictions provided for herein shall again become
-69 - effective, and no transfer of Offered Interests may be made thereafter without again offering the same in accordance with this Section 10.3.
(v) The above-described right of first offer will apply following any public offering of Partnership Interests, provided that once the Partners shall have declined to accept an offer at the then-prevailing market price of the Partnership Interests, the Transferor shall have the right to sell at any price equal to or in excess of 95% of the prevailing market price at the time it is permitted to sell hereunder.
(c) Permitted Transfers of Limited Partner Interests. Sections 10.3(a) and (b) hereof shall not apply to any transfer by a Limited Partner of all or any portion of its Partnership Interests to any Affiliate of such Limited Partner and will not apply to any of the transactions contemplated by such Memorandum of Agreement, dated as of January 1, 1995, by and between AirTouch and Loral Corporation, a New York corporation. Prior to such transfer, such Affiliate shall affirm in writing that it shall be subject to the terms and conditions of this Agreement and, if such Affiliate is not controlled by the Limited Partner transferring its Partnership Interest, the Person who controls such Affiliate shall agree in writing not to transfer control of such Affiliate for so long as such Affiliate remains a Limited Partner. If the Limited Partner transferring its interest controls such Affiliate, the Limited Partner hereby agrees that it shall not transfer control of such Affiliate for so long as such Affiliate remains a Limited Partner.
SECTION 10.4. Certain Transfers.
(a) Change of Control. A Partner, substantially all of whose assets shall consist of Partnership Interests of the Partnership, shall not offer to sell its securities, or permit its securities or the securities of any controlling Affiliate to be sold, to another party if such sale would result in a "Change in Control" of that Partner until and unless such Partner shall have first made a right of first offer with respect to such securities to the other Partners and the Partnership in the same manner as that set forth in Section 10.3(a)-(b) above. For purposes of this paragraph, a "Change of Control" shall be defined as the acquisition of a majority of the voting stock or analogous equity interest of a Partner by a party other than an Affiliate of the Partner.
-70 - (b) Pre-Approved Transfers. The provisions of Section 10.3(a) and (b) shall not apply to any transfer of Partnership Interests contemplated by Schedule X to the Subscription Agreements.
(c) Prior to the third anniversary of the Global Service Date, LQSS (i) will not withdraw, (ii) will not permit LQSS to be controlled by any Person other than Loral SpaceCom and (iii) will not, and will not permit any of its Affiliates to sell, assign or otherwise transfer securities or Partnership Interests such that, immediately following such transfer, Loral SpaceCom's direct and indirect interest in the Partnership is reduced to less than 23% of the total number of Partnership Interests outstanding. Thereafter, unless it shall have received the Consent of the Disinterested Partners, Loral SpaceCom's interest in the Partnership held through a General Partner (including GTL for so long as there has been no GTL Change of Control), whether direct or indirect, shall not be reduced to less than 15% of the total number of Partnership Interests outstanding.
ARTICLE XI. ADMISSION OF SUBSTITUTE PARTNERS
SECTION 11.1. Admission of Successor Limited Partner. (a) A transferee of a Limited Partner's Partnership Interest shall not be admitted to the Partnership as a substituted Limited Partner, until the transferee shall have furnished the Partnership with an agreement, in form reasonably satisfactory to the Partnership, to be bound by all the terms and conditions of this Agreement and such other documents or instruments as may be required by the Partnership in order to effect such transferee's admission as a Limited Partner. Prior to the time that any transferee of Partnership Interests is admitted to the Partnership as a Partner, it will have only the rights of a transferee under Delaware law, shall have no right to require any information or account of the Partnership transactions constituting Confidential Information or to inspect the Partnership's books.
(b) Any transferee of a Limited Partner's Partnership Interest who meets the requirements of subsection (a) may be admitted as a substituted Limited Partner in the Committee's sole discretion.
(c) For a transferee of a Limited Partner's Partnership Interest to be admitted as a substituted Limited
-71 - Partner under subsection (d) or (e) below, the transferee must deliver to the Partnership an opinion of counsel, addressed to the Partnership and in form and substance satisfactory to the Partnership, to the effect that, assuming the Partnership has the corporate characteristic of free transferability of interests and that the transferee is admitted as a substituted Limited Partner, the Partnership would be classified as a partnership for federal income tax purposes and would not be classified as an association taxable as a corporation.
(d) Any transferee of a Limited Partner's Partnership Interest who meets the requirements of subsections (a) and (c) and who is an Affiliate of the transferor will be admitted as a substituted Limited Partner.
(e) Any transferee of a Limited Partner's Partnership Interest who meets the requirements of subsections (a) and (c) will be admitted as a substituted Limited Partner with the consent of the Committee, which consent will not be unreasonably withheld.
SECTION 11.2. Admission of Successor General Partner. A successor General Partner selected pursuant to Section 12.1 or the transferee of or successor to the entire Partnership Interest of a General Partner pursuant to Section 10.2 shall be admitted to the Partnership as a General Partner, effective immediately prior to the withdrawal of the withdrawing General Partner and upon the receipt of proper FCC approval pursuant to Section 10.2(b), and shall continue the business of the Partnership without dissolution. Notwithstanding the foregoing, the provisions of Section 11.1 shall govern the admission of a transferee in a transfer resulting in a GTL Change of Control or a Reduction in Interest as though GTL were a Limited Partner. The successor General Partner shall furnish to the Partnership (a) acceptance in form satisfactory to counsel to the Partnership of all the terms and conditions of this Agreement and (b) such other documents or instruments as may be required by such counsel in order to effect its admission as a General Partner. No such admission shall be effected until the General Partner delivers to the Partnership an opinion of counsel, addressed to the Partnership and its Partners to the effect that such admission will not adversely affect the tax status of the Partnership. Such opinion will not be deemed delivered until approved by the Consent of the Disinterested Partners, which consent will not be unreasonably withheld. Any transferee of less than all of the Partnership Interests of a General Partner pursuant to Section 10.2 shall have only the rights of an assignee under Delaware law, shall have no right to require any information or account of the Partnership transactions constituting Confidential Informa-
-72 - tion or to inspect the Partnership's books and shall not be admitted to the Partnership as a successor General Partner.
SECTION 11.3. Amendment of Agreement and of Certificate of Limited Partnership. For the admission to the Partnership of any successor Partner, the Partnership shall take all steps necessary and appropriate to prepare and record or file as soon as practicable an amendment of this Agreement and the Certificate of Limited Partnership and may for this purpose exercise the power of attorney granted pursuant to Section 1.4.
ARTICLE XII. WITHDRAWAL OR REMOVAL
SECTION 12.1. Withdrawal or Removal of the General Partners. (a) Any transfer by a General Partner of all of its Partnership Interests as a General Partner pursuant to Section 10.2 or the conversion of all of its Partnership Interests pursuant to the Exchange and Registration Rights Agreement shall constitute the withdrawal of the General Partner for purposes of, and may be effected only in accordance with, this Section 12.1 and in the case of GTL, shall be further subject to the provisions of Section 6.3 and in the case of LQSS, 10.4(c) hereof. A General Partner may not withdraw from the Partnership as General Partner unless it gives at least 90 days prior written notice of such withdrawal to the other Partners, such withdrawal shall have been approved by Consent of the Disinterested Partners and a successor General Partner shall have been elected by Consent of the Disinterested Partners; provided, however, that such transfer shall not relieve the General Partner of any of its obligations hereunder unless the transferee has been adjudged by the Consent of the Disinterested Partners (which consent shall not be unreasonably withheld) to be a Person that has at least such comparable financial strength and technical and managerial capabilities and know- how sufficient for it to perform its duties and obligations hereunder and it has assumed all preexisting liabilities and obligations of the General Partner. The notice and election described above shall not be required in connection with a withdrawal resulting from a transfer of all of the General Partner's Partnership Interest to an Affiliate Successor, but the General Partner shall not be relieved of any of its obligations hereunder without the Consent of the Disinterested Partners required under the third sentence of Section 10.2(a).
(b) A General Partner may be removed if such removal is for Nonperformance and if such removal is approved with the Consent of the Disinterested Partners. Such removal shall be
-73 - effective immediately subsequent to the admission of the successor general partner who shall be subject to the qualifications of Section 12.1(a) hereto. The right to remove a General Partner shall not exist or be exercised unless the Partnership has received an opinion of counsel (which may be counsel selected by Consent of the Disinterested Partners) that the removal of the General Partner and the selection of a successor general partner (a) would not cause the loss of limited liability pursuant to Delaware law of the Limited Partners under this Agreement, and (b) would not cause the Partnership to be treated as an association taxable as a corporation for federal income tax purposes.
(c) A General Partner will be discharged from, and the Partnership or any Person or Persons continuing the business of the Partnership in the event it has dissolved, shall assume and pay, as they mature, all Partnership obligations and liabilities that exist on the date of a General Partner's removal or Approved Withdrawal from the Partnership and, except as otherwise expressly provided herein, will hold the General Partner harmless from any action or claim arising or alleged to arise from such assumed obligations and liabilities accruing after such date. The Partnership or any such Person or Persons continuing the business of the Partnership will promptly pay all creditors as of such date or notify such creditors (i) of the withdrawal or removal of such General Partner, as the case may be, (ii) of the discharge of such General Partner from all of the Partnership's obligations and liabilities, and (iii) of the assumption thereof by the Partnership or such Person or Persons continuing the business of the Partnership. The Partnership or such Person or Persons continuing the business of the Partnership if the Partnership has dissolved will use reasonable efforts to procure and execute an agreement from creditors of the Partnership discharging such General Partner from liability to such creditors as of the date of such removal or Approved Withdrawal of such General Partner. Nothing contained in this Section 12.1 shall relieve a General Partner of any liability it may have as of the date of its withdrawal under Section 6.11(b). As used in this Section 12.1(c), the term "Approved Withdrawal" shall mean a withdrawal of a General Partner following the election of a successor General Partner by Consent of the Disinterested Partners pursuant to the second sentence of Section 12.1(a) and approval by Consent of the Disinterested Partners of such successor General Partner's financial strength and technical and managerial
-74 - capabilities and know-how pursuant to the proviso to the second sentence of Section 12.1(a) or, in the case of an Affiliate Successor, approval by Consent of the Disinterested Partners of such Affiliate Successor's financial strength and technical and managerial capabilities and know-how pursuant to the third sentence of Section 10.2(a).
(d) Upon such removal, and the election of a successor General Partner, the interest of a General Partner in the Partnership shall be converted into limited Partnership Interests, provided that, no representative of such Limited Partner will be entitled to a vote with respect to such Partnership Interests to the extent the voting thereof is controlled by Loral SpaceCom pursuant to Section 6.4 of the LQSS Partnership Agreement.
SECTION 12.2. Right of the Managing General Partner to Become a Limited Partner. The Managing General Partner may become a Limited Partner by either (i) converting some but not all of its Partnership Interests to limited Partnership Interests or (ii) acquiring limited Partnership Interests and thereby become entitled to all of the rights of a Limited Partner to the extent of the limited Partnership Interest so converted or acquired, and the Consent of the Partners need not be obtained. Such event shall not be deemed to reduce any of the Managing General Partner's liability hereunder and will not prevent the Managing General Partner from continuing to act as a General Partner. Any transfer by the Managing General Partner of such limited Partnership Interests shall be subject to the provisions of Section 10.2(b)-(d). The Managing General Partner's Capital Contribution referred to in Section 4.1 hereof will be made in its capacity as General Partner and such Capital Contribution will not entitle the Managing General Partner to any rights of a Limited Partner, including those set forth in Article VII hereof.
SECTION 12.3. Withdrawal of Limited Partner. A Limited Partner who shall have withdrawn from the Partnership shall have no further rights hereunder.
ARTICLE XIII. DISSOLUTION AND LIQUIDATION
SECTION 13.1. Dissolution. The Partnership shall dissolve upon:
(a) December 31, 2044;
(b) the withdrawal of a General Partner, or any other event that results in its ceasing to be a General Partner such as the removal, bankruptcy or dissolution of the General Partner (other than by reason of a transfer pursuant to Section 10.2 or withdrawal effective following selection of a successor pursuant
-75 - to Section 12.1) unless at the time LQSS or a successor to LQSS remains a general partner of the Partnership;
(c) a sale of all or substantially all of the assets of the Partnership;
(d) the bankruptcy or the dissolution (and commencement of winding up) of the Managing General Partner;
(e) any other event that under the Delaware Act would cause its dissolution, except as otherwise provided herein; or
(f) with the Consent of the Partners, as set forth in Section 6.2(b)(v).
For purposes of this Section 13.1, bankruptcy of the Managing General Partner shall be deemed to have occurred when (i) it commences in good faith and under appropriate circumstances a voluntary proceeding or files in good faith and under appropriate circumstances an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any involuntary proceeding, which voluntary or involuntary proceeding seeks a liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) it is adjudged bankrupt or insolvent, or has entered against it a final and non-appealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect, (iii) it executes and delivers a general assignment for the benefit of its creditors, (iv) it seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for it or for all or any substantial part of its properties, or (v) (1) any proceeding of the nature described in clause (i) above has not been dismissed 120 days after the commencement thereof or (2) the appointment without its consent or acquiescence of a trustee, receiver or liquidator appointed pursuant to clause (ii) above has not been vacated or stayed within 90 days of such appointment, or (3) such appointment is not vacated within 90 days after the expiration of any such stay.
SECTION 13.2. Continuation of the Business of the Partnership after Dissolution. To the extent permitted by the Delaware Act, upon dissolution of the Partnership in accordance with Section 13.1(b), (d) or (e), the remaining Partners may elect to reconstitute the Partnership and continue its business on the same terms and conditions set forth in this Agreement if holders of a majority of the outstanding PPIs and a Majority in Interest of the Partners agree in writing (1) to continue the business of the Partnership and (2) to the appointment, if
-76 - necessary, effective as of the date of withdrawal, of a successor Managing General Partner. Unless such an election is made within 90 days after dissolution, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election is made within 90 days after dissolution, then: (a) the reconstituted Partnership shall continue unless earlier dissolved in accordance with this Article XIII; and
(b) all necessary steps shall be taken to cancel this Agreement and the Certificate of Limited Partnership and to enter into a new partnership agreement and certificate of limited partnership, and the successor Managing General Partner or GTL, as the case may be, may for this purpose exercise the powers of attorney granted pursuant to Section 1.4 or such similar provision in the new partnership agreement.
SECTION 13.3. Winding Up and Liquidation. (a) Upon dissolution of the Partnership other than pursuant to Section 6.13, unless the Partnership is continued under an election to reconstitute and continue the Partnership pursuant to Section 13.2, the Managing General Partner or, in the event the Managing General Partner has been dissolved or removed, has become bankrupt as defined in Section 13.1 or has withdrawn from the Partnership, a liquidator or liquidating committee selected by Consent of the Partners, shall be responsible for the winding up of the affairs of the Partnership and the distribution of its assets. The Person or Persons who assume such responsibility (whether they be the Managing General Partner or not) are referred to herein as the "Liquidator." In connection with a winding up of the affairs of the Partnership, the Liquidator shall cause an accounting to be made of the assets and liabilities of the Partnership. If any liability is contingent or uncertain in amount, a reserve will be established in such amount as the Liquidator deems reasonably necessary. Upon satisfaction or other discharge of such contingency, the amount of the reserve not required, if any, will be distributed as provided in this Section 13.3.
(b) The Liquidator (if other than the Managing General Partner) shall be entitled to receive such compensation for its services as may be approved by Consent of the Partners. The Liquidator shall agree not to resign at any time without fifteen (15) days' prior written notice and (if other than the Managing General Partner) may be removed at any time, with or without cause, by notice of removal signed by Consent of the Partners. Upon dissolution, removal or resignation of the Liquidator, a
-77 - successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within thirty (30) days thereafter be selected by Consent of the Partners. The right to appoint a successor or substitute Liquidator in the manner provided herein shall be recurring and continuing for so long as the functions and services of the Liquidator are authorized to continue under the provisions hereof, and every reference herein to the Liquidator will be deemed to refer also to any such successor or substitute Liquidator appointed in the manner herein provided. Except as expressly provided in this Article XIII, the Liquidator appointed in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the Committee under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers) to the extent necessary or desirable in the good faith judgment of the Liquidator to carry out the duties and functions of the Liquidator hereunder for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidator to complete the winding up and liquidation of the Partnership as provided for herein.
(c) The Liquidator shall liquidate the assets of the Partnership, and apply and distribute the proceeds of such liquidation in the following order of priority, unless otherwise required by mandatory provisions of applicable law:
(i) to the payment of Partnership creditors, including Partners in respect of loans or guaranteed payments, in order of priority provided by law;
(ii) to the establishment of reasonable reserves for contingencies; and
(iii) to the Partners in proportion and to the extent of the positive balances in their respective Capital Accounts (determined after applying the provisions of Article V).
(d) The Liquidator shall be authorized to sell any, all or substantially all of the assets of the Partnership for deferred payment obligations, and to hold, collect and otherwise administer any such obligations or any other deferred payment obligations held or acquired as assets of the Partnership, regardless of the terms of such obligations.
-78 - (e) A reasonable time, including, without limitation, any time required to collect deferred payment obligations, shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to enable the Liquidator to minimize the normal losses attendant upon the liquidation. Upon the Liquidator's compliance with the foregoing distribution plan, the Partners shall execute, acknowledge, swear to and cause to be filed a Certificate of Cancellation of the Partnership. Except as otherwise expressly provided herein, the General Partners shall not be personally liable for the return of the original investment or contributions of the Limited Partners, or any portion thereof. Any such return shall be made solely from Partnership assets and in accordance with the express provisions hereof.
(f) If, in the process of collecting any deferred payment obligation generated by a sale of assets of the Partnership, the Partnership reacquires any such assets, and if, at such time, there is a Managing General Partner and the same so determines, the Partnership shall be reconstituted with the Consent of the Partners upon the terms and conditions hereof.
SECTION 13.4. Cancellation of Certificate of Limited Partnership. Upon the completion of the distribution provided for in Section 13.3, the Partnership shall be terminated, and the Liquidator (or the General Partners and the Limited Partners if necessary) shall cause the cancellation of the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware and shall take such other actions as may be necessary to terminate the Partnership.
SECTION 13.5. Return of Capital. Except as otherwise expressly provided herein, the General Partners shall not be personally liable for the return of the Capital Contribution of the Limited Partners, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets.
SECTION 13.6. Waiver of Partition. Each Partner hereby waives any rights to partition of Partnership property.
SECTION 13.7. Deficit Upon Liquidation. Upon liquidation, the Partners shall not be obligated to the Partnership for any deficit in their Capital Accounts.
-79 - ARTICLE XIV. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 14.1. Amendments to be Adopted Without Consent of the Partners. The Partnership (pursuant to powers of attorney granted under Section 1.4 hereof), without the Consent of the Partners, may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:
(a) a change in the name of the Partnership approved with the Consent of the Partners or a change in the location of the principal place of business of the Partnership;
(b) a change that the Partnership, based upon the opinion of outside counsel, furnished to all the Partners, has determined to be reasonable and necessary or advisable (i) to qualify or continue the qualification of the Partnership as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or (ii) to ensure that the Partnership will not be treated other than as a partnership for federal income tax purposes;
(c) a change (i) that the Partnership, based upon the opinion of outside counsel, furnished to all the Partners, has determined is necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute, compliance with any of which the Partnership deems to be in the best interests of the Partners, or (ii) that is expressly required or expressly contemplated by this Agreement or is otherwise herein expressly permitted to be made by the Partnership;
(d) immaterial amendments to correct any mistake or clear omission or to reflect the surrender of any rights or the assumption of any additional responsibilities by the General Partners; or
(e) any amendment necessary to give effect to the issuance and sale of Additional Partnership Interests permitted by Sections 4.4 and 4.10 hereof or to give effect to the admission of any Additional Limited Partners pursuant thereto, including such amendments to Article V hereof as are necessary to give effect to any allocations of Income or Loss to the holder of such Additional Partnership Interests and any distributions to be
-80 - made to such holders and do not adversely affect the other Partners.
SECTION 14.2. Amendment Procedures. Except as provided in Section 14.1, all amendments to this Agreement shall be made in accordance with the following requirements. Subject to Sections 6.2(b)(i) and 14.1, any proposed amendment shall be effective only upon the consent of the Committee and the Consent of the Partners, provided, that no amendment adversely affecting the capital account or other economic rights of any Partner shall be made without such Partner's consent. Promptly after the adoption of an amendment to this Agreement as provided hereunder, the Partnership shall forward a copy of such amendment to each Partner.
ARTICLE XV. GENERAL PROVISIONS
SECTION 15.1. Addresses and Notices. The address of each Partner for all purposes shall be the address as set forth on the signature page of this Agreement or such other address of which each other Partner has received written notice. All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be sent to the party to whom the notice is to be given, by telex, fax (confirmed by first class mail, postage prepaid), telegram or first class mail, postage prepaid and properly addressed as provided in this Agreement (in each case such notice shall be deemed to have been duly given on the day the notice is first received by that party) or to such other address or Person as may be designated by a party, by notice given in accordance with this Section.
SECTION 15.2. Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement.
SECTION 15.3. Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.
-81 - SECTION 15.4. Further Action. (a) The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.
(b) At any time or times, upon the request of the Partnership, the Partners hereby agree to sign and swear to any certificate required by Delaware or other applicable law, to sign and swear to any amendment to or cancellation of any such certificate whenever such amendment or cancellation is required by or appropriate under law, to sign and swear to or acknowledge similar certificates or affidavits or certificates of fictitious firm name, trade name or the like (and any amendments or cancellations thereof) required by or appropriate under the laws of Delaware or any other jurisdiction in which the Partnership does or proposes to do business, and cause the filing of any of the same for record wherever such filing shall be required by law.
SECTION 15.5. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.
SECTION 15.6. Integration. This Agreement together with the Subscription Agreement entered into by each Partner or the assignor of its Partnership Interests and the Mutual Non-Disclosure Agreement dated January 11, 1994, entered into by and among the Partnership and certain of its Partners (the "Mutual Non-Disclosure Agreement"), constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.
SECTION 15.7. Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership.
SECTION 15.8. Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
SECTION 15.9. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or
-82 - the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto independently of the signature of any other party.
SECTION 15.10. Dispute Resolution. (a) The Parties shall attempt to resolve by good faith and diligent negotiation any dispute, controversy or claim between them arising out of or relating to this Agreement, or the breach, termination or invalidity thereof. If such negotiations are not concluded within 30 days of a Party's request for negotiations, a Party may (other than with respect to a controversy arising pursuant to Section 12.1 hereof) initiate arbitration as provided for below.
(b) International Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, that involves a non-U.S. Party and that has not been amicably resolved pursuant to the procedures of Section 15.10(a), shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force. The language of the arbitration proceedings shall be English. The number of arbitrators shall be one. If such an international arbitration is initiated by the Partnership, the place of arbitration shall be Geneva, Switzerland, the appointing authority shall be the Chamber of Commerce and Industry of Geneva; and any arbitrator appointed by the appointing authority shall be a retired Swiss federal or cantonal judge of a federal or cantonal court of general jurisdiction or any court having appellate jurisdiction over such a court. If the arbitration is initiated by GTL or the Limited Partners, the place of arbitration shall be New York, New York; the appointing authority shall be the American Arbitration Association; and any arbitrator appointed by the appointing authority shall be a retired United States federal judge or a retired state court judge of a federal or state court of general jurisdiction or any court having appellate jurisdiction over such a court.
(c) U.S. Arbitration. Any dispute, controversy or claim arising out of or related to this Agreement, or the breach, termination or invalidity thereof, that involves only U.S. Parties and that has not been amicably resolved pursuant to the procedures of Section 15.10(a), shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force. The language of the arbitration proceedings shall be English. The number of arbitrators shall be one. If the arbitration is initiated by the Partnership, the place of arbitration shall be San Francisco, California. If the arbitration is initiated by the Limited Partners, the place of arbitration shall be New York, New York. The appointing authority shall be the American Arbitration
-83 - Association. Any arbitrator appointed by the appointing authority shall be a retired United States federal judge or a retired state court judge of a federal or state court of general jurisdiction or any court having appellate jurisdiction over such a court.
(d) Resolution of Common Issues. If at any time there is pending an arbitration under this Section 15.10 and such arbitration involves one or more significant issues of law or fact the resolution of which a Partner desires binding on some or all its Partners, the Partnership may give written notice to such Partners identifying the issue of law or fact the resolution of which the Partnership desires to be so binding and inviting each Partner to join in such arbitration as provided in this Section 15.10(d). Each Partner which shall have received such a notice shall have the right (but shall not be obligated) to become a party to such arbitration for the limited purpose of the resolution of such issue of law or fact. The arbitrator in such arbitration may supplement and alter the UNCITRAL Rules in their application to such arbitration as may be necessary or appropriate to accommodate the multi-party nature of the arbitration and to ensure the just, expeditious, economical and final determination of the dispute. The award in any such arbitration shall be final and binding, as to resolution of the issues of fact and law decided therein and identified in the notice from the Partnership given pursuant to this Section 15.10(d), on all of the Partners who were given notice of such arbitration and an opportunity to participate as parties therein, whether or not they participated in such arbitration.
(e) Enforcement. Arbitral awards under this Section 15.10 shall be final and binding, and shall be enforceable in any court having jurisdiction.
SECTION 15.11. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. REFERENCES HEREIN TO TEMPORARY OR FINAL TREASURY REGULATIONS ALSO REFER TO CORRESPONDING PROVISIONS OF SUCCESSOR AND SUPERSEDING REGULATIONS.
SECTION 15.12. Confidentiality. (a) For purposes of this Agreement, "Confidential Information" shall mean all oral, written and/or tangible technical, financial, business and/or any other information of whatever kind created by the Partnership or disclosed by a Partner or its Affiliate or the Partnership (in any case "Owner") to a receiving party ("Recipient") which is confidential, proprietary and/or not generally available to the public, including, but not limited to, information relating, in
-84 - whole or in part, to present and future services related to the Partnership's business, business plans and strategies, marketing ideas and concepts, pricing, volume estimates, financial data, market testing information, development plans, specifications, configurations, designs, plans, drawings, apparatus, sketches, software, hardware, data, connecting requirements or other technical and business information. Confidential Information provided by Owner shall remain the sole and exclusive property of Owner.
(b) During the term of this Agreement, and until the fifth anniversary of the termination thereof, or in the event of the transfer by a Partner of all of its Partnership Interests prior to the termination of this Agreement, until the fifth anniversary of such transfer, Confidential Information:
(i) shall be treated in confidence by Recipient and shall be used only for purposes of Recipient's performance of its obligations under this Agreement, or any other written agreement between Owner and Recipient entered into subsequent to the Effective Date or the GTL Effective Date, as the case may be, in connection with the Partnership's business;
(ii) shall not be reproduced or copied in whole or in part, except as necessary for use as authorized herein; and
(iii) shall be disseminated only to those of its and its Affiliates' employees, agents and subcontractors who have a need to know it (and such employees, agents and subcontractors shall be advised of the obligations assumed herein). Recipient shall ensure by appropriate procedures that those employees, agents and subcontractors to whom Confidential Information is disseminated or disclosed treat such Confidential Information in confidence pursuant to this paragraph.
(c) Notwithstanding the foregoing, information shall not be deemed Confidential Information and Recipient shall have no obligation with respect to any such information which:
(i) is or was in the possession of the Recipient at the time of disclosure by Owner, and was not previously acquired by the Recipient directly or indirectly from Owner under an obligation to keep such information confidential; or
(ii) is or becomes publicly known, through no negligence or other wrongful act of Recipient; or
-85 - (iii) is received by Recipient from a third party having, to the best knowledge of the Recipient, a lawful right to disclose, subject to, as to disclosed information, any restriction as to use, imposed by such third party; or
(iv) is independently developed by Recipient, as evidenced by its records.
(d) Upon the termination of this Agreement, or upon a transfer by a Partner of its Partnership Interest, written Confidential Information will be returned to Owner or destroyed immediately upon the request of Owner, and no copies, extracts or other reproductions shall be retained by Recipient. All documents, memoranda, notes and other writings whatsoever prepared by Recipient which contain the Confidential Information shall be returned to Owner or destroyed at Owner's request. The redelivery or destruction of such materials shall not relieve Recipient of its obligation of confidentiality or other obligations hereunder.
(e) If Recipient (or its Affiliate) is required by order of any competent authority (by oral questions, interrogatories, directions, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, Recipient will promptly notify Owner of such order or requirement and shall cooperate with Owner in seeking appropriate protective arrangements requested by Owner. If, in the absence of a protective order or the receipt of a waiver hereunder, Recipient (or any of its Affiliates) is in the written opinion of Recipient's counsel compelled to disclose the Confidential Information or else stand liable for contempt or suffer other censure or significant penalty, Recipient (or its Affiliate) may disclose only so much of the Confidential Information to the authority compelling disclosure as is required by law. Recipient will exercise (and will cause its Affiliate to exercise) reasonable efforts to obtain appropriate protective arrangements or other reliable assurance that confidential treatment will be accorded to Confidential Information.
(f) The terms and conditions of this Agreement and all exhibits, attachments and amendments hereto and thereto shall be considered Confidential Information protected under this Section 15.12.
(g) Notwithstanding anything in this Section 15.12 to the contrary, in the event that any Confidential Information is also subject to a limitation on disclosure or use contained in another written agreement between Owner and Recipient which is
-86 - more restrictive than the limitations contained in this Section 15.12, then the limitation in such agreement shall supersede this Section 15.12.
(h) The Partners hereby agree that within six months of the date of this Agreement, they shall conform the provisions set forth in this Section 15.12 with those contained in the Mutual Non-Disclosure Agreement and any other agreement relating to confidentiality that may be in effect among the parties hereto.
SECTION 15.13. Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby, unless the effect would be to materially and adversely affect the economic rights of any Partner.
-87 - IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered by this respective duly authorized officer as of the day and year first above written.
LORAL/QUALCOMM SATELLITE SERVICES, L.P. by LORAL/QUALCOMM PARTNERSHIP, L.P. its General Partner by LORAL GENERAL PARTNER, INC. its General Partner
By:/s/Eric J. Zahler ------Name: Eric J. Zahler Title: Vice President
GLOBALSTAR TELECOMMUNICATIONS LIMITED
By:/s/Eric J. Zahler ------Name: Eric J. Zahler Title: Vice President
Limited Partners:
AIRTOUCH SATELLITE SERVICES, INC. DACOM CORPORATION DACOM INTERNATIONAL, INC. HYUNDAI CORPORATION HYUNDAI ELECTRONICS INDUSTRIES CO., INC. LORAL/DASA GLOBALSTAR, L.P. LORAL SPACE & COMMUNICATIONS LTD. SAN GIORGIO S.p.A. TELESAT LIMITED TE.SA.M VODAFONE SATELLITE SERVICES LIMITED
By: LORAL/QUALCOMM SATELLITE SERVICES, L.P. by LORAL/QUALCOMM PARTNERSHIP, L.P. its General Partner by LORAL GENERAL PARTNER, INC. its General Partner
By:/s/Eric J. Zahler ------Name: Eric J. Zahler as Attorney-in-Fact
-88 - Addresses for Notices of Limited Partners:
AIRTOUCH SATELLITE SERVICES, INC. One California Street San Francisco, CA 94105
DACOM CORPORATION DACOM Building 65-228 3 Ka. Hangang-Ro Yongson-ku Seoul, Korea
DACOM INTERNATIONAL, INC. DACOM Building Kukje Elec. Center Seochu Ku, Seoul 137 070 Korea
HYUNDAI CORPORATION Hyundai-Jeonja Building #1003 66 Chuckseon-Dong, Chongro-Ku Seoul, Korea 110-052
HYUNDAI ELECTRONICS INDUSTRIES CO., LTD. Hyundai-Jeonja Building #1003 66 Chuckseon-Dong, Chongro-Ku Seoul, Korea 110-052
LORAL/DASA GLOBALSTAR, L.P. 3825 Fabian Way Palo Alto, CA 94303
LORAL SPACE & COMMUNICATIONS LTD. 600 Third Avenue 38th Floor New York, N.Y. 10016
-89 - SAN GIORGIO S.p.A. Viale Maresciallo Pilsudski 92 00197 Roma, Italy
TELESAT LIMITED c/o ChinaSat 42 Xue Yuan Road Beijing, China 10083
T.E.SA.M. 66, Avenue du Maine 75014 Paris, France
VODAFONE SATELLITE SERVICES LIMITED The Courtyard 2-4 London Road Newbury, Berkshire RG13 1JL United Kingdom
-90 - SCHEDULE A
SCHEDULE OF PARTNERS
Initial Capital Interests Currently Partner Contribution* Held ------
LQSS $50,000,000 18,000,000 OPIs
$326,956,000** 15,338,533 OPIs see Footnote No. 1A 4,904,060 OPIs GTL see Footnote No. 1B 7,000,000 PPIs
AirTouch Satellite Services $37,500,000 3,000,000 OPIs
DACOM International see Footnote No. 2 90,000 OPIs
Hyundai Corporation see Footnote No. 2 183,000 OPIs
Hyundai Electronics see Footnote No. 2 1,281,000 OPIs
Loral/DASA Globalstar, L.P. $37,500,000 3,000,000 OPIs
Loral Space & Communications Ltd. $37,500,000 7,176,000 OPIs
San Giorgio S.A. $18,750,000 610,000 OPIs
TE.SA.M $37,500,000 1,830,000 OPIS
TeleSat $18,750,000 937,500 OPIs
Vodafone Satellite Services Limited $37,500,000 1,830,000 OPIs
------
* Represents initial capital contributions funded by the partners to acquire partnership interests at the outset.
** Includes the net proceeds from GTL's initial public offerings and issuance by GTL of common stock upon the exercise of outstanding warrants and employee stock options as of December 31, 1998.
1A. 4,769,231 PPIs were issued in consideration of the net proceeds from the CPEO Offering; these were subsequently converted into 4,769,231 OPIs. In addition, an interest make-whole payment of 134,829 OPIs were issued in April, 1998 in connection with a provisional redemption of the PPIs.
1B. Issued in consideration of the net proceeds from the Preferred Stock Offering.
-91 - 2. The initial contribution of $37,500,000 was made by the Hyundai/DACOM consortium.
-92 - SCHEDULE B
RELATED PARTY TRANSACTIONS
1. Contract for the Development of Certain Portions of the Ground Operations Control Center between Globalstar and Loral Western Development Laboratories, a division of Loral Aerospace Corp. as outlined in the request for Consent of Disinterested Partners, dated May 2, 1994.
2. Contract for the Development of Satellite Orbital Operations Centers between Globalstar and Loral Aerosys, a division of Loral Aerospace Corp.
3. Office Lease between Globalstar and Loral Western Development Laboratories.
4. Subcontract Providing Work for Hyundai, dated April 29, 1994, between Globalstar, SS/L and Hyundai.
5. Support Agreement (completed), dated August 26, 1994, between Globalstar and AirTouch.
-93 - SCHEDULE C
ARTICLE I Covenants
SECTION 1.1. Distributions on PPIs. Cumulative accrued distributions shall be payable on the PPIs as set forth in Section 5.5(a)(ii) and subject to Section 5.5(e) of this Agreement on each Scheduled Distribution Payment Date commencing on May 15, 1999 (or, if such date is not a Business Day, on the next succeeding Business Day). Subject to Section 5.5 of this Agreement, distributions on the PPIs shall occur, as and if designated by the Committee in its sole discretion. Distributions on the PPIs will accrue on a daily basis (360 day year and twelve 30-day months) (without interest or compounding) whether or not the Partnership has earnings or profits, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are declared. Distribution Arrearages shall not accrue interest.
SECTION 1.2. Deferral of Distributions. The Partnership may defer paying Scheduled Distributions on any Scheduled Distribution Payment Date if the Committee so determines in its sole discretion, but so long as any Distribution Arrearage remains outstanding, except as set forth in Section 5.5(a)(iv) of the Partnership Agreement and Section 4.1 of this Schedule C, the Partnership will be prohibited from paying distributions on (i) its OPIs or (ii) preferred partnership interests that may be issued in the future other than pro rata based on the redemption amount of such preferred partnership interests, except for distributions (A) on OPIs consisting solely of OPIs, (B) on securities that rank pari passu or junior to the PPIs, in securities that rank pari passu or junior to the PPIs, respectively, or (C) on securities that rank senior to the PPIs.
SECTION 1.3. Payment of Redemption Price and Distributions.
(a) The Partnership will duly and punctually pay or cause to be paid by no later than one Business Day prior to the date such payment is due the redemption price of the PPIs, and any applicable additional amounts in accordance with the terms of Sections 2.6, 2.7 and 2.8 of this Schedule C;
(b) The Partnership may elect, at its option, to pay the Redemption Price (including any Distribution Make Whole Payment) of, and Scheduled Distributions, on, the PPIs, (i) in cash, (ii) by delivery of OPIs (in the manner described in paragraph (c) of this Section 1.3) or (iii) through any combination of the foregoing as selected by the Committee in its sole discretion.
(c) If the Partnership elects to deliver any OPIs in lieu of a cash payment on the applicable date of payment, the Partnership shall deliver, in the aggregate, the number of OPIs equal to (i) the amount of payment that is not being paid in cash, (ii) divided by: (A) in the case of any Scheduled Distributions, Provisional Redemption payment, Distribution Make-Whole Payment, Optional Redemption payment, or portion thereof, 95% of the Average Market Value of the GTL Common Stock; (B) in the case of any Mandatory Redemption payment, or portion thereof, (1) if on the date of such payment the Shelf Registration Statement covers the resale of such shares and is effective or no longer required to be effective, 100% of the Average Market Value of the GTL Common Stock and (2) otherwise, 90% of the Average Market Value of the GTL Common Stock; provided, however, if GTL shall have made a GTL Dividend Payment Notice or a GTL Response Redemption Notice which indicates that GTL shall have elected to make its corresponding payment from the proceeds from the sale of any issuance of GTL Common Stock, then the valuation of the OPIs to be issued by the Partnership pursuant to Section 1.3(c) of this Schedule C shall be based upon the actual price at which such GTL Common Stock is sold.
(d) The Partnership shall deliver a Globalstar Distribution Payment Notice to GTL 15 Business Days prior to the applicable record date corresponding to the Scheduled Distribution Payment Date.
SECTION 1.4. Certain Accompanying Payments. PPIs surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Scheduled Distribution Payment Date to the opening of business on such Scheduled Distribution Payment Date (except PPIs called for redemption on a Redemption Date from the close of business on any Regular Record Date to the close of business on the Business Day immediately following the corresponding Scheduled Distribution Payment Date) must be accompanied by payment in cash, OPIs or a combination thereof in an amount equal to the distribution thereon which GTL is entitled to receive; provided, that no payment shall be owed or payable to GTL if the Committee shall have elected to defer the distribution to be made on such Scheduled Distribution Payment Date. No other adjustment for
-2- distributions, including any Distribution Arrearages, is to be made upon conversion.
ARTICLE II Redemption of PPIs
SECTION 2.1. Right of Redemption; Mechanics of Redemption. (a) The PPIs may be redeemed pursuant to (i) a Provisional Redemption (as described in Section 2.6 of this Schedule C, any such Provisional Redemption shall include the Distribution Make-Whole Payment, as well as accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the date of such Provisional Redemption)) or (ii) an Optional Redemption (as described in Section 2.7 of this Schedule C, any such Optional Redemption shall include accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the date of such Optional Redemption), at the election of the Partnership, in whole or from time to time in part; the PPIs shall be redeemed at the Mandatory Redemption Date, at the Redemption Price specified in Section 2.8, together with accrued and unpaid Scheduled Distributions and Preferred Stock Liquidated Damages, if any, to the Mandatory Redemption Date. (b) The Partnership shall deliver a Globalstar Redemption Notice to GTL not fewer than 40 days nor more than 60 days before any such Redemption Date.
SECTION 2.2. Selection by the Managing General Partner of PPIs to be Redeemed. If any PPI selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the PPI so selected, the converted portion of such PPI shall be deemed (so far as may be) to be the portion selected for redemption. PPIs which have been converted during a selection of PPIs to be redeemed shall be treated by the Managing General Partner as Outstanding for the purpose of such selection, but not for the purpose of paying the Redemption Price thereof.
For all purposes of this Schedule C, unless the context otherwise requires, all provisions relating to the redemption of PPIs shall relate, in the case of any PPIs redeemed or to be
-3- redeemed only in part, to the portion of the redemption amount of such PPI which has been or is to be redeemed.
SECTION 2.3. Notice of Redemption. Whenever a Globalstar Redemption Notice is required to be delivered to GTL, such Notice shall state:
(1) the Redemption Date;
(2) the Redemption Price and the form of consideration the Partnership will use to satisfy the Redemption Price;
(3) if less than all the Outstanding PPIs are to be redeemed, the identification (and, in the case of partial redemption, the redemption amounts) of the particular PPIs to be redeemed;
(4) that on the Redemption Date the Redemption Price, together with (i) in the case of a Provisional Redemption, the Distribution Make-Whole Payment and accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the Provisional Redemption Date (ii) in the case of an Optional Redemption, accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the Optional Redemption Date, and (iii) in the case of a Mandatory Redemption, accrued and unpaid Scheduled Distributions and Preferred Stock Liquidated Damages, if any, to the Mandatory Redemption Date, will become due and payable upon each such PPI to be redeemed and that distributions thereon will cease to accrue on and after said date;
(5) the Conversion Ratio, the date on which the right to convert the PPIs to be redeemed will terminate and the place or places where such PPIs may be surrendered for conversion; and
(6) the place or places where such PPIs are to be surrendered for payment of the Redemption Price.
SECTION 2.4. Deposit of Redemption Price. Prior to any Redemption Date, the Partnership shall deposit with the
-4- Partnership's paying agent (or, with the Partnership if the Partnership is acting as its own paying agent with respect to the PPIs) an amount of consideration sufficient to pay, in the case of a cash payment, or deliver, in the case of delivery of OPIs, the Redemption Price, together with (i) in the case of a Provisional Redemption, the Distribution Make-Whole Payment and accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the Provisional Redemption Date (ii) in the case of an Optional Redemption, accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidated Damages, if any, to the Optional Redemption Date, and (iii) in the case of a Mandatory Redemption, accrued and unpaid Scheduled Distributions and Preferred Stock Liquidated Damages, if any, to the Mandatory Redemption Date, on all the PPIs which are to be redeemed on that date (other than any PPIs called for redemption on that date which have been converted prior to the date of such deposit, except with respect to any applicable Distribution Make-Whole Payment and Preferred Stock Liquidated Damages, which shall be payable regardless of such conversion).
If any PPI called for redemption is converted, any cash or OPIs deposited with the Partnership's paying agent or with the Partnership shall (subject to any right of GTL to receive accrued and unpaid distributions as provided in Section 1.3 of this Schedule C) be paid or delivered to the Partnership upon its request. Any Distribution Make-Whole Payment will be paid to GTL on the date of conversion or the Provisional Redemption Date, as the case may be.
SECTION 2.5. PPIs Payable on Redemption Date. Notice of redemption having been given as aforesaid, the PPIs so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified plus such other amounts as may be due and payable pursuant to the terms hereof, and from and after such date (unless the Partnership shall default in the payment of the Redemption Price and accrued Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution Payment Date) and Preferred Stock Liquidation Damages, if any, to the Redemption Date or, if applicable, any Distribution Make-Whole Payment) no further distributions shall be payable or accrue with respect to such
-5- PPIs and such PPIs shall cease to be convertible into OPIs. Upon surrender of any such PPI for redemption in accordance with said notice, such PPI shall be paid, subject to Section 1.3, by the Partnership at the Redemption Price, together with accrued Scheduled Distributions to the Redemption Date.
If any PPI called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price (but not any accrued and unpaid Scheduled Distributions) shall, until paid, bear interest from the Redemption Date at 8% per annum.
SECTION 2.6. Provisional Redemption. The Partnership may redeem, in whole or in part (a "Provisional Redemption"), at any time on or prior to February 15, 2002, at the Redemption Price of 104.6% of the aggregate Stated Value of the PPIs to be redeemed (the "Provisional Redemption Date"), in the event that the Current Market Value of the GTL Common Stock equals or exceeds the following Trigger Percentages of the prevailing GTL Conversion Price then in effect for at least 20 Trading Days in any consecutive 30 Trading Day period ending on the Trading Day prior to the date of mailing of the Globalstar Redemption Notice if called for Provisional Redemption in the 12- month period ending February 15 of the following years:
Year Trigger Percentage ------
2000 170%
2001 160%
2002 150%
Upon any Provisional Redemption, the Partnership shall make the
Distribution Make-Whole Payment with respect to the PPIs called for redemption. The Partnership shall make the Distribution Make-Whole Payment on all PPIs called for Redemption, regardless of whether such PPIs are converted prior to the Provisional Redemption Date.
SECTION 2.7. Subsequent Optional Redemption. The PPIs may be redeemed, in whole or from time to time in part, at the option of the Partnership (the "Optional Redemption") on or after February 20, 2002 at a redemption price equal to the percentage of the Stated Value set forth below, in each case, together with accrued and unpaid Scheduled Distributions (including an amount equal to a prorated Scheduled Distribution for any period following the immediately preceding Scheduled Distribution
-6- Payment Date) and Preferred Stock Liquidated Damages, if any, to the date of redemption, upon not less than 30 nor more than 60 days' prior written notice, if redeemed during the 12-month period commencing on the dates set forth below:
Year Redemption Price ------
February 20, 2002 104.6%
February 19, 2003 103.4%
February 19, 2004 102.3%
February 19, 2005 101.1%
February 19, 2006 and thereafter 100.0%
SECTION 2.8. Mandatory Redemption. Each PPI (if not earlier redeemed or converted) will be mandatorily redeemed by the Partnership on the Mandatory Redemption Date at a Redemption Price of 100% of the Stated Value thereof, together with accrued and unpaid Scheduled Distributions and Preferred Stock Liquidated Damages, if any, to the Mandatory Redemption Date.
SECTION 2.9. Other Redemption Procedures. No Provisional Redemption or Optional Redemption may be authorized or made unless, prior to giving the applicable redemption notice, all accumulated and unpaid distributions for periods ended prior to the date of such redemption notice shall have been paid in cash or OPIs. In the event of partial redemptions of PPIs, the PPIs to be redeemed will be determined pro rata or by lot, as determined by the Partnership, provided that the Partnership may redeem all PPIs held by holders of fewer than 100 PPIs (or by holders that would hold fewer than 100 PPIs following such redemption) prior to its redemption of other PPIs.
ARTICLE III Conversion of PPIs
SECTION 3.1. Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article, one PPI initially shall be convertible into the number of OPIs (the "Conversion Ratio") determined by dividing $50 by the product of the initial conversion price applicable to the Preferred Stock, which is $23.2563, and 4.05. One PPI shall initially be convertible into .53085 OPIs (i.e., $50 Stated
-7- Value/($23.5623 initial conversion price times 4.05)). This Conversion Ratio shall be adjusted in certain circumstances as provided in Section 3.4. Upon any conversion of Preferred Stock by a holder thereof, GTL shall convert a proportionate amount of PPIs into OPIs. Such conversion right shall expire at the close of business on the Business Day next preceding the Mandatory Redemption Date. In case a PPI or portion thereof is called for redemption, such conversion right in respect of the PPI so called shall expire at the close of business on the Business Day next preceding the Redemption Date, unless the Partnership defaults in making the payment due upon redemption.
SECTION 3.2. Exercise of Conversion Privilege. PPIs surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Scheduled Distribution Payment Date to the opening of business on such Scheduled Distribution Payment Date shall (except PPIs called for redemption on a Redemption Date from the close of business on any Regular Record Date to the close of business on the Business Day immediately following the corresponding Scheduled Distribution Payment Date) be accompanied by payment in cash, OPIs or a combination thereof in an amount equal to the distribution thereon which GTL is entitled to receive; provided, that no payment shall be owed or payable to GTL if the Committee shall have elected to defer the distribution to be made on such Scheduled Distribution Payment Date. No other adjustment for distributions, including any Distribution Arrearages, is to be made upon conversion.
PPIs shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such PPIs for conversion in accordance with the foregoing provisions, and at such time the rights of GTL with respect to such PPIs shall cease, and OPIs issuable upon conversion shall be treated for all purposes as having been issued at such time.
SECTION 3.3. Fractions of Interests. In the event that GTL shall be required to pay a cash adjustment in lieu of any issuance of fractional interests in GTL Common Stock as provided in its Bye-Laws and GTL shall not have cash available to make such payment, then the Partnership shall make a cash distribution to GTL, in lieu of a payment of such amount in OPIs under this Agreement and to the extent that funds shall be legally available thereof, to allow GTL to make such cash adjustments.
-8- SECTION 3.4. Adjustment of Conversion Ratio. Upon a subdivision, combination or reclassification of OPIs, the Conversion Ratio shall be adjusted to take into account such subdivision, combination or reclassification.
SECTION 3.5. Provisions in Case of Consolidation, Merger or Conveyance or Transfer of Properties and Assets. In case of any consolidation of the Partnership with, or merger of the Partnership into, any other partnership or other business entity, or in case of any merger of another partnership or other business entity into the Partnership (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Partnership Interests or a transaction governed by Section 6.13 of this Agreement), or in case of any conveyance or transfer of the properties and assets of the Partnership substantially as an entirety, the partnership, corporation, or other business entity formed by such consolidation or resulting from such merger or which acquires by conveyance or transfer such properties and assets, as the case may be, shall execute and deliver to GTL an agreement providing that GTL shall have the right thereafter, during the period PPIs shall be convertible as specified in this Article III, to convert such PPIs only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a Partner holding OPIs immediately prior to such consolidation, merger, conveyance or transfer, assuming such Partner failed to exercise its rights of election, if any, as to the kind or amount of partnership interests, securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer (provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each unit of Ordinary Partnership Interests in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purpose of this Section the kind and amount of partnership interests, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each nonelecting OPI shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting OPIs). Such agreement shall provide for adjustments which, for events subsequent to the effective date of such agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section shall similarly apply to successive consolidations, mergers, conveyances or transfers. The Partnership will not become a party to any consolidation or
-9- merger unless the terms of such consolidation or merger are consistent with this Section.
SECTION 3.6. Taxes on Conversions. The Partnership will pay any and all taxes that may be payable in respect of the issue or delivery of OPIs on conversion of PPIs pursuant hereto.
ARTICLE IV Subordination of PPIs
SECTION 4.1. PPIs Subordinate to All Liabilities. The PPIs shall be subordinated and subject, to the extent and in the manner herein set forth, in right of payment to the prior payment in full of all existing and future liabilities of the Partnership, including without limitation: (i) certain distributions made to partners in respect of taxes levied upon the operations of Globalstar; (ii) distributions of the Management Fee; and (iii) guarantee fees to be made to partners and other persons in connection with their guarantee of the Partnership's obligations under the Globalstar Credit Agreement.
SECTION 4.2. No Payments When Liabilities in Default; Payment Over of Proceeds upon Dissolution, etc. In the event the Partnership shall default in the payment of any liabilities of the Partnership when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, then, unless and until such default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash or property, by setoff or otherwise) need be made or agreed to be made on account of the PPIs (excepting cash payment for fractional interests as set forth in Section 3.3 above).
Upon the happening of an event of default with respect to any liability, as defined therein or in the instrument under which the same is outstanding, permitting the holders thereof to accelerate the maturity thereof (under circumstances when the terms of the preceding paragraph are not applicable), unless and until such event of default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash or property, by setoff or otherwise) need be made or may agreed to be made on account of the PPIs (excepting cash payment for fractional interests as set forth in Section 3.3 above).
In the event of:
-10 - (a) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relating to the Partnership or its property;
(b) any proceeding for the liquidation, dissolution or other winding up of the Partnership or its property;
(c) any assignment by the Partnership for the benefit of creditors; or
(d) any other marshaling of the assets of the Partnership; all liabilities (including any interest thereon accruing after the commencement of any such proceedings) shall first be paid in full before any payment or distribution (direct or indirect), whether in cash or property, by setoff or otherwise, need be made on account of any PPIs.
SECTION 4.3. Voting Rights. Excepting as required by law, the PPIs will not have any voting rights. Upon a Voting Rights Deferral Triggering Event, (i) the number of members of the Committee will be increased by one and (ii) the holders of the Preferred Stock, voting separately as a class with the holders of any other securities upon which similar voting rights have been conferred and are exercisable, will be entitled to elect one representative to the Committee (the "Preferred Stock Representative"). The Preferred Stock Representative will promptly resign upon receipt of notice from GTL that all Distribution Arrearages with respect to the PPIs have been paid.
-11 - AMENDMENT TO THE LORAL SPACE & COMMUNICATIONS LTD. 1996 STOCK OPTION PLAN
The Loral Space & Communications Ltd. 1996 Stock Option Plan (the "Plan") is hereby amended as follows:
The first sentence of Section 3 of the Plan is amended to read as follows:
"The total number of shares of Common Stock which shall be subject to Options granted under the Plan shall not exceed 18,000,000, subject to adjustment as provided in Section 7 hereof." 1
FIRST AMENDMENT
FIRST AMENDMENT, dated as of May 7, 1998 (this "Amendment"), to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among LORAL SPACECOM CORPORATION (the "Borrower"), SPACE SYSTEMS/LORAL, INC. ("SS/L"), the Banks from time to time parties thereto (the "Banks"), ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. ("San Paolo"), individually and as selling bank (in such capacity, the "Selling Bank"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank of America"), as administrative agent (in such capacity, the "Administrative Agent") and as issuing bank, THE CHASE MANHATTAN BANK, as syndication agent and NATIONSBANK OF TEXAS, N.A., as documentation agent.
W I T N E S S E T H :
WHEREAS, the Borrower has requested that the Credit Agreement be amended to extend the period of time by which the Borrower must deliver financial statements to the Administrative Agent, the Selling Bank and each Bank; and
WHEREAS, the Required Banks are willing to agree to such amendment;
NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined.
Section 2. Amendment of Subsection 8.1 (Financial Statements). Subsection 8.1 of the Credit Agreement is hereby amended as follows:
(a) by deleting the reference to "90 days" in the first line of paragraph (a) of such subsection and substituting "120 days" therefor.
(b) by deleting the phrase "45 days" in the first line of paragraph (b) of such subsection and substituting "60 days" therefor.
Section 3. Conditions Precedent. This Amendment shall become effective as of the date (the "Amendment Effective Date") that the Administrative Agent shall have received counterparts of this Amendment, duly executed by the Borrower, SS/L, the Selling Bank and the Required Banks.
Section 4. Legal Obligation. The Company represents and warrants to each Bank that this Amendment constitutes the legal, valid and binding obligation of the Borrower, 2 enforceable against it in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyances, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.
Section 4. Continuing Effect. Except for the amendments expressly provided herein, the Credit Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. The amendments provided herein shall be limited precisely as drafted and shall not be construed to be an amendment or waiver of any other provision of the Credit Agreement other than as specifically provided herein.
Section 5. Expenses. The Borrower agrees to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Amendment and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent.
SECTION 6. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written.
LORAL SPACECOM CORPORATION
By: /s/ Loral SpaceCom Corporation ------Title:
SPACE SYSTEMS/LORAL, INC.
By: /s/Space Systems/Loral, Inc. ------Title:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent and as a Bank
By: /s/Steve A. Aronowitz ------Title: Managing Director
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Issuing Bank
By: /s/Steve A. Aronowitz ------Title: Managing Director
ISTITUTO BANCARIO SAN PAOLO DI TORINO, S.P.A., as Selling Bank and in its individual capacity
By: /s/Istituto Bancario San Paolo Di ------Torino, S.P.A. Title: Vice Presidents
By: Title: 4
THE CHASE MANHATTAN BANK
By: /s/Richard C. Smith ------Title:
NATIONSBANK OF TEXAS, N.A.
By: /s/Pamela S. Kurtzman ------Title: Vice President
THE BANK OF NEW YORK
By: /s/Ken Sneider ------Title: Vice President
BARCLAYS BANK PLC
By:/s/Barclays Bank PLC ------Title: Director
CREDIT LYONNAIS, NEW YORK BRANCH
By: /s/Credit Lyonnais, New York Branch ------Title: Vice President
5
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES
By: /s/Robert Wood ------Title: Director
By:/s/Susan L. Pearson ------Title: Director
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/The Industrial Bank of Japan, Limited ------Title: Joint General Manager
MELLON BANK N.A.
By: /s/Mellon Bank N.A ------Title: Senior Vice President
THE SANWA BANK, LIMITED, NEW YORK BRANCH
By:
Title:
SOCIETE GENERALE
By: /s/Societe Generale ------Title: Vice President
6
THE SUMITOMO BANK LIMITED
By: /s/John C. Kissinger ------Title: Joint General Manager
BANK OF MONTREAL
By: /s/W.T. Calder ------Title: Director
THE BANK OF NOVA SCOTIA
By: /s/J. Alan Edwards ------Title:
BANQUE NATIONALE DE PARIS
By: /s/Sophie Revillard Kaufman ------Title: Vice President
By: /s/Gwen Abbott ------Title: Assistant Vice President
BANQUE PARIBAS
By: /s/Banque Paribas ------Title: Vice President
By: /s/Matthew C. Bishop ------Title: Assistant Vice President
7
BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH
By: /s/Peter Oberman ------Title: Senior Vice President Manager Lending Division
By: /s/Sean O'Sullivan ------Title: Vice President
CIBC INC.
By: /s/Cynthia McCahill ------Title: Executive Director
CITICORP USA, INC.
By: /s/Citicorp USA, Inc. ------Title: Attorney-in-Fact
FUJI BANK, LIMITED
By: /s/Fuji Bank, Limited ------Title: Vice President and Manager
THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED
By: /s/Ken Yoshizaki ------Title: Deputy General Manager
8
THE MITSUBISHI TRUST AND BANKING CORPORATION
By: /s/Scott J. Paige ------Title: Senior Vice President
NATIONAL CITY BANK
By:
Title:
PNC BANK, NATIONAL ASSOCIATION
By:/s/Steffen W. Crowther ------Title: Vice President
THE TOKAI BANK, LIMITED NEW YORK BRANCH
By: /s/The Tokai Bank, Limited New York Branch ------Title: Assistant General Manager
THE TOYO TRUST & BANKING CO., LTD.
By: /s/The Toyo Trust & Banking Co., Ltd. ------Title: Vce President
9
YASUDA TRUST AND BANKING COMPANY, LIMITED
By:
Title: CONFORMED AS AMENDED
FIRMAMENTO MEXICANO, S. DE R.L. DE C.V.
MEMBERSHIP AGREEMENT
Amended and Restated Membership Agreement, dated and effective as of the 21st day of August, 1998, among Loral SatMex Ltd., a company organized under the laws of the Islands of Bermuda ("Loral") and Ediciones Enigma, S.A. de C.V., a sociedad anonima de capital variable organized under the laws of Mexico ("EE" and, together with Loral, the "Members"), and Firmamento Mexicano, S. de R.L. de C.V., a sociedad de responsibilidad limitada de capital variable organized under the laws of Mexico (the "Company"). Certain terms used in this Agreement are defined in Section 8 hereof.
R E C I T A L S
WHEREAS, the Company has been created with an authorized capital of P$1,170,050,000, which capital is divided into voting capital represented by Class A Social Parts and Class B Social Parts (collectively, the "Voting Capital") and non-voting capital represented by Class N Social Parts (the "Non-Voting Capital"). The authorized Voting Capital and Non-Voting Capital was subscribed on November 17, 1997 by Loral and EE in the following amounts and in exchange for issuance of the following Social Parts:
EE:
1. a Class A Social Part representing invested capital of P$25,500 and constituting 51% of the total Voting Capital.
2. a Class N Social Part representing invested capital of P$409,492,000 and constituting 35% of the total Non-Voting Capital.
LORAL:
1. a Class B Social Part representing invested capital of P$24,500 and constituting 49% of the total Voting Capital. 2. a Class N Social Part representing invested capital of P$760,508,000 and constituting 65% of the total Non-Voting Capital.
WHEREAS, the Company owns all but one share of the issued and outstanding capital stock of Servicios Corporativos Satelitales, S.A. de C.V. ("Satmex Holdings"), which in turn owns all but two shares of the issued and outstanding capital stock of Corporativo Satelites Mexicanos, S.A. de C.V. (the "Acquisition Sub"). The Acquisition Sub was formed for the purpose of making the acquisition of 75% of the equity interest of Satelites Mexicanos, S.A. de C.V. (the "Acquisition");
WHEREAS, the amounts invested by EE and Loral in the Company have been used to fund, through the Acquisition Sub, a portion of the purchase price payable at the first closing of the Acquisition;
WHEREAS, the second closing of the Acquisition will occur on December 29, 1997 and in connection therewith, Loral and EE may be required pursuant to the terms of the Financing Documents to make certain Additional Capital Contributions to the Company; and
WHEREAS, the Members and the Company desire to promote their mutual interests by agreeing to certain matters relating to the Additional Capital Contribution, the operations and governance of the Company and the Companies Entities and the disposition and voting of Social Parts.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows:
1. ADDITIONAL CAPITAL CONTRIBUTION; SOCIAL PART CERTIFICATES
(a) Each of Loral and EE hereby agrees that if an Additional Capital Contribution is required, then it shall, in accordance with the terms set forth below, fund 65% and 35%, respectively, of the amount of such Additional Capital Contribution by increasing the authorized equity capital of the Company in such amount, which increase will be allocated among Voting Capital and Non-Voting Capital in the same proportion as the initial funding and which increased capital will be subscribed by Loral and EE in the same proportions as the initial funding such that the percentage of Voting Capital and Non-Voting Capital of each of Loral and EE remains unchanged.
-2- (b) Closing. The closing of any such sales and purchases shall take place at 9:00 A.M., New York City time, on the date of the second closing of the Acquisition, at the offices of Sanchez Mejorada Velasco y Valencia, Paseo de la Reforma 450, Lomas de Chapultepec, 11000 Mexico, D.F., or such other location as the Members shall mutually select.
(c) Application of Proceeds. The initial capital contribution, as well as any Additional Capital Contribution was and shall be used to fund the Acquisition. Such funding was and shall be effected by a contribution of the invested capital by the Company to its Subsidiaries.
(d) Legends. The certificates evidencing the Social Parts subscribed by the Members, will bear the legend set forth in Section 5(d) and the following legend reflecting the restrictions on the transfer of such interests contained in this Agreement:
"The Social Parts evidenced hereby are subject to the terms of that certain Membership Agreement dated and effective as of November 17, 1997, by and among the Company and certain Members identified therein, including certain restrictions on transfer. A copy of this Agreement is available upon request to the Company."
2. GOVERNANCE
(a) Election of Directors. The Members and the Company shall take all action within their respective power, including, but not limited to, the voting of all Voting Capital owned by them to cause the Board of Directors of the Company to consist of five (5) members or such other odd number as the Members may from time to time establish (the "Authorized Number"), which shall at all times throughout the term of this Agreement (except as set forth in Section 4(e) hereof) be comprised of (i) directors equal to a simple majority of the Authorized Number and holding a simple majority of the votes entitled to be cast by directors at any meeting of the Board, each such director to be designated by EE (each, an "EE Director"), and (ii) the remaining director(s) to be designated by Loral (each, a "Loral Director"). For so long as EE designates the majority of directors of the Board of the Company pursuant to the foregoing sentence, EE shall nominate the Chairman of the Board of the Company and the Members agree that they shall take all action within their respective
-3- power to elect such nominee. For so long as EE designates the Chairman of the Board of the Company, Loral shall have the right to nominate the Secretary of the Board (and his alternate) and the Members agree that they shall take all action within their respective power to elect such nominee, which Secretary shall not be a member of the Board for any purpose and shall not count as a Loral Director. The Company shall cause the Board of Directors of SatMex and any other direct or indirect subsidiary of the Company to be constituted in an identical manner unless determined otherwise by the Board of Directors of the Company by a Consensus Vote provided that the Board of Directors of SatMex shall have such additional directors (not appointed by either Loral or EE) as may be required pursuant to Mexican law or the by-laws of SatMex. Each of Loral and EE shall have the authority to designate alternate directors (each a "Designated Alternate") to substitute for the Loral Directors or EE Directors, as the case may be, in accordance with the bylaws of the Company Entities. As of the date hereof, the Board of each Company Entity (as defined below) shall consist of those persons set forth on Schedule I hereto.
(b) Replacement Directors. Each Loral Director or EE Director is subject to removal at any time for any reason or for no reason by the Member who designated him or her. If, at any time, a vacancy is created on the Board of any Company Entity by reason of the death, removal or resignation of any Loral Director or EE Director, the Member who designated such director shall, within five days after the date such vacancy first occurs, take such action as is reasonably necessary, including the voting of all Voting Capital held by it, to elect a director or directors designated in accordance with Section 2(a) hereof to fill such vacancy or vacancies; provided, that during such five day period following the creation of the vacancy, the Board of such Company Entity shall not transact any other business except by Consensus Vote. Each Member agrees that it will vote or execute a written consent with respect to all of its Voting Capital to effectuate the intent of this Section 2(b).
(c) Quorum; Required Vote. A quorum of any meeting of the Board of any Company Entity shall require the presence of a majority of the Board, which shall include at least one Loral Director and one EE Director. No action at any meeting may be taken by the Board unless a quorum is present and notice therefor (setting forth all actions to be taken at such meeting) is duly given at least five business days before the date of the meeting (or unless duly waived by the directors in accordance with the by-laws). No resolution, action or decision required or permitted to be taken, adopted or made by the Board of any Company Entity shall be so taken, adopted or made without a vote of the majority of all directors present, provided that if the matter being considered is an Extraordinary Matter, the approval of at least one Loral Director and one EE Director shall be
-4- required (a "Consensus Vote"). Any such resolution, action or decision may also be taken, adopted or made by unanimous written consent.
(d) Mutual Approvals Required for Certain Action. A Consensus Vote, or if the matter requires approval by shareholders or members under Mexican law or the by-laws of the Company Entities, the approval of each Member, shall be required to approve and authorize any of the following matters with respect to any Company Entity (each, an "Extraordinary Matter"):
(i) New Line of Business. Engagement by the Company Entities in any business other than that conducted on the date hereof or as set forth in the Business Plan and any business directly related to such business, in each case, as such business or businesses may, from time to time develop, provided, that such related business or developed business does not constitute a material change in the nature of the business of the Company Entities as it is conducted on the date hereof or as set forth in the Business Plan.
(ii) Transfer of Material Assets. Sell, lease (as lessor), transfer, mortgage, assign, pledge, exchange or otherwise dispose of all or substantially all of the assets of any of the Company Entities.
(iii) Merger or Liquidation. Approve any transaction or merger, consolidation, amalgamation, recapitalization or other form of business combination, or any liquidation, winding up or dissolution of any of the Company Entities or any other transaction in which a Company Entity is not the surviving entity.
(iv) Voluntary Bankruptcy. Commence a voluntary case under the applicable Mexican bankruptcy code, as now or hereafter in effect, or any successor thereto, or any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency, liquidation or similar law under any other jurisdiction or make a general assignment for the benefit of creditors.
(v) Organizational Documents. Amend in any material manner the articles of incorporation or by-laws or organizational documents of any of the Company Entities, except as contemplated in the SatMex Stock Purchase Agreement.
-5- (vi) Adoption of or Amendments to the Business Plan. Adopt or amend in any material manner the Business Plan.
(vii) Dividends and Distributions; Redemption and Repurchase; Dividend Policy. Declare or pay any dividends or distributions (other than (i) to the Company or (ii) in the case of SatMex, in accordance with the SatMex Dividend Policy) or repurchase or redeem any equity securities of any of the Company Entities except as set forth in Section 4(f). Amend in any manner the SatMex Dividend Policy.
(viii) Affiliated Parties. Enter into or engage in transactions with entities directly or indirectly, controlling, controlled by or under common control of either of the Members other than the Permitted Transactions. For such purposes, "control" shall mean the direct or indirect possession of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Control, by contract or otherwise.
(ix) Significant Decisions. Any Significant Decision.
(x) Budget. The adoption by the Company Entities of a Budget, as more fully described in Section 2(f).
(xi) Capital Expenditures and Certain Actions. Except as provided in any Budget approved by a Consensus Vote, (i) any individual or series of related expenditures, commitments, obligations or agreements by any Company Entity in excess of US$1,000,000 or (ii) any commitment, arrangement or agreement outside of the ordinary course of business of the Company Entities, including without limitation entering into any joint venture or strategic alliances or partnerships.
(xii) Incurrence or Payment of Indebtedness. Create, incur, guarantee, assume, refinance or pre-pay indebtedness of any Company Entities outside of the ordinary course of business except for the indebtedness contemplated by the Business Plan, the Bridge Note Commitment Letter, the Facility Commitment Letter, the Interim Facility, the Fixed Rate Financing and the Government Obligations and any refinancing of any of the foregoing.
(xiii) Acquisitions. The direct or indirect loan or advance to, any acquisition of any business, assets, capital stock, equity interest or other security of, or other
-6- investment in, any Person or Persons, in each case, by any Company Entity, in any transaction or in any series of related transactions, that involve or could reasonably be valued in excess of US$1,000,000, except for the transactions contemplated under the SatMex Stock Purchase Agreement.
(xiv) Issuance of Securities. Approve any issuance of equity securities or any other security convertible, exercisable or exchangeable into equity securities of any Company Entity (other than to the Company or as contemplated in the Business Plan), including any option, warrant, put, call or other arrangement of any kind to purchase or otherwise receive from any Company Entity (other than to the Company or as contemplated in the Business Plan) any such securities outside of the ordinary course of business, except for (i) the issuance of warrants in connection with the High Yield Financing or as contemplated in the Bridge Commitment Letter and (ii) the issuance of securities pursuant to an employee stock option plan or similar plan adopted pursuant to a Consensus Vote in accordance with Section 2(d)(xix).
(xv) Appointment, Suspension or Removal of Senior Officers; Compensation. Except as set forth in Section 2(h), any appointment, suspension or removal of any person who is, or upon appointment would be, a senior executive officer of any of the Company Entities and the determination of the compensation in respect of any such senior executive officer.
(xvi) Engagement of Accountants. The engagement or dismissal of independent public accountants, whether in connection with an audit of the financial statements of the Company Entities or otherwise.
(xvii) Accounting and Tax. Establish or modify the accounting or tax methods, practices, procedures or policies of the Company Entities except as required by law or generally accepted accounting principles.
(xviii) Litigation and Arbitration. Commence any litigation or arbitration that pertains to any of the Company Entities or assets of any of the Company Entities or the settlement or any other material decision relating to a litigation, arbitration, governmental investigation or other proceeding, with a potential claim for damages in excess of US$1,000,000.
-7- (xix) Employee Benefit Plans. Adopt, amend or make any grants pursuant to any employee benefit or stock option plans.
(xx) Transfer of Telecommunications Licenses. Sell, lease (as lessor), transfer, mortgage, assign, pledge, exchange or otherwise dispose of the telecommunications licenses of the Company Entities, except as contemplated under the Facility Commitment Letter.
(xxi) Certain Agreements. The entry into any agreement or arrangement to do any of the foregoing.
(e) Management and Operating Decisions. The day and day management and operation of SatMex, including the taking of such actions as may be necessary to implement the Business Plan, shall be vested in the Chief Executive Officer and the Chief Operating Officer of SatMex who shall have authority to approve all decisions related thereto; provided, however, that any decision that would impact the Operating Cash Flow, as set forth in the Business Plan, by more than 10% or US$10 million (a "Significant Decision") shall be approved by a Consensus Vote of the Board of Directors as set forth in Section 2(d)(ix) above. The Chief Operating Officer shall report to the Chief Executive Officer of SatMex and the Executive Committee of SatMex and shall serve as Chief Executive Officer of SatMex during any period in which there is a vacancy in the position of Chief Executive Officer.
(f) Budget Approval. (i) The Members shall consider and, if agreement is reached, shall adopt and approve at least once each fiscal year, a budget for the successive fiscal year. If any proposed budget, or any material amendment thereto, is not approved by a Consensus Vote, then the last budget so approved by the Members shall be extended as described below (the "Carry-Over Budget"), until approval is received from by Consensus Vote.
(ii) The Carry-Over Budget shall provide for (x) adjustments for the greater of five percent (5%) per annum or the increase in the Consumer Price Index in effect for the period in question, (y) any additional increases necessary to meet (A) any payment escalation provisions of any authorized contractual commitments of the Company Entities, or (B) any authorized contractual commitments of the Company Entities, in either case to the extent such contractual commitments shall have been previously approved by the Members or by a Consensus Vote to the extent required by the provisions hereof or the provisions of the By-laws or the Membership Agreement and (z) if any material items set
-8- forth in the Budget shall be denominated in Pesos, a method for adjusting any peso denominated amounts in the event of a material fluctuation in the Peso-Dollar exchange rate.
(g) Appointment of Officers.
(i) Each Member and the Company hereby agrees to take such action as may be necessary to appoint as officers to SatMex, effective as of the date hereof, as follows: (A) as Chief Executive Officer, such individual as Loral and EE shall mutually agree and who shall be a Mexican national, (B) as Chief Operating Officer, such individual as may be designated by Loral, with the approval of EE, which approval shall not be unreasonably withheld and (C) as all other executive officers, such individuals as Loral and EE shall mutually agree. Schedule II hereto sets forth the officers of SatMex as of the date hereof.
(ii) Each Member and the Company hereby agrees to take such action as may be necessary to appoint as officers to the Company, effective as of the date hereof, as follows: (i) as President, such individual as may be designated by EE, with the approval of Loral, which approval shall not be unreasonably withheld, (ii) as Chief Executive Officer, such individual as may be designated by Loral, with the approval of EE, which approval shall not be unreasonably withheld, (iii) as Chief Operating Officer, such individual as may be designated by Loral, with the approval of EE, which approval shall not be unreasonably withheld and (iv) as Chief Financial Officer, such individual as may be designated by EE, with the approval of Loral, which approval shall not be unreasonably withheld. Schedule II hereto sets forth the officers of the Company as of the date hereof.
(iii) The officers of all other Company Entities shall be appointed by their respective Board of Directors, if the members agree that they are needed.
(h) Removal of Officers. The officers of SatMex shall be removed as follows: (i) the Chief Executive Officer, by either EE or Loral, (ii) the Chief Operating Officer, by Loral or by the Executive Committee if removal of such officer was recommended to the Executive Committee by the Chief Executive Officer and such recommendation was approved by the Executive Committee and (iii) all other executive officers, by either EE or Loral or by the Executive Committee if removal of such officer was recommended to the Executive Committee by either the Chief Executive Officer or Chief Operating Officer and such recommendation was approved by
-9- the Executive Committee. The officers of the Company shall be removed as follows: (i) the President and Chief Financial Officer, by EE and (ii) the Chief Executive Officer and Chief Operating Officer, by Loral. Each Member and the Company hereby agrees to take such action as may be necessary to effect all such removal and to appoint any successor to fill any vacancy resulting from such removal or from the death or resignation of any officer in accordance with Section 2(g) above.
(i) Executive Committee. Each of the Members and the Company agrees to take such action as shall be necessary to create an Executive Committee of the Board of Directors of the Company and SatMex, which Executive Committee shall be composed of one Loral Director and one EE Director. Schedule I hereto sets forth the members of the Executive Committees as of the date hereof. The Executive Committees shall be authorized to take action on all matters, including Extraordinary Matters that may be authorized by the Board of Directors under this Agreement or otherwise. Each of Loral and EE shall be authorized to designate an alternate director to substitute for the Loral Director and EE Director, as the case may be, on each Executive Committee (each an "Executive Committee Alternate"). Schedule I hereto sets forth the Executive Committee Alternates as of the date hereof.
(j) Certain Actions of SatMex Board. Each of Loral and EE shall use its reasonable best efforts to cause the directors of the Board of SatMex designated by Loral or EE, as the case may be, to vote in favor of any action relating to SatMex previously approved by the Board of the Company.
(k) By-laws. The Members and the Company shall cause the provisions of this Section 2 to be included in the by-laws of each of the Company Entities, as applicable.
3. DEADLOCK
(a) Proposal. If either Loral or EE proposes a capital expenditure (the "Proposing Member") in excess of US$1 million not provided for in the Business Plan, but such expenditure is within the existing line of business of the Company as described in Section 2(d)(i) (the "Proposal"), the Proposing Member shall send to the other Member written notice of its intent to effect such a capital expenditure and if within ten Business Days following receipt of such notice such expenditure is opposed in writing by the other Member (the "Objection"), the Proposing Member may, notwithstanding the provisions of Section 2(d)(xi), implement the Proposal, and the other member (the "Opposing Member") shall vote its Social Parts and otherwise cooperate to
-10 - implement the Proposal, provided that the Opposing Member shall have the option, exercisable by delivering to the Proposing Member written notice of its intent to exercise its option under this Section 3(a), within 60 days after the date of the Objection, to sell to the Proposing Member, and the Proposing Member shall be required to purchase, all of the Social Parts of the Company held by the Opposing Member and its Affiliates for Fair Market Value (as defined in Section 3(d)) as of the end of the fiscal quarter immediately preceding the date the Proposal was made. If the Opposing Member is EE and it elects to exercise its rights under this Section 3(a), Loral may, in its sole discretion, elect to assign the right to purchase the Social Parts of the Company owned by EE to a Qualified Mexican Person at a price negotiated with such buyer, provided that in no event shall EE receive for its Social Parts less than the Fair Market Value as of the end of the fiscal quarter immediately preceding the date the Proposal was made.
(b) EE Action. If EE causes any of the Company Entities to take any material action not explicitly provided for in the Business Plan and Loral opposes such action in writing within ten (10) Business Days from the day it first becomes aware of such material action, then Loral, in its sole discretion, shall have the option to provide EE with a written notice (the "Opposition Notice") stating its opposition to the action and the reason it is material and that the failure to cure such action within twenty days after receipt of the Opposition Notice shall give rise to its option under this Section 3(b). No such action shall be deemed material if it would not require a Consensus Vote or if it does not involve the expenditure or incurrence of obligations in excess of US $1 million. If EE does not cure such action within twenty days after receipt of the Opposition Notice, Loral shall have the option, exercisable by delivering to EE written notice of its intent to exercise its option under this Section 3(b) within 60 days of the date of the Opposition Notice, to either: (i) sell to EE, and EE shall be required to purchase, all of the Social Parts of the Company held by Loral and its Affiliates at a price equal to 120% of the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date such action was taken, or (ii) purchase from EE and EE shall be required to sell, all of the Social Parts of the Company held by EE and its Affiliates for cash in an amount equal to the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date such action was taken, provided that such exercise shall be conditioned upon Loral identifying a Qualified Mexican Person willing to purchase
-11 - the Social Parts of the Company owned by EE and its Affiliates at such Fair Market Value.
(c) Loral Inaction. If Loral fails to approve any material matter which requires a Loral vote and which is provided for in the Business Plan and EE approves such a matter and has given Loral written notice (the "Warning Notice") that such failure to approve the matter gives rise to its option under this Section 3(c), then unless Loral grants such approval within twenty (20) days after receipt of such notice, then EE shall have the option, exercisable by delivering to Loral written notice of its intent to exercise its option under this Section 3(c) within sixty (60) days of the date of such notice, to either: (i) sell to Loral, and Loral shall be required to purchase, all of the Social Parts of the Company held by EE and its Affiliates at a price equal to 120% of the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date of the Warning Notice, as (ii) purchase from Loral and Loral shall be required to sell, all of the Social Parts of the Company held by Loral and its Affiliates for cash in an amount equal to the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date of the Warning Notice. No such action will be deemed material if it would not require a Consensus Vote or if it does not involve the expenditure or incurrence of obligations in excess of US $1 million.
(d) Determination of Fair Market Value. The determination of the fair market value (the "Fair Market Value") of the Social Parts described in Section 3(a) - 3(c) above shall be made in accordance with this Section 3(d). Promptly upon receipt by a Member of a call or put notice, as the case may be, under Sections 3(a), 3(b) or 3(c) above, each Member shall promptly appoint as an appraiser an internationally-recognized investment banking firm (a "recognized investment banking firm"). Each appraiser shall, within thirty (30) days of appointment, separately investigate the value of the Social Parts to be purchased or sold, as the case may be, as of the proposed transfer date and shall submit a notice of an appraisal of that value to each Member. If the appraised values of such consideration (the "Earlier Appraisals") vary by less than ten percent (10%), the average of the two appraisals on a per unit basis shall be controlling as the fair market value. If the appraised values vary by more than ten percent (10%), the appraisers, within ten (10) days of the submission of the last appraisal, shall appoint a third appraiser which shall be a recognized investment banking firm. The third appraiser shall, within thirty (30) days of its appointment, appraise the fair market value of the Social Parts in question as of the proposed
-12 - transfer date and submit notice of its appraisal to each Member. The value determined by the third appraiser shall be controlling as the fair market value of the Social Parts unless the value is greater than the two Earlier Appraisals, in which case the higher of the two Earlier Appraisals will control, and unless the value is lower than the two Earlier Appraisals, in which case the lower of the two Earlier Appraisals will control. If any Member fails to appoint an appraiser or if one of the two initial appraisers fails after appointment to submit its appraisal within the required period, the appraisal submitted by the remaining appraiser shall be controlling. Each Member shall bear the cost of its respective appointed appraiser. The cost of the third appraisal shall be shared equally between the Members.
(e) Closing. Within the later of 30 days after the date on which the fair market value of the Social Parts is finally determined pursuant to Section 3(d), the Member selling the Social Parts, whether pursuant to a call or a put option, as the case may be, shall convey to the purchasing Member all of the Social Parts then held by it or its Affiliates, free and clear of all liens, claims and encumbrances, and the purchasing Member shall deliver cash to the selling Member equal to the appropriate amount in consideration therefor, at a closing to be held at the offices of the Company or at such other place as shall be agreed to by the Members.
4. TRANSFER OF STOCK
(a) Resale of Social Parts. No Member shall Transfer any Social Parts other than in accordance with the provisions of this Section 4. Any Transfer or purported Transfer made in violation of this Section 4 shall be null and void and of no effect.
(b) Rights of First Offer.
(i) If a Member proposes to Transfer any of the Social Parts owned by it other than in a Permitted Transfer, then the Member desiring to make the Transfer (hereinafter referred to as the "Transferor") must first make the offer to sell the Social Parts to the other Member (the "Other Member").
(ii) Offer by Transferor. Copies of the Transferor's offer shall be given to the Other Member and shall consist of an offer to sell to the Other Member, for cash, all of the Social Parts then proposed to be transferred by the Transferor (the "Subject Social Parts") upon customary terms and conditions, representations,
-13 - warranties and covenants, at a cash price designated by the Transferor (the "Stated Price").
(iii) Acceptance of Offer. Within twenty (20) days after the receipt of the offer described in Section 4(b)(ii), the Other Member may, at its option, elect to purchase all, but not less than all, of the Subject Social Parts for the Stated Price on the terms and conditions set forth in such offer. The Other Member shall exercise such option by giving notice to the Transferor, in which event the notice required to be given by the purchasing party (the "Purchaser") shall specify a date for the closing of the purchase which shall not be more than thirty (30) days after the date of the giving of such notice. If the Other Member does not accept the offer by the twentieth day following the date the offer was received, it shall be deemed to have waived all its rights under this Section 4(b)(iii) with respect to such offer.
(iv) Closing of Purchase. The closing of the purchase shall take place at the office of the Company or such other location as shall be mutually agreeable and the Stated Price shall be paid at the closing. At the closing, the Transferor shall cause the Company to deliver to the Purchaser new certificates evidencing the Subject Social Parts to be conveyed.
(v) Release from Restriction; Termination of Rights. If the offer to sell is not accepted by the Other Member, the Transferor shall be free for six months following the period described in Section 4(b)(iii) above to solicit offers for the Social Parts, provided that (A) the Transferor shall not offer or sell the Social Parts at a price that is less than 98% of the Stated Price, and if the sale to the third party is other than entirely for cash, the Transferor shall certify to the other Member as to the cash value of any noncash consideration, (B) such Transfer shall be made only in strict accordance with the other terms of the offer described in Section 4(b)(ii) and (C) the transferee agrees, in writing, to be bound by the provisions of this Agreement. In the event that the Transferor shall have failed to effect a sale of the Social Parts in compliance with the requirements of (A), (B) and (C) above in the six month period provided herein or shall have offered the Social Parts to third parties at a price that is less than 98% of the Stated Price, the restrictions provided for herein shall again become effective, and no transfer of Social Parts may be made thereafter without again offering
-14 - the same in accordance with this Section 4(b). Any purported transfer of the Social Parts which contravenes any of this Section 4(b)(v) shall be deemed null and void.
(vi) Assignment by Loral. The parties hereto agree that if EE is the Transferor, Loral shall be free to assign its rights under this Section 4(b) to a Qualified Mexican Person upon written notice to EE of its intent to do so, which notice shall state the name and address of the Qualified Mexican Person, and following the date of such notice, the Qualified Mexican Person shall be treated as the Other Member for all purposes of this Section 4(b).
(vii) Limitations. The provisions of this Section 4(b) shall not apply to sales by Tag-Along Holders (as defined below) pursuant to Section 4(c) hereof.
(c) Tag-Along Rights.
(i) In the event any Member intends to Transfer any or all of its Social Parts (excluding a Permitted Transfer but including Transfers made to third parties pursuant to Section 4(b)(v)), such Member (the "Selling Member") shall notify the other Member (the "Tag-Along Holder"), in writing, of such proposed Transfer, the name of the third party and its terms and conditions. Within twenty (20) days of the date of such notice, the Tag-Along Member shall notify the Selling Member if it elects to participate in such Transfer. If the Tag-Along Holder fails to notify the Selling Member within such twenty (20) day period, it shall be deemed to have waived its rights hereunder. Upon notification by the Tag- Along Holder of its intent to exercise its rights under this Section 4(c), the Tag-Along Holder shall have the right to sell, at the same price and on the same terms and conditions as the Selling Member, an amount of Social Parts equal to the Social Parts the third party actually proposes to purchase multiplied by a fraction, the numerator of which shall be the number of Social Parts issued and owned by the Tag-Along Holder and the denominator of which shall be the aggregate number of Social Parts issued and owned by the Selling Member and the Tag-Along Holder. The Selling Member agrees that, in such event, it will reduce the amount of Social Parts to be sold by it to such third party by a corresponding amount. If, however, the Selling Member proposes to sell all of its Social Parts and the third party shall have agreed to purchase all the Social Parts held by the Selling Member and the Tag-Along Holder, the Tag-Along Holder shall have the
-15 - right to sell at the same price and on the same terms and conditions as the Selling Member all of its Social Parts.
(ii) Notwithstanding anything contained in this Section 4(c), in the event that all or a portion of the purchase price consists of securities and the sale of such securities to the Tag-Along Holder would require either a registration under the Securities Act or the preparation of a disclosure document pursuant to Regulation D under the Securities Act (or any successor regulation) or a similar provision of any jurisdiction's securities law (and such sale would not otherwise have been registered under the Securities Act), then, at the option of the Selling Member, the Tag- Along Holder may receive, in lieu of such securities, the fair market value of such securities in cash, as may be determined (A) in the case of publicly traded securities, by calculating the average of the reported closing market prices per share of such securities for the 10 consecutive trading days ending on the fifth trading day prior to the closing date for such Transfer, (B) in the case of non-publicly traded securities, as determined by a nationally recognized investment banking firm appointed by a Consensus Vote, or (C) in such other manner as may be determined by a Consensus Vote of the Board of Directors of the Company.
(d) Minimum Holdings. EE hereby agrees that without the prior written consent of Loral, it shall not Transfer any of its Social Parts, if immediately following such Transfer, the direct and indirect ownership in the Company then held by Qualified Mexican Persons is reduced to less than the number of Social Parts required to be held by a Qualified Mexican Person under Mexican law.
(e) Amendments to Applicable Mexican Law. Should the applicable Mexican law be amended to allow Persons not organized under the laws of Mexico to hold a majority of the voting securities of SatMex and the Company, the parties hereto shall promptly take action to (i) amend the designation of the Class N Social Parts to convert them into voting securities and (ii) amend the provisions of Section 2(a)(i) to provide that the majority of the Board of Directors of the Company Entities shall be designated by the Person holding a majority of the Social Parts then outstanding. In addition, if so requested by EE at its option, Loral shall thereafter negotiate in good faith with EE to exchange all Social Parts in the Company held by EE and its Affiliates (the "EE Social Parts") for common stock, par value US$.01 per share, of Loral Space & Communications Ltd. (the
-16 - "Loral Common Stock"), based upon an appraisal of the fair market value of the EE Social Parts in accordance with the provisions of Section 3 (d).
(f) Redemption of Social Parts. At the request of either Loral or EE (the "Requesting Member"), the Company shall sell such number of shares of common stock (the "SatMex Equivalent Shares") of SatMex held by the Company as shall correspond to the indirect interest in SatMex represented by the Social Parts proposed to the Transferred by the Requesting Member. The Company shall promptly thereafter use the proceeds of such sale to redeem from the Requesting Member the applicable number of Social Parts requested to be Transferred by the Requesting Member. Notwithstanding the provisions of this Section 4(f), the sale of the SatMex Equivalent Shares shall (A) be made in compliance with any applicable restrictions under the Ley General de Sociedades Mercantiles, or any other applicable law, and (B) remain subject to the provisions of Section 4(a) through 4(c) as if they were Social Parts proposed to be Transferred by a Member.
(g) Sale of Member. A Member, substantially all of the assets of which shall consist of Social Parts, shall not offer to sell its securities, or permit its securities to be sold, to another party if such sale would result in a Change of Control of such Member until and unless such Member shall have first made a right of first offer with respect to such securities to the other Member in the same manner as that set forth in Section 4(b) above.
5. CERTAIN COVENANTS OF THE PARTIES
(a) Expenses and Indemnification. Each of Loral and EE agrees to cause the Company Entities to pay the fees and expenses incurred by the lenders under the Commitment Letters, and to provide indemnification to the lenders as set forth therein. In the event that the Company Entities shall be unable for whatever reason, to provide such expense reimbursement or indemnification, then Loral and EE, severally, agree to assume the obligations to pay such expenses or provide such indemnity, as the case may be, in the following proportion: Loral 65% and EE 35%.
(b) The Members shall cause SatMex to: (i) enter into a management services agreement with each of Loral and EE or their respective Affiliates substantially in the form set forth as Exhibit A hereto (the "Management Services Agreement"); (ii) enter into a license agreement with Loral or its Affiliates substantially in the form set forth as Exhibit B hereto (the "IP Agreement") and (iii) adopt a marketing policy submitted by
-17 - Loral, which policy shall be consistent with the guidelines set forth in the definitive prospectus relating to the exchange offer of SatMex's 10 1/8% Senior Notes due 2004 and approved by EE (the "Marketing Policy"). The Members hereby agree that they shall not amend, or cause SatMex to amend, any of the Management Services Agreement, the IP Agreement or the Marketing Policy without the consent of Loral and EE.
(c) Tax Considerations. Each of Loral and EE agrees that, at the request of either Member, it shall execute and deliver any documents necessary for the Company or any Company Entity to be treated as a partnership to the extent permitted for United States federal income tax purposes, provided that such designation shall not adversely effect the other Member or any Company Entity.
(d) Application of (Mexican) General Business Entities Act. Each of Loral, EE and the Company covenants and agrees, and each party hereto acknowledges that each other party hereto is entering into this Agreement in reliance on, the following:
(i) that any and all rights that the parties hereto may have under Articles 38 and 42 of the General Business Entities Act (or any successor provisions) are hereby expressly waived;
(ii) that the events of rescission provided for in Article 50 of the General Business Entities Act (or any successor provisions) shall not be actionable by the parties hereto and shall not apply to the Company except as may be expressly provided for in this Agreement or in the by- laws of the Company; and
(iii) any attempt by any party hereto to exercise or invoke any of the provisions of Articles 15, 38, 42 or 50 of the General Business Entities Act (or any successor provisions) other than as expressly provided for herein or in the by-laws of the Company shall be void and shall constitute a material breach of this Agreement by such party which will be actionable by any other party.
The Company covenants and agrees that each certificate evidencing Social Parts or other instrument issued by the Company which represents or evidences an interest in Social Parts shall bear a legend to the foregoing effect.
(e) Loral hereby agrees that, without the prior written consent of EE after full disclosure of all material facts and
-18 - circumstances, it will not knowingly permit any Company Entity to take any action or adopt any policy that would discriminate unfairly against any Company Entity in favor of Loral or any of its other Affiliates in any material respect, including, without limitation, marketing policies applicable to areas in which any Company Entity competes with Loral or such Affiliate.
6. WARRANTIES AND REPRESENTATIONS OF THE MEMBERS
Each Member severally, represents to the other Member that:
(a) Corporate Existence and Power. Such Member (a) is duly organized and validly existing under the laws of the jurisdiction of its organization and (b) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement. Such Member is duly qualified to do business as a corporation in each jurisdiction in which the conduct of its business or the nature of the property owned by it requires such qualification except where the failure to so qualify would not have a material adverse effect on such Member.
(b) Authorization. This Agreement constitutes the valid and binding obligation of such Member, enforceable against such Member in accordance with its terms, except to the extent that enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws affecting creditors' rights and remedies generally from time to time in effect. The execution, delivery, and performance of this Agreement have been duly authorized by all necessary action on the part of such Member.
(c) No Contravention. The execution, delivery and performance by such Member of this Agreement and the transactions contemplated hereby (a) do not contravene the terms of the charter, by-laws or other organizational documents of such Member, (b) do not violate, conflict with or result in any breach or contravention of, or the creation of any lien under, any indenture, mortgage, deed of trust, credit agreement or other agreement to which such Member is party or to which its properties may be bound and (c) do not violate any provisions of applicable law.
(d) Governmental Authorization; Third Party Consents. No approval, consent, exemption, authorization or other action by, or notice to, or filing with, any governmental authority or any other Person in respect of any requirement of law or any requirement of contract or otherwise, and no lapse of a waiting
-19 - period under any requirement of law, is necessary or required in connection with the execution, delivery or performance by such Member, or the enforcement against such Member, of this Agreement, or the transactions contemplated hereby.
(e) Investment for Own Account. Such Member is acquiring the Social Parts purchased hereunder for its own account for investment and not with a view towards the resale, transfer or distribution thereof, nor with any present intention of distributing such Social Parts. Except as set forth in this Agreement, no other Person has any right with respect to or interest in the Social Parts to be purchased by such Member, nor has the Member agreed to give any Person any such interest or right in the future.
(f) Offering Exemption. Such Member understands that the Social Parts being purchased by it hereunder have not been registered under the Securities Act, nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon the representations of the Members contained herein.
7. INTERPRETATION OF THIS AGREEMENT
(a) Terms Defined. As used in this Agreement, the following terms have the respective meaning set forth below:
Acquisition: has the meaning set forth in the recitals hereto.
Acquisition Sub: has the meaning set forth in the recitals hereto.
Additional Capital Contribution: shall mean any additional equity contribution that may be required to be funded by Acquisition Sub as a condition precedent to the closing of the Credit Agreement or the Bridge Securities Purchase Agreement.
Affiliate: means any Person or entity, directly or indirectly controlling, controlled by or under common control with such Person or entity.
Bridge Note Commitment Letter: shall mean that certain commitment letter, dated as of November 17, 1997, by and between Loral Space & Communications Ltd. and Telefonica Autrey, S.A. de C.V., on the one hand, and DLJ Bridge Finance, Inc. and LB I
-20 - Group Inc., on the other hand, with respect to the financing of certain bridge securities, in the amount of up to US$270 million.
Bridge Securities Purchase Agreement: shall mean the definitive securities purchase agreement entered into in connection with the Bridge Note Commitment Letter.
Business Plan: shall mean the business plan dated January 23, 1998 agreed upon by Loral and EE in connection with the Acquisition.
Change of Control: shall mean the acquisition of a majority of the voting stock or analogous equity interest of a Member by a party other than an Affiliate of such Member.
Closing Date: shall have the meaning set forth in Section 1(c).
Concession Agreements: The Agreements dated October 23, 1997 entered into between SetMex and the Mexican Government relating to geostationary orbital positions located at 116.8(Degree)W, 109.2(Degree)W and 113.0(Degree)W.
Concession Subsidiary: shall mean a subsidiary of the Company formed for the purpose of applying for, and holding, a license from the Mexican Government to provide satellite transmission services directly to end-users.
Consumer Price Index: shall mean the Bureau of Labor Statistics Consumer Price Index, Subgroup "Urban Consumers (Revised)" for the United States as published by the United States Department of Labor.
Commitment Letters: shall mean collectively, the Bridge Note Commitment Letter and the Facility Commitment Letter.
Company Entities: shall mean the Company, SatMex and their respective subsidiaries provided that if the Board of Directors of the Company shall determine by a Consensus Vote under Section 2(a)(i) that the board of directors of any subsidiary (other than SatMex) need not be identical to that of the Board of Directors of the Company, then such subsidiary shall not be deemed to be a Company Entity for purposes of Section 2 (a)-(d).
Consensus Vote: shall have the meaning set forth in Section 2(c).
-21 - Credit Agreement: shall mean the definitive credit agreement entered into in connection with the Facility Commitment Letter.
Earlier Appraisals: shall have the meaning set forth in Section 3(d).
Extraordinary Matter: shall have the meaning set forth in Section 2(d).
Facility Commitment Letter: shall mean that certain commitment letter, dated as of November 17, 1997, by and between Loral Space & Communications Ltd. and Telefonica Autrey, S.A. de C.V., on the one hand, and DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and Donaldson Lufkin & Jenrette Securities Corporation on the other hand, with respect to the financing up to US$500 million of secured credit facilities.
Financing Documents: shall mean collectively, the Bridge Securities Purchase Agreement and the Credit Agreement and all related documents.
Fixed Rate Financing: shall mean the issuance of notes of a Company Entity to finance a portion of the purchase price of the SatMex acquisition or to refinance indebtedness, if any, outstanding in respect of the Bridge Note Commitment Letter.
Government Obligation: The obligation incurred by SatMex Holdings to the federal government of the United Mexican States under that certain Agreement, dated as of December 1997.
Interim Facility: shall mean that Demand Loan Agreement dated as of November 17, 1997, by and between Corporativo Satellites Mexicanos, S.A. de C.V., on the one hand, and DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and Donaldson Lufkin & Jenrette Securities Corporation, on the other hand, with respect to the financing up to US$57.5 million of interim credit facilities.
Member, Members: shall have the meaning set forth in the introduction.
Permitted Transactions: shall mean collectively, the following: (i) transactions contemplated under the Management Services Agreement, as amended from time to time in accordance with the terms hereof, (ii) transactions contemplated under the IP Agreement, as amended from time to time in accordance with the terms hereof, (iii) transactions contemplated under the Marketing
-22 - Policy, as amended from time to time in accordance with the terms hereof, (iv) the guarantee by Loral Space & Communications Ltd. of the Interim Credit Facility, (v) transactions between and among the Company Entities and any of the Service Subsidiary or the Concession Subsidiary and (vi) transactions between and among the Company Entities.
Permitted Transfer: a transfer (i) by either Loral or EE of Social Parts owned by it to any of its Affiliates, (ii) to the Company provided that in the case of clause (i), the transferee shall agree in writing to comply with all the provisions of this Agreement and provided further that no such transfer shall relieve the transferring Member from any liability of such transferring Member hereunder.
Person: an individual, partnership, joint-stock company, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof.
Proposal: shall have the meaning set forth in Section 3(a).
Proposing Member: shall have the meaning set forth in Section 3(a).
Purchaser: shall have the meaning set forth in Section 4(b).
Qualified Mexican Person: shall mean a Person that is either a Mexican national or is organized under the laws of Mexico and satisfies the requirements of the Federal Telecommunications Law and Foreign Investment Laws as then in effect.
SatMex: Satelites Mexicanos, S.A. de C.V., a company organized under the laws of Mexico.
SatMex Holdings: shall have the meaning set forth in the recitals hereto.
SatMex Dividend Policy: The policy by SatMex to pay annual dividends in an amount equal to at least 20% of the total amount available for distribution (after payment of liabilities and establishment of appropriate reserves as determined by management) but only to the extent such dividends are permitted under the debt instruments to which the Company Entities are bound and only to the extent of the balance in SatMex's Cuenta de Fiscal Neta (CUFIN) account.
-23 - SatMex Stock Purchase Agreement: The Stock Purchase Agreement between the Company and the Mexican government dated as of November 17, 1997, with respect to the purchase of a 75% interest in SatMex.
Securities Act: the United States Securities Act of 1933, as amended.
Selling Member: shall have the meaning set forth in Section 4(c).
Service Subsidiary: shall mean a subsidiary of the Company formed for the purpose of hiring and providing administrative, management, accounting, legal, operations, maintenance and other ancillary services to SatMex.
Significant Decision: shall have the meaning set forth in Section 2(e).
Social Parts: shall have the meaning set forth in the Recitals.
Stated Price: shall have the meaning set forth in Section 4(b).
Subject Social Parts: shall have the meaning set forth in Section 4(b). subsidiary: shall mean in respect of any Person any other Person which, at the time as of which any determination is being made, such Person or one or more of its subsidiaries has, directly or indirectly, Voting Control.
Tag-Along Holder: shall have the meaning set forth in Section 4(c).
Transfer: any sale, assignment, pledge, hypothecation, or other disposition or encumbrance.
Transferor: shall have the meaning set forth in Section 4(b).
Voting Control: shall mean, at any time, (A) the ownership or control, whether direct or indirect, of outstanding Social Parts of capital stock of (or equity interests in) a Person, which Social Parts or interest at such time have by the terms thereof ordinary voting power to elect a majority of the members of the Board of Directors (or Persons performing similar functions) of such Person (excluding voting power of the holders
-24 - of preferred stock arising upon the occurrence of a contingency) or (B) with respect to any partnership when (i) the sole general partner or the managing general partner of which is such Person or a subsidiary of such Person or (ii) the only general partners of which are such Person or of one or more subsidiaries of such Person (or any combination thereof).
(b) Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
(c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Mexico applicable to contracts made and to be performed entirely within such jurisdiction.
(d) Section Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof.
(e) Arbitration. In the event of any dispute, controversy or claim arising out of or relating to this Agreement, or to the breach or termination hereof (a "Dispute"), the parties agree to resolve the same as follows:
(a) The parties to the Dispute shall initially attempt to resolve it through consultations and negotiations.
(b) If the Dispute has not been resolved amicably within thirty (30) days after any party provides notice thereof, unless the parties agree otherwise, the Dispute shall be resolved by final and binding arbitration in New York, New York, if EE shall have initiated the proceeding or in Dallas, Texas, if Loral shall have initiated the proceeding, in each case in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL"), as in effect on the date of this Agreement. The language to be used in the arbitral proceeding shall be English. The International Chamber of Commerce shall serve as the appointing authority. The arbitrators shall render a written award stating the reasons for the decision. Judgment on an arbitral award or decision may be entered by any court of competent jurisdiction, or application may be made to such a court for judicial acceptance of the award or decision and any appropriate order, including enforcement (homologacion).
-25 - (c) Each of the parties hereto consents to the submission of any Dispute for settlement by final and binding arbitration in accordance with paragraph (b) above. Such consent shall satisfy the requirements for:
(i) A written arbitration agreement between the parties pursuant to Article I of the Inter-American Convention on International Commercial Arbitration (Convercion Interamericana Sobre Arbitaje Comercial Internacional), promulgated in Panama on January 30, 1975;
(ii) An "agreement in writing" pursuant to Article II of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitration Awards, done at New York on June 10, 1958; and
(iii) A written arbitration agreement between the parties pursuant to Article 1423 of the Mexican Commercial Code (Codigo de Comercio).
(d) The parties hereby agree to continue to perform their obligations hereunder while any Dispute is pending.
(e) Each of the parties hereby undertakes to carry out without delay the provisions of any arbitral award or decision.
8. CONFIDENTIALITY
As to so much of the information and other material furnished under or in connection with this Agreement (whether furnished before, on or after the date hereof) as constitutes or contains confidential business, financial or other information of any of the Company Entities, each Member covenants for itself and its directors, officers and partners that it will use due care to prevent its officers, directors, partners, employees, counsel, accountants and other representatives from disclosing such information to Persons other than their respective authorized employees, counsel, accountants, Members, partners, limited partners and other authorized representatives; provided, however, that a Member may disclose or deliver any information or other material disclosed to or received by it should the Member be advised by its counsel that such disclosure or delivery is required by law, regulation or judicial or administrative order. For purposes of this Section 9, "due care" means at least the same level of care that a Member would use to protect the
-26 - confidentiality of its own sensitive or proprietary information, and this obligation shall survive termination of this Agreement.
9. MISCELLANEOUS
(a) Notices.
(i) All communications under this Agreement shall be in writing and shall be delivered by hand or mailed by overnight courier or by facsimile:
(A) if to Loral, at Loral SpaceCom Corporation, 600 Third Avenue, New York, New York 10016, marked for the attention of Eric J. Zahler, Vice President, General Counsel and Secretary, or at such other address as Loral may have furnished the Company in writing (with a copy to Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022 for the attention of Bruce R. Kraus, Esq. and Sanchez Mejorada Velasco y Valencia, Paseo de la Reforma 450, Lomas de Chapultepec, 11000 Mexico, D.F. to the attention of Carlos R. Valencia Barrera, Esq.);
(B) if to EE, at Sierra Santa Rosa No. 61, Lomas de Chapultepec, Mexico, D.F. 11650, marked for the attention of Lauro Gonzalez, or at such other address as EE may have furnished the Company in writing (with a copy to Vinson & Elkins L.L.P., 3700 Trammel Crow Center, Dallas, Texas 75201 for the attention of Tim Foarde); and
(C) if to the Company, at Eje Central Lagard Cardenas 567 Piso 12, Ala Norte Col. Narvarte, C.P. 03020, Mexico D.F. marked for attention of General Counsel, or at such other address as it may have furnished in writing to each of the Members.
(ii) Any notice so addressed shall be deemed to be given: if delivered by hand, on the date of such delivery; if mailed by courier, on the third business day following the date of such mailing; and if sent by facsimile, on the next business day after receipt of confirmation.
(b) Reproduction of Documents. This Agreement and all documents relating thereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, (ii) documents received by each Member pursuant hereto and (iii) financial statements, certificates and other
-27 - information previously or hereafter furnished to each Member, may be reproduced by each Member by a photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and each Member may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by each Member in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.
(c) Injunctive Relief. The Company and the Members hereby declare that it is impossible to measure in money the damages which will accrue to the parties hereto by reason of the failure of any party to perform any of its obligations set forth in this Agreement. Therefore, the Company and the Members agree that in the event of a breach or threatened breach by any other party of the provisions of this Agreement, in addition to any remedies at law, they shall, respectively, without posting any bond, be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may then be available, and if any party hereto shall institute any action or proceeding to enforce the provisions hereof, each of the Company and the Members hereby waives the claim or defense that the party instituting such action or proceeding has an adequate remedy at law.
(d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties.
(e) Entire Agreement; Amendment and Waiver. This Agreement constitutes the entire understanding of the parties hereto relating to the subject matter hereof and supersedes all prior understandings among such parties, between any of them and the Company or among any of them. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company, Loral and EE.
(f) Severability. In the event that any part or parts of this Agreement shall be held illegal or unenforceable by any court or administrative body of competent jurisdiction, such determination shall not effect the remaining provisions of this Agreement which shall remain in full force and effect.
-28 - (g) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement.
(h) Non-Contravention. Each of the parties hereto agrees that it shall not take any action that would result in a violation of the Federal Telecommunications law (by Federal Telecommunicaciones) or the Concession Agreements.
(i) Further Actions. Each of the parties hereto agrees that it shall amend, or cause to amend, the by-laws of the Company Entities in such manner as may be reasonably requested by either Loral or EE so as to effectuate the provisions of this Agreement.
-29 - IN WITNESS WHEREOF, the parties hereto have executed this Membership Agreement as of the date first above written.
EDICIONES ENIGMA, S.A. DE C.V.
By:/s/ Lauro A. Gonzalez Moreno ------Name: Lauro A. Gonzalez Moreno Title:
LORAL SATMEX LTD.
By:/s/ Eric J. Zahler ------Name: Eric J. Zahler Title:
FIRMAMENTO MEXICANO, S. de R.L. de C.V.
By:/s/ Lauro A. Gonzalez Moreno ------Name: Lauro A. Gonzalez Moreno Title:
By:/s/ Eric J. Zahler ------Name: Eric J. Zahler Title:
-30 - SCHEDULE I
Board of Directors
Board of Directors of the Company and SatMex(1)
Designating Member Director ------EE Sergio Autrey Maza, Chairman of the Board(2)
Loral Bernard L. Schwartz(2)
Loral Eric J. Zahler (3)
EE Lauro Gonzalez Moreno(3)
EE Xavier Autrey Maza
In addition, Eric J. Zahler shall serve as Secretary to the Board of the Company and SatMex.
(1) In addition to the persons set forth on this Schedule I, the Mexican Government shall have the right to appoint one additional director to SatMex.
(2) Member of the Executive Committee.
(3) Executive Committee Alternate.
-31 - SCHEDULE II
Executive Officers of the Company
President Sergio Autrey Maza Chief Executive Officer Bernard L. Schwartz Chief Operating Officer Gregory J. Clark Chief Financial Officer Lauro Gonzalez Moreno
Executive Officers of SatMex
Chief Executive Officer Lauro Gonzalez Moreno Chief Operating Officer Joseph Del Riego Chief Financial Officer Cynthia Pelini Chief Accounting Officer Jorge Lopez Aguado
SHAREHOLDERS AGREEMENT
DATE: 7th December, 1998
PARTIES:
(1) ALCATEL SPACECOM SOCIETE PAR ACTIONS SIMPLIFIEE, a company incorporated in France whose principal place of business is at 12, rue de la Baume, 75008 Paris, France ("ALCATEL");
(2) LORAL SPACE & COMMUNICATIONS LTD., a company incorporated in Bermuda whose registered office is at Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda ("LORAL");
(3) DR. JURGEN SCHULTE-HILLEN of Haus Altgluck, 53773 Hennef, Germany, for himself and as agent for the Schulte-Hillen Parties ("JSH"); and
(4) EUROPE*STAR LIMITED, a company incorporated in England under registered number 3562015 whose registered office is at 35 Basinghall Street, London EC2V 5DB (the "COMPANY"). 2
PART 1
INTERPRETATION AND CONDITIONS PRECEDENT TO THIS AGREEMENT
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
Terms defined in Schedule 1, Part I of the Definitions Agreement dated on or about the same date as this agreement shall have the same meaning and construction when used in this agreement.
1.2 INTERPRETATION
The rules of construction and interpretation set out in Schedule 1, Part II of the Definitions Agreement shall apply to this agreement, unless otherwise specified.
1.3 SCHEDULES
The schedules form part of this agreement and shall have the same force and effect as if expressly set out in the body of this agreement, and any reference to this agreement shall include the schedules.
2. CONDITIONS PRECEDENT
This agreement shall come into force immediately upon execution and delivery of all the Definitive Agreements by all the parties thereto. 3
PART 2
JOINT VENTURE OPERATIONS AND MANAGEMENT
3. OPERATIONS
3.1 SCOPE OF BUSINESS
The parties agree that (unless and until a resolution is passed in accordance with clause 6.1) the business of the Company shall be:
(i) to build, launch and operate the Initial Satellite and one or more other geostationary communications satellites to be located at one or more of the Orbital Positions and otherwise to develop, market, finance, build and operate the Europe*Star System; and
(ii) to engage in the business of providing satellite services in connection therewith, in accordance with the provisions of this agreement and the other Definitive Agreements.
3.2 OPERATIONS CENTRE
The operations centre of the Company will be located in Toulouse (i) pursuant to the E*S System Contract and (ii) otherwise on terms approved by the Directors.
3.3 SALES AND MARKETING
Sales and marketing of Europe*Star capacity will be conducted in accordance with the principles set forth in the Loral Global Alliance Policy Statement. The Chief Executive Officer of the Company, and any other executive officer of the Company as may be required, shall attend monthly operations review meetings with executives from Loral and Loral Skynet, in order to discuss plans and operating performance.
4. MANAGEMENT PLANNING AND BUDGETS
4.1 PURPOSE OF BUSINESS PLANS AND ANNUAL BUDGETS
Subject to clause 6.1, the affairs of the Company shall be managed initially in accordance with the Initial Business Plan, and thereafter in accordance with the Business Plan and Annual Budget current from time to time.
4.2 BUSINESS PLANS
(a) PREPARATION: Each Business Plan shall be prepared in respect of the period from and including, in the case of the Initial Business Plan, the Final Closing Date or, in the case of any subsequent Business Plan, the date on which such plan is first adopted in accordance with the provisions of clause 4.2(b), to the date falling 15 years after the Operations Date for the Initial Satellite. Each Business Plan shall be substantially in the form of, and shall contain financial data of a nature substantially the same as that contained in, the Initial Business Plan. All Business Plans shall also incorporate appropriate explanations of the management's proposed strategy, business forecasts and details of the assumptions used. 4
(b) ADOPTION AND APPROVAL: The A Shareholders shall adopt the Initial Business Plan on or prior to the Final Closing Date. By not later than 60 days prior to the end of each Annual Period, a revised draft of the Business Plan shall be submitted by the Directors to the A Shareholders for approval in accordance with this clause prior to the beginning of the next Annual Period. If a Business Plan has not been so adopted or approved prior to the relevant date or period then, until such time as a new Business Plan is so adopted or approved in accordance with the provisions of this clause, the previous approved Business Plan shall continue to apply, subject to clause 6.2(d).
4.3 ANNUAL BUDGETS
(a) PREPARATION: The first Annual Budget shall cover the first Annual Period and shall be adopted by the A Shareholders on or prior to the Final Closing Date. By not later than 60 days prior to the end of each subsequent Annual Period, a draft annual budget covering the next Annual Period shall be submitted by the Directors to the A Shareholders for approval in accordance with this clause. Each draft Annual Budget shall include, inter alia, a breakdown in reasonable detail of:
(i) monthly revenues, operating expenses, operating results and net interest expenses;
(ii) quarterly capital expenditures and cash flow;
(iii) balance sheet as at the end of such Annual Period and profit and loss account for such Annual Period;
(iv) expected funding requirements on a quarterly basis and the proposed methods of meeting those requirements, including without limitation any proposal to raise any loan or otherwise incur any indebtedness in respect of borrowed money;
(v) cash flow return on investment.
All Annual Budgets shall incorporate, in addition to the above financial data, appropriate explanations of the management's proposed strategy, business forecasts and details of the assumptions used.
(b) ADOPTION AND APPROVAL: If an Annual Budget for a particular period has not been adopted prior to the beginning of that period then, until such time as a new Annual Budget is adopted and approved in accordance with the provisions of this clause 4, the previous approved Annual Budget shall continue to apply (subject to clause 6.2(d)).
5. MANAGEMENT STRUCTURE
5.1 BOARD OF DIRECTORS
(a) NUMBER: The maximum number of Directors shall be six.
(b) APPOINTMENT AND REMOVAL: No person shall be appointed or removed from office as a Director except in accordance with the provisions of the Articles of Association and this agreement.
(c) OBSERVERS: The Schulte-Hillen Parties shall be entitled, for so long as JSH (or any of the other Schulte-Hillen Parties) continues to hold any B Shares, to designate one person to attend at all meetings of the board of Directors as a non -voting observer. 5
5.2 CHAIRMAN
The Chairman of the board of Directors shall be one of the Directors designated by Alcatel (so long as it is a Relevant A Shareholder) and shall preside at any general meeting at which he is present.
5.3 CHIEF EXECUTIVE OFFICER
(a) NOMINATION BY ALCATEL: Alcatel shall, so long as it is a Relevant A Shareholder, be entitled (subject to the prior written approval of Loral, so long as it is a Relevant A Shareholder, under clause 5.3(b) below and subject to clause 5.3(e)), by notice in writing to the Company and Loral to nominate a Director to act as the Chief Executive Officer of the Company.
(b) APPROVAL BY LORAL: If Loral has not notified Alcatel in writing that it disapproves of the Director nominated by Alcatel within 10 days of being notified of such nomination, the appointment of the relevant Director shall be treated as having been approved for the purposes of this clause 5.3.
(c) REMOVAL AND REPLACEMENT: Alcatel (so long as it is a Relevant A Shareholder) shall be entitled, and at the request of Loral (so long as it is a Relevant A Shareholder) shall be obliged, by notice in writing to the Company and the other Relevant A Shareholders, to remove the Chief Executive Officer appointed under this clause, any successor to be appointed in accordance with paragraph (a) above.
(d) POWERS: The Chief Executive Officer shall be responsible for the day to day operations of the Company and the implementation of the Business Plan, and all executives of the Company (including the Head of Marketing and the Chief Financial Officer) shall be responsible to him. Immediately upon the appointment of the Chief Executive Officer the parties shall procure the passing of a resolution of the board of Directors pursuant to which the Chief Executive Officer shall be authorised and empowered to manage the day to day operations of the Company and to implement the Business Plan (other than Extraordinary Decisions).
(e) NOMINATION BY LORAL: Loral shall be entitled, in place of Alcatel (subject to corresponding rights in favour of Alcatel equivalent to those of Loral regarding approval (clause 5.3(b)), removal and replacement (clause 5.3(c)), to nominate the Chief Executive Officer under clause 5.3(a), in the circumstances specified in paragraph 13 of Schedule 4.
(f) FIRST SENIOR VICE PRESIDENT: During any period in which Loral is entitled to nominate the Chief Executive Officer pursuant to clause 5.3(e), Alcatel shall be entitled (subject to corresponding rights in favour of Loral regarding approval (clause 5.3(b)) and removal and replacement (clause 5.3(c) that apply to the nomination of the Chief Executive Officer) by notice in writing to the Company and to Loral to nominate a person to act as the First Senior Vice President of the Company.
5.4 HEAD OF MARKETING AND SALES
(a) NOMINATION BY LORAL: Loral shall, so long as it is a Relevant A Shareholder, be entitled (subject to the prior written approval of Alcatel, so long as it is a Relevant A Shareholder, under (b) below) by notice in writing to the Company to nominate from time to time the Head of Marketing and Sales of the Company.
(b) APPROVAL BY ALCATEL: If Alcatel has not notified Loral in writing that it disapproves of the appointment of the Head of Marketing and Sales (whose title shall be Executive Vice President and Vice President of Marketing and Sales) nominated by Loral within 5 business days of being notified of such nomination, the appointment of the relevant person shall be treated as having been approved for the purpose of this clause. 6
(c) REMOVAL AND REPLACEMENT: Loral (so long as it is a Relevant A Shareholder) shall be entitled, and at the request of Alcatel (so long as it is a Relevant A Shareholder) shall be obliged, by notice in writing to the Company and the other Relevant A Shareholders, to remove from office any head of marketing appointed under this clause, any successor to be appointed in accordance with paragraph (a) above. The Head of Marketing and Sales may only be removed from office pursuant to this clause 5.4.
(d) SALES AND MARKETING ORGANISATION: The Head of Marketing shall report to the Chief Executive Officer and shall be responsible for the marketing of the Company in accordance with the Business Plan and the Loral Global Alliance Policy Statement. A director of sales (who need not be a Director) shall be recommended by the Head of Marketing and Sales and appointed by the Directors and shall report and be responsible to the Head of Marketing and Sales. The sales organisation of the Company shall report and be responsible to the director of sales and, ultimately, to the Head of Marketing and Sales.
5.5 CHIEF FINANCIAL OFFICER
(a) NOMINATION: The Chief Executive Officer for the time being shall, subject to the prior written approval of both Alcatel and Loral (in each case, so long as it is a Relevant A Shareholder), be entitled by notice in writing to the Company, Alcatel and Loral to nominate from time to time the Chief Financial Officer of the Company.
(b) APPROVAL: If either Alcatel or Loral has not notified the Chief Executive Officer that it disapproves of the appointment of the Chief Financial Officer of the Company so nominated within 5 business days of being notified of such nomination, it shall be deemed to have given its consent to such nomination for the purposes of this clause 5.5.
(c) REMOVAL AND REPLACEMENT: Alcatel or Loral shall be entitled (in each case, so long as it is a Relevant A Shareholder) by notice in writing to the Company and the other Relevant A Shareholders, to remove from office any Chief Financial Officer of the Company appointed under this clause, any successor to be appointed in accordance with paragraph (a) above.
5.6 INDEMNITY
Any Relevant A Shareholder who, pursuant to this clause 5, removes (other than pursuant to a request of the other Relevant A Shareholder) a Director or an officer of the Company appointed in accordance with this clause 5 from office shall indemnify each other Shareholder and the Company against any claim, whether for compensation for loss of office, wrongful dismissal or otherwise, which arises out of the removal of that Director or officer of the Company from office.
5.7 EXECUTIVE COMMITTEE
(a) FUNCTION: An Executive Committee shall be formed, the only functions of which shall be to:
(i) meet with the Chief Executive Officer of the Company and such other executive officer of the Company as may be required, for the purpose of discussing and exchanging information regarding the operations of the Company;
(ii) advise and make recommendations to the Chief Executive Officer as it deems appropriate; and
(iii) discuss and attempt to resolve disagreements or disputes between the parties in a timely manner pursuant to clause 28.1. 7
(b) STATUS: The Executive Committee shall have the advisory powers and functions specified in paragraph (a) above. It shall not be a committee of the board of Directors for the purposes of the Articles of Association or be vested with any powers of such a committee, except to the extent the Directors may unanimously decide. For the avoidance of doubt, the Executive Committee shall not be entitled to exercise any of the responsibilities, powers and functions assigned to the Chief Executive Officer.
(c) NOMINATIONS: Immediately upon the appointment of the Chief Executive Officer of the Company, Loral shall appoint the President of Skynet and Alcatel shall appoint the President of Alcatel Spacecom to participate in meetings of the Executive Committee. Each Executive Committee member shall participate in meetings in person or, in the case of absence, may from time to time nominate another senior executive to represent him. Loral and Alcatel shall each be entitled from time to time to remove such committee member and replace, as a member of the Executive Committee, the person who is for the time being (in the case of Loral) the President of Skynet and (in the case of Alcatel) the President of Alcatel Spacecom.
(d) MEETINGS: The Executive Committee shall convene at the Company's offices or any other mutually agreed location and members of the Executive Committee may participate in its meetings by telephone or video conference which allows all persons participating in the meeting to hear each other, it being understood that meetings in person are preferred. The Executive Committee shall convene as frequently as required, but no less than once a month, and its meetings may also be attended by Loral and Alcatel executives.
6. MANAGEMENT POWERS
6.1 EXTRAORDINARY DECISIONS
(a) APPROVAL: As a matter overriding any other provision of this agreement or the Articles of Association, the Company shall not (unless the relevant decision is one to which Schedule 4 applies) take, or do or agree to do anything which would require it to take, any Extraordinary Decision unless and until each of Alcatel and Loral (in each case, so long as (i) it is a Relevant A Shareholder and (ii) it has not transferred, other than to transferees which continue to be members of its Group, A Shares representing 30% or more of its holding of A Shares (appropriately adjusted to reflect any sub-division, consolidation or other re-organisation of the capital of the Company) immediately following completion of the Subscription Agreement) has given its prior approval:
(i) in writing; or
(ii) by a vote in favour of a separate and specific members' resolution on that matter; or
(iii) by a vote in favour of a separate and specific directors' resolution on that matter by a Director appointed by that Shareholder.
(b) NO DEEMED APPROVAL: The approval of any Business Plan or Annual Budget shall not imply or be deemed to be an approval of any matter within that Business Plan or Annual Budget which would itself constitute an Extraordinary Decision requiring approval in accordance with this clause.
6.2 PROCEDURES TO RESOLVE DEADLOCK
(a) CONSULTATION PROCESS: If Alcatel or Loral does not approve any Extraordinary Decision which has been submitted to it for approval in accordance with the provisions of clause 6.1, they shall, in good faith and for the period of three months following the date on which such approval is withheld, enter into discussions and take such other steps as may be considered desirable to resolve such deadlock (including, but without limitation, procuring, where initial discussions have been unsuccessful, 8 discussions between the senior management of each Alcatel's and Loral's Group). If, at the end of such three month period, Alcatel and Loral have not reached an agreement on such Extraordinary Decision in accordance with the provisions of clause 6.1 then the following provisions of this clause shall apply.
(b) PART 1 MATTERS: If any disapproval of an Extraordinary Decision specified in Part 1 of Schedule 1 is not resolved pursuant to (a) above, each of Alcatel and Loral shall have the right to serve a notice on the other Shareholders (a "DEADLOCK NOTICE"), with a copy to the Company, specifying that a deadlock has occurred, and the provisions of clause 11.3 shall apply.
(c) PART 2 MATTERS: If any disapproval of an Extraordinary Decision specified in Part 2 of Schedule 1 is not resolved pursuant to (a) above, such Extraordinary Decision may, so long as Alcatel remains a Relevant A Shareholder, be approved by Alcatel only. Such approval may be given be Alcatel in accordance with the provisions of clause 6.1(a) and once given, such matter shall be regarded in all respects as having been approved by the Company. If Alcatel approves such matter, then Loral (and members of its Group then holding A Shares) may, if Loral continues to disapprove such matter, serve a notice on Alcatel requiring it (or a third party nominated by Alcatel) to purchase all of the A Shares held by Loral (and members of its Group); and Alcatel shall be obliged to purchase or procure the purchase of such Shares in accordance with the provisions of clause 11.2.
(d) PART 3 MATTERS: If any disapproval of an Extraordinary Decision specified in Part 3 of Schedule 1 is not resolved pursuant to (a) above, then the last approved Business Plan or, as the case may be, the last approved Annual Budget shall continue to apply (pending agreement on a new Business Plan or Annual Budget) subject to the following adjustments:
(i) all costs, revenues payments or other amounts in the relevant Business Plan or, as the case may be, Annual Budget shall be increased by 5% flat;
(ii) all such costs, revenues payments or other amounts shall be further increased (beyond that specified in (i) above) to the extent necessary to reflect any payment or other escalation or indexing provisions applicable to any authorised contractual commitments of the Company and its Subsidiaries, and any other present or future obligations or liabilities or commitments of the Company and its Subsidiaries which have been duly approved by the board of Directors or the Chief Executive Officer in accordance with the powers set forth in clause 5.3(d).
7. MANAGEMENT FEES
(a) MANAGEMENT SERVICES AGREEMENTS: In consideration of management and other administrative services to be provided by Alcatel and Loral, the Company shall pay or procure the payment of management fees to Alcatel and Loral in accordance with the Management Services Agreements.
(b) The Company agrees that if there is any modification to the definition or the basis for determining the amount of "Gross Revenue" for the purpose of calculating management fees under any of the Management Services Agreements, then it will procure that the same modification is offered to SLOD regarding the provisions of the License of the Slot Usage Agreement insofar as those provisions affect the determination of Gross Revenue or the extent to which SLOD is obliged to accept royalty payments in currencies which are determined by the Company to be non -convertible or non -transferable. 9
PART 3
JOINT VENTURE FINANCING ARRANGEMENTS
8. CAPITAL REQUIREMENTS OF THE JOINT VENTURE
8.1 INITIAL CAPITAL
(a) INITIAL SHARE CAPITAL: The initial share capital of the Company will, following the Final Closing, be the aggregate amount of the consideration payable for the subscriptions for the A Shares and the B Shares made by or on behalf of the Shareholders pursuant to clause 2 of the Subscription Agreement (being $16,260,000 in the case of Alcatel, $15,622,353 in the case of Loral and (pound)5 in the case of JSH). The proceeds of such subscriptions shall be used in accordance with the Schedule of Sources and Uses of Proceeds.
(b) SHAREHOLDER LOANS: In addition to the initial share capital referred to in clause 8.1(a), the Company and the A Shareholders acknowledge that as at the date of this agreement each A Shareholder has contributed additional capital to fund payments under the E*S System Contract and other operating expenses of the Company, amounting to: (i) in the case of ALCATEL, $29,768,700 ($8,000,000 pursuant to the Authorisations to Proceed dated 20th February, 1998, $20,050,000 pursuant to the Authorisations to Proceed dated 22nd October, 1998 and $1,718,700 towards operating expenses); and (ii) in the case of Loral, $28,601,300 ($12,768,347 pursuant to the Authorisations to Proceed dated 22nd October, 1998, $1,651,300 towards operating expenses and $14,181,653 in cash on the Final Closing Date).
8.2 COMMITTED CAPITAL SPECIFIED IN THE BUSINESS PLAN
(a) FUNDING SCHEDULE: In addition to initial capital referred to in clause 8.1, the parties agree that the capital requirements of the Company shall be funded, by way of additional shareholder loan capital or other debt or financial support, in the amounts and on the dates shown in the Funding Schedule. Such initial capital and such agreed additional loan capital, which together amounts to $125,000,000, are hereafter called the "COMMITTED CAPITAL".
(b) FORM OF COMMITTED CAPITAL: In the absence of agreement to the contrary between Alcatel and Loral, all instalments of Committed Capital, other than the initial share capital referred to in clause 8.1, shall be advanced and treated as shareholder loans to the Company on terms to be agreed by Alcatel and Loral in accordance with clause 6.1.
(c) CONSEQUENCES OF FAILURE TO CONTRIBUTE COMMITTED CAPITAL: If and to the extent that an A Shareholder fails to make its Committed Capital contribution when due, then the other non-defaulting A Shareholder (i) may (but only for so long as such failure remains unremedied) in its sole discretion make or procure that its Affiliates make its own Committed Capital contribution in the form of a loan to the Company which shall bear interest at a rate equal to LIBOR plus 2% and (ii) if it so elects, having first provided all its Committed Capital contribution as and when due or in the form of a loan pursuant to (i) above, may in its discretion provide, or cause its Affiliates to provide, all or part of the amount of the Committed Capital contribution of the defaulting A Shareholder in the form of a loan to the Company which shall bear interest at a rate equal to LIBOR plus 4%, and which shall be repaid by the Company out of the proceeds of the Committed Capital contribution of the defaulting A Shareholder immediately upon receipt of such proceeds. If the defaulting A Shareholder has not made its Committed Capital contribution within 60 days of the non-defaulting A Shareholder making such loan, the non-defaulting A Shareholder (or its Affiliates) making such loan shall be entitled to convert such loan into additional A Shares at a conversion price per share equal to the lesser of the fair market value or book value of one A Share or, in the 10 case where its Affiliates have provided the loan, effect a transaction the economic effects of which are consistent with the conversion described above.
(d) A SHAREHOLDERS' RIGHTS OF FIRST REFUSAL: The parties shall procure that any Shares or other securities which may be issued by the Company pursuant to (and any right to participate in any other form of debt or other financial support contemplated under) clause 8.2(a) or otherwise under the Business Plan shall be offered to the A Shareholders on equal terms pro rata, as nearly as practicable, to the nominal value of their holdings of A Shares at the time of such offer.
8.3 ADDITIONAL CAPITAL
(a) PROCEDURE FOR RAISING ADDITIONAL CAPITAL: If the board of Directors shall determine that any capital in addition to the Committed Capital is at any time required from the Shareholders by the Company, whether as a result of capital requirements which were not contemplated by the Business Plan, or the Company being unable to raise all or part of any third party financing contemplated in the Business Plan from external sources on reasonable terms, or otherwise ("ADDITIONAL CAPITAL"), the Company shall (not less than 30 days prior to the proposed date for approval of the raising of such Additional Capital, if required under clause 6.1) issue to each of the A Shareholders a written notice (with a copy to the B Shareholders) setting out in reasonable detail:
(i) the amount of Additional Capital considered by the Directors to be necessary;
(ii) the proposed manner in which such Additional Capital is to be raised;
(iii) the purpose of such Additional Capital; and
(iv) an explanation for the variation (if any) between the amount of Additional Capital required and the amount of Committed Capital shown by the most recent Business Plan.
Such proposals are referred in this clause 8.3 as an "ADDITIONAL CAPITAL PROPOSAL".
(b) NOTICE OF ISSUE: Subject to any approval of the Additional Capital Proposal, if required, pursuant to clause 6.1, the Company shall not less than 30 days prior to the proposed date for issue of the securities under such Additional Capital, serve a notice on each of the A Shareholders (with a copy to the B Shareholders):
(i) confirming that the Additional Capital Proposal has, if required, been approved pursuant to clause 6.1 in the form specified in the Additional Capital Proposal;
(ii) specifying the number, price and terms of payment of the Shares, securities to be issued, or other financial support to be raised, and inviting each of the "A" Shareholders to state in writing within a period of 14 days whether it is willing to take on any, and if so what maximum number or value of, such Shares or securities or other financial support; and
(iii) specifying the time and place where completion of the subscription for the shares or securities, or of the provision of other financial support, shall take place.
(c) RIGHTS OF FIRST REFUSAL: At the expiration of the time stipulated by an offer pursuant to paragraph (b) of this clause 8.3, the Directors shall, subject to compliance with the terms of that offer, allot and issue the Shares or other securities offered to or amongst those A Shareholders who have notified to the Company their willingness to take any of the Shares or other securities offered. In the case of competition, such allotment shall be made in proportion (as nearly as may be and without involving fractions) to the number of A Shares held by them respectively at the date of the offer but so that no person shall be required to take more than the maximum number of Shares or other securities which it has stated it is willing to take. In addition, the A Shareholders shall have the pre-emptive right, but not any obligation, to participate in any other form of debt or other 11 financial support contemplated in any Additional Capital Proposal and, in the case of competition, in proportion to the number of A Shares then held by them.
(d) FAILURE TO AGREE ADDITIONAL CAPITAL PROPOSAL PRIOR TO SECOND CLOSING DATE: If Additional Capital is required at any time before the Second Closing Date, but the Directors are not able to agree upon the form and content of an Additional Capital Proposal in accordance with clause 8.3(a), then Alcatel and Loral shall negotiate in good faith with a view to agreeing upon a method of providing such Additional Capital on an agreed basis. If Alcatel and Loral have not reached such an agreement by the date on which the unutilised amount of the US$125 million of Committed Capital becomes insufficient to enable the Company to continue to perform the E*S System Contract or to satisfy other budgeted expenses contemplated in the Business Plan as and when they fall due and payable, then during the period (the "INTERIM FUNDING PERIOD") commencing on such date and ending on the Second Closing Date, the provisions of Schedule 4 will apply.
8.4 BORROWING AND GUARANTEES
(a) REQUESTS FOR SHAREHOLDER GUARANTEES: Except as contemplated in Schedule 4, if, as a term of entering into any borrowing, a third party requires any Shareholders to enter into any guarantee in respect of the Company's obligations or liabilities, then the Company shall consult with the A Shareholders with a view to agreeing whether it is appropriate for such borrowing to be made or other agreement or arrangement to be entered into.
(b) PROVISION OF SHAREHOLDER GUARANTEES: Except as contemplated in Schedule 4, if all the Relevant A Shareholders consent to such borrowing, then any guarantee which any of them may agree to give shall be given on a several basis in the same proportion as its respective holdings of A Shares, or such greater proportion as it may agree at its discretion. Any A Shareholder which provides such a guarantee may receive reasonable consideration for so doing whether by charging a fee, receiving warrants to subscribe for Shares or otherwise.
8.5 B SHAREHOLDERS
For the avoidance of doubt, none of the provisions set out in clauses 8.2, 8.3 or 8.4 nor any other provision of any of the Definitive Agreements shall impose on the B Shareholders any obligation to advance loans, given guarantees or otherwise provide capital for the benefit of the Company except to the extent expressly provided in this agreement or otherwise expressly accepted in writing by the B Shareholders. 12
PART 4
OWNERSHIP STRUCTURE AND EXIT ARRANGEMENTS
9. ISSUES OF SHARES AND EQUITY SECURITIES
9.1 RESTRICTIONS ON NEW ISSUES
The parties shall procure that during the continuance of this agreement there shall be no issue of any Shares or equity securities in the Company, nor any grant of any option or other right to subscribe Shares or any security or other right or obligations of any kind convertible or exchangeable into share capital of the Company, other than pursuant to the provisions of the Articles of Association, pursuant to the provisions of this agreement, or with the consent of all the Relevant A Shareholders given pursuant to clause 6.1.
9.2 EXISTING SHAREHOLDERS' RIGHTS OF FIRST REFUSAL
Except as contemplated in Schedule 4, the parties shall procure that any new Shares of any class or other equity or debt securities for the time being unissued and which may be created or issued in future shall be offered, before they are issued, to the existing holders of Shares of that class in accordance with the provisions set out in the Articles of Association.
In addition, no A Shares may be allotted or issued during the period from the Final Closing Date until the Second Closing Date unless, simultaneously with such allotment or offer, the existing holders of the B Shares are each offered on equal terms, pro rata, as nearly as practicable, to the nominal amount of their existing holdings of B Shares, such number of B shares as will result in the aggregate number of B Shares for the time being in issue (immediately following the allotment of such A Shares) representing the same percentage as the aggregate of all the A Shares and B Shares then in issue as they represented on the Final Closing Date. In the case of any Additional Capital Proposal made after the Second Closing Date, Alcatel and Loral shall, during the period of 30 days from the date of such Additional Capital Proposal, consult with JSH in good faith with a view to establishing whether some basis can be agreed for JSH to subscribe at market value for additional B Shares in such number as would result in JSH and the other Schulte-Hillen Parties and their Relatives together continuing to hold 5% of the issued ordinary share capital of the Company, but without any liability whatever on any party in the event of any failure to so agree.
9.3 UNDERTAKINGS BY NEW SHAREHOLDERS
No new member shall be registered as the holder of any Shares unless it:
(i) shall first have entered into a Deed of Adherence in which such allottee shall undertake to the Shareholders and the Company to be bound by the provisions of this agreement as if it were a party to this agreement as a Shareholder (but without prejudice to the continuation inter se of the rights and obligations of the Shareholders); and
(ii) produces to the Company satisfactory evidence that all necessary Regulatory Consents have been obtained. 13
10. VOLUNTARY DISPOSALS OF SHARES
10.1 RESTRICTIONS ON DEALINGS IN SHARES
No disposal of any Share or any legal or beneficial interest in a Share shall be permitted except a transfer of the entire legal and beneficial interest in the Share made in accordance with the provisions of the Articles of Association and the terms of this agreement.
10.2 COMPLIANCE BY GROUP TRANSFEREES
Each Shareholder shall procure that all Group Transferees or Relatives holding Shares in respect of which it is the Original Holder shall execute a Deed of Adherence.
11. MANDATORY TRANSFERS OF SHARES
11.1 INSOLVENCY, DISSOLUTION ETC.
If:
(i) Insolvency: any Shareholder is unable or admits in writing its inability to pay its debts as they fall due or commences negotiations with one or more of its creditors with a view to the general readjustment or rescheduling of all or part of its indebtedness or proposes or enters into any composition or other arrangement for the benefit of its creditors generally or any class of creditors or proceedings are commenced in relation to any Shareholder under any law, regulation or procedure relating to reconstruction or readjustment of debts;
(ii) Dissolution: an order is made or a resolution passed for the administration, receivership, winding up, liquidation or dissolution of any Shareholder (other than for the purpose of a solvent amalgamation or reconstruction) or any other analogous event under the laws applicable to the relevant Shareholders, then the relevant Shareholder shall, and shall procure that all its Affiliates shall, forthwith serve a Transfer Notice or Transfer Notices in respect of all the Shares owned by that Shareholder and its Affiliates, in accordance with the provisions of the Articles of Association. If the relevant Shareholder or any of its Affiliates shall default in the service of such Transfer Notice or Notices, it and the relevant Affiliates shall be deemed to have given Transfer Notices to the Company in respect of all the Shares held by them, and the provisions of the Articles of Association shall apply, save that:
(a) any deemed Transfer Notice shall be deemed to:-
(1) provide that the price of such Shares shall be their Fair Value determined by the procedure set out in clause 11.3(a); and
(2) provide for the transfer of all the Shares owned by the relevant Shareholder;
(b) the fourteen days in which the Company is required to send a notice to existing holders of Shares under Article 36 of the Articles of Association shall commence on the date on which the Company receives the certification of the Fair Value of such Shares in the manner described in clause 11.3(a). 14
11.2 LORAL PUT OPTION
Loral (and its Affiliates) shall be entitled, in the circumstances described in clause 6.2(c), to serve notice in writing (an "OPTION NOTICE") on Alcatel requiring Alcatel to purchase or procure the purchase by a third party of all of the Shares then held by Loral and its Affiliates at their Fair Value, established using the procedure described in clause 11.3(a), and setting out the time (not being less than two nor more than seven days after the date of determination of the Fair Value but in no event later than 30 days after the date of the Option Notice) and place for completion of the sale and purchase of such Shares.
11.3 PROCEDURE FOR SALE FOLLOWING DEADLOCK
(a) DETERMINATION OF FAIR VALUE: The Company shall, promptly upon this clause becoming applicable, procure the appointment of an Expert to make a determination of the Fair Value of the A Shares, acting as an expert and not as arbitrator. Such Expert shall be such independent investment bank or international firm of accountants of good repute as may be appointed jointly by Alcatel and Loral or if a joint appointment is not agreed within 10 days from the written notice of nomination of an expert by one party to the other, by the President for the time being of the Institute of Chartered Accountants in England and Wales on the application of either Alcatel or Loral. The Expert shall conduct its valuation in accordance with generally accepted accounting principles and on the following assumptions and bases:-
(i) the A Shares are being sold on an arm's length basis between a willing vendor and a willing purchaser;
(ii) the purchaser is acquiring the A Shares in order to continue the business of the Company in co-operation with the remaining shareholders of the Company in accordance with the terms of this agreement (without giving effect to minority discounts);
(iii) if the Company is then carrying on business as a going concern, that it will continue to do so;
(iv) taking full account of the rights and restrictions attaching to the A Shares and other Shares; and
(v) on such other terms as it shall consider appropriate and making such assumptions as it considers necessary.
The Expert shall notify the Company of its determination which shall, in the absence of manifest or proven error, be final and binding on the A Shareholders. The costs of the valuation (including, but without limitation, the fees and expenses of the Expert) are to be borne by the A Shareholders in their respective Relevant Proportions.
(b) ELECTIONS TO BUY OR SELL AT FAIR VALUE: Following receipt of a Deadlock Notice and the Expert's determination, the Company will notify each of the A Shareholders of the Fair Value of the A Shares. Each of Alcatel and Loral shall within 10 (ten) days of such notice, serve notice in writing (each an "ELECTION NOTICE") on the other electing either (i) to buy all the A Shares held by the other and its Affiliates or (ii) to sell all the A Shares held by it and its Affiliates. Each Election Notice delivered by that party under this paragraph shall constitute an irrevocable offer (until superseded by any later Election Notice delivered by that party under this clause) to sell or, as the case may be, buy all the A Shares held by the other party and its Affiliates at the Fair Value of those A Shares.
(c) IF ONE PARTY WISHES TO BUY AND THE OTHER TO SELL: If one of Alcatel and Loral offers in its Election Notice to buy all the A Shares held by the other of them (and Affiliates), and the other one of them 15 elects in its Election Notice to sell all the A Shares held by it (and Affiliates), those parties shall be bound to buy and sell the relevant A Shares at Fair Value in accordance with their elections.
(d) IF BOTH PARTIES WISH TO BUY: If each of Alcatel and Loral elects, in its Election Notice, to purchase all the A Shares held by the other (and that other's Affiliates), the Company shall invite Alcatel and Loral to serve a second Election Notice within 7 days setting out an offer for all, but not some, of the A Shares of the other (and its Affiliates) at a price which shall not be less than the Fair Value. If both Alcatel and Loral deliver a second Election Notice to purchase, the Company shall invite Alcatel and Loral to serve a third Election Notice within 7 days setting out an offer for all, but not some, of the A Shares of the other (and its Affiliates), which shall not be less than the highest value attributed to the A Shares by any of the second Election Notices, and such process shall be repeated until one only of Alcatel and Loral elects to purchase all the A Shares held by the other (and its Affiliates), at which point the other party (and its Affiliates) shall be obliged to sell all of its (and their) A Shares to the party who submitted the final Election Notice to purchase . Each Election Notice delivered by any party under this paragraph shall constitute an irrevocable offer (until superseded by any later Election Notice by that party) to sell or, as the case may be, buy all the A Shares held by the other party and members of its Group at the value stated in such Election Notice.
(e) IF BOTH PARTIES WISH TO SELL: In the event that all the A Shareholders elect at any time to sell the A Shares held by them (and members of their respective Groups), the Company shall offer all, but not some, of the A Shares as agent for the A Shareholders to third parties which may, for the avoidance of doubt, include any holder of B Shares. The Company shall use its reasonable endeavours to procure the sale of all, but not some, of the A Shares to such a third party and accordingly, shall (at the expense of the A Shareholders) accept the highest offer made by any such third party for all, but not some of, the A Shares.
(f) COMPLETION: Subject to the provisions of clause 11.3(g), completion of each sale and purchase under clause 11.3(c) and (d) shall be made on the date specified by the purchaser which shall be not less than two and not more than seven days from the date its offer is accepted, or deemed to be accepted, under clause 11.3 (c) and (d).
(g) REGULATORY REQUIREMENTS: An A Shareholder may make an offer under this clause 11.3 conditional upon receiving Regulatory Consent within 60 days of acceptance of such offer. If it does so, then the parties will use their reasonable endeavours to obtain that Regulatory Consent. In the event that such regulatory Consent is refused or not obtained within such 60 days period such offer shall lapse, without any liability or obligation on the part of the offering party.
In this paragraph the term "REGULATORY CONSENT" means the obtaining of all relevant statutory or governmental, regulatory or other licences, consents, authorisations and approvals required for, or in connection with, such transfer (including, without limitation, for the purchaser of the Shares to hold such Shares and the Company to continue carrying on its business following such transfer in the same manner in which it was carried on prior to such transfer).
(h) ASSIGNMENT: Following the service of a Deadlock Notice, each of the A Shareholders shall have the right to assign (in whole or in part) to any person all its rights to elect to purchase and to purchase A Shares in accordance with the provisions of this clause 11.3 and following any such assignment, references in this clause 11.3 to any A Shareholder, shall, in connection with any election to purchase, be to such assignee.
11.4 JSH CALL OPTION
JSH shall be entitled, in the circumstances contemplated in clause 11.3(a) where:
(i) Alcatel (and its Affiliates) has given or has been deemed to have given Transfer Notices in respect of all the Shares held by it and its Affiliates; and 16
(ii) Loral (and its Affiliates) has given or has been deemed to have given Transfer Notices in respect of all the Shares held by it and its Affiliates, to serve a notice in writing on Alcatel and Loral requiring all of the Shares held by Alcatel (and its Affiliates) and Loral (and its Affiliates) to be sold to JSH (or his Relatives) at a price which shall be whichever is the higher of the Fair Value established using the procedure described in clause 11.3(a) and such higher value as may have been specified in any such Transfer Notice, by a date not more than seven days after the date of determination of the Fair Value. Time shall be of the essence of such sale and in the event of any failure by JSH (or his Relatives) to purchase all of the relevant Shares at their Fair Value on the due date, each of Alcatel and Loral shall have no further obligation under this clause and shall, subject to the provisions of the Articles of Association, be at liberty to sell its Shares to any third party on such terms as it may at its discretion see fit.
12. TAG-ALONG RIGHTS
(a) TAG-ALONG NOTICE: If an A Shareholder ("DIVESTING SHAREHOLDER") proposes to sell any or all of its Shares to a third party, and pursuant to the Articles of Association becomes entitled to transfer any Shares to a third party, the Divesting Shareholder shall immediately give written notice to the other Shareholders (the "TAG ALONG NOTICE") specifying the name and address of the third party and the price and other material terms and conditions of the transaction.
(b) TAG-ALONG DEMAND: Each of the other Shareholders may, not later than 20 days after receipt of the Tag-Along Notice, deliver to the Divesting Shareholder a notice in writing invoking the provisions of this clause 12 (a "TAG-ALONG DEMAND"). The delivery by any Shareholder (a "TAG-ALONG SHAREHOLDER") of a Tag-Along Demand shall be irrevocable and shall bind the Divesting Shareholder:
(i) to sell or procure the sale, in accordance with the provisions of this clause, of such number of Shares (the "TAG-ALONG Shares") owned by the relevant Tag-Along Shareholder and its Affiliates or Relatives as is equal to the number of Shares which the Divesting Shareholder is proposing to sell, multiplied by a fraction, the numerator of which shall be the number of Shares owned by the relevant Tag-Along Shareholder and its Affiliates or Relatives and the denominator of which shall be the number of Shares owned by the Divesting Shareholder (and its Affiliates) and each other Tag-Along Shareholder that delivers a Tag-Along Demand with respect to such sale (and their respective Affiliates or Relatives); or
(ii) at the option of the Divesting Shareholder (notified to the relevant Tag-Along Shareholders not later than three days before commencing any sale) to acquire, or cause the third party to deliver to the relevant Tag-Along Shareholders an irrevocable, valid, binding and bona fide offer in writing (the "TAG-ALONG OFFER") to acquire, the Tag-Along Shares from the relevant Tag-Along Shareholders and their respective Affiliates or Relatives. The Tag-Along Offer shall remain open for acceptance for a period of not less than fourteen days from the date at which it is delivered to the Tag-Along Shareholders. If it is not accepted in writing during that period the Tag-Along Offer may lapse.
(c) TERMS AND CONDITIONS OF SALE: The purchase by the Divesting Shareholder or, as the case may be, the Tag-Along Offer shall, subject to the provisions of this clause:
(i) in the case of any A Shares held by any Tag-Along Shareholders, be made only on such terms and conditions as are identical to those upon which the Divesting Shareholder or any of its Affiliates proposes to sell A Shares to the third party and the price for A Shares which shall be paid by the Divesting Shareholder or specified in the Tag-Along Offer (as the case may be), shall be the same as, or the cash equivalent of, the consideration at which the Divesting Shareholder or any of its Affiliates proposes to sell to the third party; and 17
(ii) in the case of any B Shares, be at such price as may be specified by the Divesting Shareholder or in the Tag-Along Offer as being the price which the Divesting Shareholder at its discretion, acting in good faith, considers to be the fair market value of such B Shares having regard to the rights and restrictions attaching to such Shares.
Subject thereto, each Tag-Along Shareholder shall, if requested by the Divesting Shareholder, join as an additional seller in the sale and purchase agreement entered into between the Divesting Shareholder and the third party purchaser, and so that such Tag-Along Shareholder shall,
(i) in respect of any A Shares which it is selling, have substantially the same rights and several obligations as those of the Divesting Shareholder in respect of the A Shares being sold by the Tag-Along Shareholder
(ii) in respect of any B Shares which it is selling, have such rights as shall be specified by the Divesting Shareholder acting in good faith and obligations which are not more onerous than those applicable to any Tag-Along Shareholder which is selling A Shares.
(d) EXCEPTIONS: The provisions of this clause 12 shall not apply if any steps have been taken to commence Insolvency Proceedings in respect of the Company, or in the case of any consolidation or merger of the Company with or into any other person or entity. 18
PART 5
PROTECTION OF JOINT VENTURE
13. CONFIDENTIALITY
13.1 CONFIDENTIAL INFORMATION
Each party shall treat as confidential all information ("CONFIDENTIAL INFORMATION") obtained as a result of negotiating and entering into this agreement and the other Definitive Agreements or, in the case of a Shareholder, through its interest in the Company or any of its business or assets and which relates to: (i) the provisions of this agreement; (ii) the negotiations relating to this agreement; (iii) the Company or its business or assets; or (iv) any Shareholder.
13.2 USE OF CONFIDENTIAL INFORMATION
Each party shall:-
(i) not disclose any Confidential Information to any person other than a Director appointed by it or any person employed by it whose duties include the management or monitoring of the business of the Company or its investment in the Company and who needs to know such information in order to discharge his duties;
(ii) not use any Confidential Information other than for the purpose of managing or monitoring its investment in the Company or the business of the Company;
(iii) use its best efforts to cause any person to whom Confidential Information is disclosed by it to comply with the restrictions set out in this clause 13 as if such person were a party to this agreement.
13.3 PERMITTED DISCLOSURE
(a) Notwithstanding the previous provisions of this clause 13, any party may (subject to clause 13.2(iii)) disclose Confidential Information:-
(i) if and to the extent required by law or for the purpose of any judicial proceedings;
(ii) if and to the extent required by the Initial Project Documents and the Definitive Agreements;
(iii) if and to the extent required by any securities exchange or regulatory or governmental body to which that party is subject, wherever situated, whether or not the requirement for information has the force of law;
(iv) to its professional advisers, auditors, lenders and bankers (provided that in each case, they have agreed to keep such information in confidence);
(v) if and to the extent the information has come into the public domain through no fault of that party; or
(vi) to a proposed third party transferee of any Shares after notice has been given to the other parties of the identity of the proposed transferee and with the prior written approval of the Shareholder to whom the Confidential Information belongs or, if the Confidential 19
Information belongs to the Company, the prior written approval of each of the A Shareholders such approval not to be unreasonably withheld or delayed.
(b) Any information to be disclosed pursuant to paragraphs (i), (ii), or (iii) of this clause 13.3 shall be disclosed only after (if and to the extent practicable) prior notification to the party or parties to whom the Confidential Information belongs.
(c) Each Director is irrevocably authorised by the Company to disclose any information or records belonging to or concerning the Company, its subsidiaries and its or their business and assets to any Shareholder who has appointed him.
13.4 DURATION OF OBLIGATIONS
The restrictions contained in this clause 13 shall continue to apply to each party (including any Shareholder who has ceased to hold Shares) for 5 years after termination of this Agreement.
14. ANNOUNCEMENTS
14.1 RESTRICTION ON ANNOUNCEMENTS
No announcement concerning this agreement shall be made by any party without the prior written approval of the others, such approval not to be unreasonably withheld or delayed. This clause 14.1 does not apply in the circumstances described in clause 14.2.
14.2 PERMITTED ANNOUNCEMENTS
Any party may, after (if and to the extent practicable) prior notification to the other parties, make an announcement concerning this agreement if required by: (i) law; or (ii) any of the Initial Project Documents or the Definitive Agreements; or (iii) any securities exchange or regulatory or governmental body to which that party is subject, wherever situated, whether or not the requirement has the force of law.
14.3 DURATION OF RESTRICTIONS
The restrictions contained in this clause 14 shall continue to apply to each party (including any Shareholder who has ceased to hold Shares) for 5 years after termination of this agreement.
15. VOTING UNDERTAKINGS
Each Shareholder shall exercise its voting rights and other rights as members of the Company in order to procure (insofar as they are able to do so through the exercise of such rights) that the Company complies with the provisions of this agreement. Each Shareholder shall procure that any Director appointed by it from time to time shall (subject to their fiduciary duties to the Company) exercise their voting rights and other powers and authorities in order to procure (insofar as they are able to do so through the exercise of such rights, powers and authorities) that the Company complies with the provisions of this agreement. 20
PART 6
GENERAL PROVISIONS
16. RESTRICTIVE TRADE PRACTICES ACT 1976
If this agreement (which for the purposes of this clause 16 includes any other agreement or arrangement of which it forms part) contains any provision which causes or would cause it to be subject to registration under the Restrictive Trade Practices Act 1976, and if it is not a non- notifiable agreement under that Act, that provision will not take effect until the day after particulars of this agreement have been furnished to the Director General of Fair Trading in accordance with section 24 of that Act.
17. ASSIGNMENT
This agreement shall be binding on and inure for the benefit of each party's successors in title but (subject to clause 11.3(h)) no party shall assign all or any part of the benefit of, or its rights or benefits under, this agreement without the prior written consent of the other parties (such consent not to be unreasonably withheld), provided that:
(i) any A Shareholder may (subject to paragraph (ii) below) assign all or any part of the benefit of, or its rights or benefits under this agreement to any member of its Group; and
(ii) each A Shareholder expressly acknowledges that any such assignment to another member of its Group shall not in any respect release it from any of its obligations under this agreement which shall continue in full force and effect, unless otherwise agreed in writing by all other A Shareholders.
18. ENTIRE AGREEMENT
(a) WHOLE AND ONLY AGREEMENT: This agreement and the other Definitive Agreements together constitute the whole and only agreement between the parties relating to the Company and its business and assets.
(b) PRE-CONTRACTUAL STATEMENTS SUPERSEDED: Except to the extent repeated in this agreement or any Definitive Agreement, this agreement and the Definitive Agreements supersede and extinguish any Pre-contractual Statement. Each party acknowledges that in entering into this agreement and the Definitive Agreements it is not relying upon any Pre-contractual Statement which is not set out in this agreement or in a Definitive Agreement. For this purpose "PRE-CONTRACTUAL STATEMENT" means a draft, agreement, undertaking, representation, warranty, promise, assurance or arrangement of any nature whatsoever, whether or not in writing, relating to the Company and its business and assets made or given by a party to this agreement or any Definitive Agreement or any other person at any time prior to the execution of this agreement or any Definitive Agreement.
(c) EXCLUSION OF OTHER RIGHTS OF ACTION: None of the parties shall have any right of action against any other party to this agreement arising out of or in connection with any Pre-contractual Statement (except in the case of fraud) except to the extent repeated in this agreement or in a Definitive Agreement.
(d) RESTRICTIONS ON COLLATERAL ARRANGEMENTS: No Shareholder shall enter into any agreement, arrangement or understanding with any person (whether legally binding or not) which imposes 21
(directly or indirectly) obligations or restrictions with respect to the exercise of any voting rights attached to any Share, other than as set out or referred to in this Agreement.
(e) VARIATION: This agreement may only be varied in writing signed by each of the parties.
(f) CONFLICT WITH ARTICLES OF ASSOCIATION: In the event of any ambiguity or discrepancy between the provisions of this agreement and the Articles of Association, then as between the Shareholders the provisions of this agreement shall prevail. Each of the Shareholders shall exercise all voting and other rights and powers available to it so as to give effect to the provisions of this agreement and, if necessary, to procure (so far as it is able to do so) any required amendment to the Articles of Association.
19. NOTICES
(a) NOTICES TO BE IN WRITING: A notice or other communication required or permitted under this agreement shall be given in writing and shall be delivered personally or sent by prepaid telegram or by telex or by facsimile transmission, or by post or by reputable international courier.
(b) NOTICES EFFECTIVE ON RECEIPT: Such notice or other communication shall be deemed to have been effectively given:
(i) if delivered personally or sent by prepaid telegram, at the time of delivery at the correct address;
(ii) if sent by facsimile, at the time of despatch if the correct facsimile number appears on the relevant transmission report;
(iii) if sent by reputable international courier, two days following the date of despatch;
(iv) if sent by post, ten days following the date of posting.
(c) ADDRESSES: Notices and other communications under this agreement shall be delivered to the address of the intended recipient as set out below:
If to Alcatel
26 Ave Jean-Francois
Champollion BP
1187-31037
Facsimile no. 33 (0)5 34 35 51 32
Attention: Mr. Alain Roger 22
If to Loral
c/o Loral Spacecom Corporation
600 Third Avenue,
New York, New York 10016
U.S.A.
Facsimile no. 212 338 5350
Attention: Eric J. Zahler
If to JSH c/o SCIENTIFIC CONSULTING Dr Schulte-Hillen GmbH
Mathias-Bruggen Stra(beta)e 87-89
D-50829 Koln,
Germany
Facsimile no. 0049 221 597 0049
Attention: Beatrix von Wietersheim (Private and Confidential)
If to the Company
26 Ave Jean-Francois
Chaupollion BP
1187-31037
France
Facsimile no. 33 (0)5 34 35 51 32
Attention: Mr Alain Roger
Any party may change its address and other details on giving notice to the other parties of the change.
(d) SERVICE OF SERVICE DOCUMENTS: The provisions of this clause 19 shall not apply in relation to the service of Service Documents. 23
20. EXERCISE OF RIGHTS AND REMEDIES
(a) DELAY: No delay or omission by any party to this agreement in exercising any right, power or remedy provided by law or under this agreement shall affect, or operate as a waiver of, that right, power or remedy.
(b) PARTIAL EXERCISE: The single or partial exercise of any right, power or remedy provided by law or under this agreement shall not preclude any other or further exercise of it or the exercise of any other right, power or remedy.
(c) REMEDIES NON-EXCLUSIVE: The rights, powers and remedies provided in this agreement are cumulative and not exclusive of any rights, powers and remedies provided by law.
(d) ENFORCEMENT: Notwithstanding any express remedies provided under this agreement and without prejudice to any other right or remedy which any party may have, each party acknowledges and agrees that damages alone may not be an adequate remedy for any breach by it of the provisions of this agreement, so that in the event of a breach or anticipated breach of such provisions, the remedies of injunction and/or an order for specific performance would in appropriate circumstances be available.
21. INVALIDITY AND SEVERABILITY
If at any time any provision of this agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, that shall not affect or impair:-
(i) the legality, validity or enforceability in that jurisdiction of any other provision of this agreement; or
(ii) the legality, validity or enforceability under the law of any other jurisdiction of that or any other provision of this agreement.
22. NO PARTNERSHIP
Nothing in this agreement and no action taken by the parties under this agreement shall constitute a partnership, association, or other co - operative entity between any of the parties or constitute any party the agent of any other party for any purpose.
23. COSTS AND EXPENSES
Except as otherwise stated in this agreement, each party shall pay its own costs and expenses in relation to the negotiation, preparation, execution and carrying into effect of this agreement and the Definitive Agreements.
24. COUNTERPARTS
This agreement may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this agreement, but all the counterparts shall together constitute but one and the same instrument. 24
25. CHOICE OF GOVERNING LAW
This agreement is to be governed by and construed in accordance with English law.
26. JURISDICTION
(a) JURISDICTION OF ENGLISH COURTS: Subject to clause 28, the courts of England are to have jurisdiction to settle any dispute arising out of or in connection with this agreement. Any proceeding, suit or action arising out of or in connection with this agreement ("PROCEEDINGS") may therefore be brought in the English courts. This jurisdiction agreement is irrevocable and each Shareholder and the Company agrees that it is for the exclusive benefit of the other Shareholder.
(b) RIGHT TO TAKE PROCEEDINGS: Nothing contained in this clause 26 shall limit either Shareholder's right to take Proceedings against the other Shareholder or the Company in any other court or in the courts of more than one jurisdiction at the same time.
(c) WAIVER OF OBJECTIONS: Each party irrevocably waives any objection, on the ground of forum non conveniens or on any other ground, to the taking of Proceedings in any court referred to in this clause 26. Each party also irrevocably agrees that a judgement in Proceedings brought in any jurisdiction referred to in this clause 26 shall be conclusive and binding upon it and may be enforced in any other jurisdiction.
27. AGENT FOR SERVICE
(a) APPOINTMENT OF AGENT(S): Alcatel irrevocably appoints Alcatel Network Systems Limited of Alcatel Court, 19 George Street, Banbury, Oxon OX16 8BH to be its agent for the service of process in England, Loral irrevocably appoints Willkie, Farr & Gallagher of 35 Wilson Street, London EC2M 2UA to be its agent for service and process in England and JSH appoints Ashurst Morris Crisp (Attn: Graeme Ward) of Broadwalk House, 5 Appold Street, London EC2A 2HA to be his agent for service of process in England. Each of the Shareholders agrees that any writ, summons, order, judgement or other process issued out of the courts of England and Wales in connection with any Proceedings ("SERVICE DOCUMENT") may be effectively served on it in connection with Proceedings in England and Wales by service on its agent.
(b) SERVICE OF SERVICE DOCUMENTS: Any Service Document shall be deemed to have been duly served if addressed to the relevant agent for service of process at the applicable address specified in clause 27(a) or such other address within England or Wales as may be notified and:
(i) left at the specified address; or
(ii) sent to the specified address by first class post.
In the case of (i), the Service Document shall be deemed to have been duly served when it is left. In the case of (ii), the Service Document shall be deemed to have been duly served two clear business days after the date of posting.
(c) APPOINTMENT OF REPLACEMENT AGENT: If the agent at any time ceases for any reason to act as such, Alcatel, Loral or JSH (as the case may be) shall appoint a replacement agent having an address for service in England or Wales and shall notify the other parties of the name and address of the replacement agent. Failing such appointment and notification, the Company shall be entitled by notice to Alcatel, Loral or JSH (as the case may be) to appoint a replacement agent to act on Alcatel, Loral or JSH (as the case may be) behalf. The provisions of this clause 27 applying to service on an agent apply equally to service on a replacement agent. 25
(d) COPIES OF SERVICE DOCUMENTS: A copy of any Service Document served on an agent shall be sent by post to Alcatel, Loral or JSH (as the case may be). Failure or delay in so doing shall not prejudice the effectiveness of service of the Service Document.
28. DISPUTE RESOLUTION
28.1 INITIAL DISPUTE RESOLUTION MEETING
If any disagreement or dispute arises under or in connection with this agreement which the relevant parties are unable to resolve, any of the parties to such disagreement or dispute may (without prejudice to those matters which are specifically required to be referred to an Expert or to clause 6.1 or 6.2) notify the other relevant parties to such dispute pursuant to this clause and request that a meeting of the Executive Committee be held as soon as reasonably practicable to discuss and attempt to resolve the disagreement or dispute.
28.2 MEMORANDUM OF THE MATTER IN DISPUTE
If any of the parties gives notice of a disagreement or dispute pursuant to clause 28.1 which the parties to such disagreement or dispute are unable to resolve through the Executive Committee within a period of 5 (five) business days of such notice being given, or such further time as the parties to such disagreement or dispute may agree, or if a meeting of the Executive Committee is not held within such period, then (save in the case of those matters which are specifically required to be referred to an Expert under this Agreement and without prejudice to clause 6.1 and 6.2), any party may give written notice to the other pursuant to this clause after which, within 30 (thirty) business days of the date of service of such notice, each party shall prepare and send to the other party a memorandum stating its understanding of the matter in dispute or disagreement, its position in relation to such dispute or disagreement, its reasons for taking such position and any proposals for resolving such dispute or disagreement.
28.3 FURTHER EXECUTIVE COMMITTEE MEETING
If within 5 (five) business days from the delivery of the memoranda referred to in clause 28.2, the parties shall have failed to resolve the dispute or disagreement, a further meeting of the Executive Committee shall be held as soon as reasonably practicable to discuss the dispute or disagreement and each party shall use its reasonable endeavours to procure that the dispute or disagreement is resolved.
28.4 ARBITRATION
If any such claim, dispute or difference is not resolved within 60 (sixty) days of the notice under clause 28.1 being given, or such further time as the parties to such claim, dispute or difference may agree, any claim or dispute or difference arising out of or under or in connection with this Agreement (if it arises under clause 3 (Operations), clause 4 (Management Planning and Budgets) or clause 8.4 (Borrowing and Guarantees)) shall be fully resolved by an arbitration by three arbitrators under the Rules on Conciliation and Arbitration of the International Chamber of Commerce, which Rules are deemed incorporated by reference into this clause 28, in each case as such Rules may be amended by agreement between the parties to such claim, dispute or difference or as ordered by their arbitrators. 26
28.5 ARBITRATORS' DECISION FINAL
The decision of any arbitrators appointed pursuant to clause 28.4 shall be final, conclusive and binding on the parties hereto without right of appeal and may be enforced in any court of competent jurisdiction.
28.6 LANGUAGE
Any arbitration hereunder shall be held in London and shall be conducted in the English language. 27
SCHEDULES
SCHEDULE 1: EXTRAORDINARY DECISIONS
PART I: MATTERS TO WHICH, ON DEADLOCK, COMPULSORY SALE AND PURCHASE PROVISIONS APPLY
Constitution and Existence
(1) any amendment to the memorandum or articles of association of the Company or any change to the rights attaching to any class of shares in the Company;
(2) taking steps to commence Insolvency Proceedings in respect of the Company or the making of any settlement with creditors generally;
(3) the merger and consolidation of the Company with any other person or entity;
Equity and debt financing
(4) the creation, issue or allotment of any share or loan capital of the Company or the creation of any option or right to subscribe or acquire or convert any security into any share or loan capital of the Company (other than in accordance with the terms of this agreement or pursuant to and in accordance with the terms of any convertible security, the terms of which have been approved in accordance with the terms of this agreement) or the redemption or other repayment prior to its stated maturity of any equity or debt security issued by the Company (it being expressly understood and agreed that the provision of Bridge Finance or other interim funding pursuant to the provisions of Schedule 4 shall not constitute an Extraordinary Decision which is subject to clause 6.1);
(5) the raising of any loan or credit or the variation or termination of any agreement for the raising of any loan or credit by the Company or the entering into any leasing, hire purchase or deferred payment agreement or any other indebtedness in respect of borrowed money, other than in accordance with the terms of this agreement or any overdraft or other banking facility established in the ordinary course of business and contemplated by the Business Plan or Annual Budget currently in force) (it being expressly understood and agreed that the provision of Bridge Finance or other interim funding pursuant to the provisions of Schedule 4 shall not constitute an Extraordinary Decision which is subject to clause 6.1);
(6) the repayment by the Company of any Shareholder Loan (as defined in the Agreement relating to Shareholders Loans) or the payment of interest thereon by the Company;
Business
(7) any material expansion in the nature and any material change in the scope of the Business, including the introduction of any field of activity;
(8) any amendment, variation or termination of the Loral Global Alliance Policy Statement;
Assets
(9) any disposal of all or substantially all of the assets of the Company;
Transactions with related parties
(10) the entering into or variation of any transaction by the Company with a Shareholder or any Affiliate thereof or any Director or officer of the Company or of any Subsidiary of the Company which is not 28 a wholly owned Subsidiary, in all such cases other than pursuant to the Definitive Agreements (but it being expressly understood and agreed that the matters specified in paragraphs (11) and (12) below shall constitute Extraordinary Decisions subject to clause 6.1);
(11) the exercise of the Company's option to launch the Second Satellite pursuant to the E*S System Contract;
(12) the voluntary termination by the Company of the E*S System Contract;
Subsidiaries
(13) the formation of any subsidiary and the effecting of any of the matters specified in this Part I by a Subsidiary of the Company.
PART 2: MATTERS FOR WHICH, ON DEADLOCK, ALCATEL'S DECISION SHALL PREVAIL
Capital Expenditure
(14) any capital expenditure or commitment of the Company or any Subsidiary which is not accounted for in the Business Plan in force for the time being (including, without limitation, expenditure relating to construction, launch and operation of additional satellites);
Distributions
(15) the declaration or payment of any dividend or other distribution or any resolution to retain or allocate profits or the repayment of capital or assets to members;
Transactions
(16) the entering into, variation or termination of any agreement or arrangement outside the ordinary course of the Business (including, without limitation, the initiation or settlement of litigation or arbitration proceedings where the disputed amounts exceed US$500,000) which does not otherwise involve an Extraordinary Decision;
Assets
(17) any subscription for, acquisition or disposal of any securities in or the assets of any person by the Company or making, varying or terminating any arrangements for any joint venture, partnership or consortium;
(18) making any investment, or the liquidation of any investment made by the Company, in any other person or business;
Subsidiaries
(19) the effecting of any of the matters specified in this Part 2 by a Subsidiary of the Company.
PART 3: BUSINESS PLAN AND ANNUAL BUDGETS
(20) the adoption of any Business Plan (other than the Initial Business Plan) or approval of any amendment to any Business Plan, or the approval or ratification of any departure from the current Business Plan; 29
(21) the adoption of any Annual Budget or any amendment thereto or the approval or ratification of any departure from the current Annual Budget. SIGNATURES
Signed by ALAIN ROGER for and on behalf of ALCATEL SPACECOM SOCIETE ALAIN ROGER PAR ACTIONS SIMPLIFIEE (Signature of named signatory)
Signed by AVI KATZ for and on behalf of LORAL SPACE & COMMUNICATIONS LTD AVI KATZ (Signature of named signatory)
Signed by DR. JURGEN SCHULTE-HILLEN DR. JURGEN SCHULTE-HILLEN (Signature of named signatory)
Signed by ALAIN ROGER for and on behalf of EUROPE*STAR LIMITED ALAIN ROGER (Signature of named signatory)
EXECUTION COPY
LORAL SPACE & COMMUNICATIONS LTD.
$350,000,000
9-1/2% Senior Notes due 2006
REGISTRATION RIGHTS AGREEMENT
New York, New York January 21, 1999
Lehman Brothers Inc. Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette Securities Corporation C.E. Unterberg, Towbin CIBC Oppenheimer Corp. ING Baring Furman Selz LLC c/o Lehman Brothers Inc. 3 World Financial Center 200 Vesey Street New York, New York 10285
Ladies and Gentlemen:
Loral Space & Communications Ltd., a Bermuda company (the "Company"), proposes, subject to the terms and conditions stated in a purchase agreement dated January 15, 1999 (the "Purchase Agreement"), to issue and sell to you (the "Initial Purchasers") $350,000,000 aggregate principal amount of 9-1/2% Senior Notes due 2006 (the "Notes"). The Notes will be issued pursuant to an indenture dated as of January 15, 1999 (the "Indenture"), between the Company and The Bank of New York, as trustee (the "Trustee"). This Agreement will have no force and effect until the Notes are issued. As an inducement to the Initial Purchasers, the Company hereby agrees with the several Initial Purchasers, for the benefit of the holders of the Notes (including, without limitation, the Initial Purchasers), the Exchange Notes (as defined below) and the Private Exchange Notes (as defined below)(collectively, the "Holders"), as follows:
1 Registered Exchange Offer. The Company shall, at its cost and expense, prepare and, not later than 90 days after (or if the 90th day is not a business day, the first business day thereafter) the Issue Date (as defined in the Indenture) of the Notes, file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Exchange Offer Registration Statement") on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a proposed offer (the "Registered Exchange Offer") to the Holders of Transfer Restricted Notes (as defined in Section 6(e)), who are not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer, to issue and deliver to such Holders, in exchange for the Notes, a like aggregate principal amount of debt securities (the "Exchange Notes") of the Company issued under the Indenture and identical in all material respects to the Notes (except for the transfer restrictions relating to the Notes) that would be registered under the Securities Act. The Company shall use reasonable efforts to cause such Exchange Offer Registration Statement to become effective under the Securities Act within 210 days (or if the 210th day is not a business day, the first business day thereafter) after the Issue Date of the Notes and shall keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer if required by applicable law or the policy of the Commission) after the date on which notice of the Registered Exchange Offer is mailed to the Holders (such period being called the "Exchange Offer Registration Period").
If the Company effects the Registered Exchange Offer, the Company will be entitled to close the Registered Exchange Offer 30 days after the commencement thereof; provided, however, that the Company has accepted all the Notes theretofore validly tendered in accordance with the terms of the Registered Exchange Offer.
Following the declaration of the effectiveness of the Exchange Offer Registration Statement, unless the Registered Exchange Offer would not be permitted by applicable law or the Commission's policy, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder of Transfer Restricted Notes electing to exchange the Notes for Exchange Notes (assuming that such Holder is not an affiliate of the Company within the meaning of the Securities Act, acquires the Exchange Notes in the ordinary course of such Holder's business, has no arrangements with any person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Notes and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. In connection with such Registered Exchange Offer, the Company shall take all such reasonable further action, including, without limitation, appropriate filings under state securities laws, as may be necessary to realize the foregoing objective subject to the proviso of Section 3(h).
The Company and the Initial Purchasers acknowledge that the foregoing statement of the objective of the Registered Exchange Offer is based upon current interpretations by the staff of the Commission's Division of Corporation Finance, which interpretations are subject to change without notice, and further acknowledge that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, in the absence of an applicable exemption therefrom, (i) each Holder that is a broker-dealer electing to exchange Notes, acquired for its own account as a result of market making activities or other trading activities, for Exchange Notes (an "Exchanging Dealer"), is required to deliver a prospectus containing the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and in Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Notes received by such Exchanging Dealer pursuant to the Registered Exchange Offer and (ii) an Initial Purchaser that elects to sell Exchange Notes acquired in exchange for Notes constituting any portion of an unsold allotment is required to deliver a prospectus containing the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with such sale.
The Company shall use its reasonable efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein in order to permit such prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Notes; provided, however, that (i) in the case where such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer or an Initial Purchaser, such period shall be the lesser of 180 days after the expiration date of the Registered Exchange Offer and the date on which all Exchanging Dealers and the Initial Purchasers have sold all Exchange Notes held by them (unless such period is extended pursuant to Section 3 (j) below), and (ii) the Company shall make such prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any resale of any Exchange Notes for a period not less than 90 days after the consummation of the Registered Exchange Offer.
If, upon consummation of the Registered Exchange Offer, any Initial Purchaser holds Transfer Restricted Notes acquired by it as part of its initial distribution, the Company, simultaneously with the delivery of the Exchange Notes pursuant to the Registered Exchange Offer, shall issue and deliver to such Initial Purchaser upon the written request of such Initial Purchaser, in exchange (the "Private Exchange") for the Transfer Restricted Notes held by such Initial Purchaser, a like principal amount of debt securities of the Company issued under the Indenture and identical in all material respects (including the existence of restrictions on transfer under the Securities Act and the securities laws of the several states of the United States) to the Transfer Restricted Notes (the "Private Exchange Notes"); provided, however, that the Company shall not be required to effect such exchange if, in the opinion of counsel to the Company, such exchange cannot be effected without registration under the Securities Act. The Private Exchange Notes shall bear the same CUSIP number as the Exchange Notes. The Transfer Restricted Notes, the Exchange Notes and the Private Exchange Notes are herein collectively called the "Securities".
In connection with the Registered Exchange Offer, the Company shall:
(a) mail, or cause to be mailed, to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 calendar days (or longer, if required by applicable law or policy of the Commission) after the date notice thereof is mailed to the Holders;
(c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee;
(d) permit Holders to withdraw tendered Transfer Restricted Notes at any time prior to the close of business, New York time, on the last Business Day (as defined in the Indenture) on which the Registered Exchange Offer shall remain open;
(e) use its best efforts to consummate the Registered Exchange Offer within 30 business days after the Exchange Offer Registration Statement is declared effective; and
(f) otherwise comply in all material respects with all applicable law.
As soon as practicable after the close of the Registered Exchange Offer or the Private Exchange, as the case may be, the Company shall:
(i) accept for exchange all the Transfer Restricted Notes validly tendered and not validly withdrawn pursuant to the Registered Exchange Offer or the Private Exchange, as the case may be;
(ii) deliver, or cause to be delivered to, the Trustee for cancelation all the Transfer Restricted Notes so accepted for exchange; and
(iii) cause the Trustee to authenticate and promptly deliver to each Holder of the Transfer Restricted Notes, Exchange Notes or Private Exchange Notes, as the case may be, equal in principal amount to the Transfer Restricted Notes of each Holder so accepted for exchange.
The Exchange Notes and the Private Exchange Notes may be issued under the Indenture, which will provide that the Exchange Notes will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter.
Interest on the Exchange Notes and the Private Exchange Notes will accrue from (A) the later of (i) the last interest payment date on which interest was paid on the Securities surrendered in the exchange therefor or (ii) if the Securities are surrendered for exchange on a date in a period which includes the record date for an interest payment date to occur on or after the date of such exchange and as to which interest will be paid, the date of such interest payment date or (B) if no interest has been paid on such Securities, from the date of original issue of the Securities.
Each Holder participating in the Registered Exchange Offer shall be required to represent to the Company that at the time of the consummation of the Registered Exchange Offer (i) any Exchange Notes received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any person to participate in the distribution of the Notes or the Exchange Notes within the meaning of the Securities Act, (iii) such Holder is not an "affiliate", as defined in Rule 405 of the Securities Act, of the Company or, if it is an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Notes, and (v) if such Holder is a broker-dealer, that it will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such Exchange Notes.
Notwithstanding any other provisions hereof, the Company will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto will comply in all material respects with the Securities Act and the rules and regulations thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that in no such case shall the Company be responsible for information concerning any Initial Purchaser of the Securities included in the Exchange Offer Registration Statement, the prospectus contained therein, or any amendment or supplement thereto, as the case may be.
2 Shelf Registration. If (i) the Company is not required to file the Exchange Offer Registration Statement or permitted to consummate the Registered Exchange Offer because the Registered Exchange Offer is not permitted by applicable law or Commission policy; or (ii) any Holder of Transfer Restricted Notes notifies the Company prior to the 20th day following the consummation of the Registered Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Registered Exchange Offer, or (B) that it may not resell the Exchange Notes acquired by it in the Registered Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales, or (C) that it is a broker-dealer and owns Notes acquired directly from the Company or an affiliate of the Company, the Company shall take the following actions:
(a) The Company shall, at its cost, use reasonable efforts to file, as promptly as practicable (but in no event later 90 days after so required or requested pursuant to this Section 2 with the Commission and shall thereafter use its reasonable efforts to cause to be declared effective within 210 days after the obligation to file such Shelf Registration Statement arises a registration statement (a "Shelf Registration Statement" and, together with the Exchange Offer Registration Statement, a "Registration Statement") on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Notes by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (hereinafter, a "Shelf Registration"); provided, however, that no Holder (other than an Initial Purchaser) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder (including certain indemnification obligations).
(b) The Company shall use its reasonable efforts to keep any Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities, until the principal of, and interest and Liquidated Damages (if any) on, the Securities have been paid in full or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been sold pursuant thereto or (ii) are distributed to the public pursuant to Rule 144 under the Securities Act or are saleable pursuant to Rule 144(k) under the Securities Act (in any such case, such period being called the "Shelf Registration Period"). Subject to Section 6(b), the Company shall be deemed not to have used its reasonable efforts to keep a Shelf Registration Statement effective during the requisite period if the Company voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless such action is required by applicable law; provided, however, that the Company shall not be deemed to have voluntarily taken any such action if the Company enters, in good faith, into negotiations concerning, or executes and delivers any agreement or other document relating to, any business combination, acquisition or disposition.
(c) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause any Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
3 Registration Procedures. In connection with any Shelf Registration contemplated by Section 2 hereof and, to the extent applicable, the Registered Exchange Offer contemplated by Section 1 hereof, the following provisions shall apply:
(a) The Company shall (i) furnish to each Initial Purchaser, prior to the filing thereof with the Commission, a copy of each Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and, in the event that an Initial Purchaser (with respect to any portion of an unsold allotment from the original offering) is participating in the Registered Exchange Offer or a Shelf Registration Statement, shall use its reasonable efforts to reflect in each such document, when so filed with the Commission, such comments as such Initial Purchaser reasonably may propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; (iii) if requested by an Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; (iv) include within the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution", reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of Exchange Notes received by such broker-dealer in the Registered Exchange Offer (an "Exchanging Dealer"), whether such positions or policies have been publicly disseminated by the staff of the Commission or such positions or policies, in the reasonable judgment of the Initial Purchasers based upon advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission; and (v) in the case of a Shelf Registration Statement, include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement as selling securityholders.
(b) The Company shall give written notice to the Initial Purchasers and the Holders of the Securities from whom the Company has received prior written notice that it will be an Exchanging Dealer in the Registered Exchange Offer (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made):
(i) when a Registration Statement or any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or supplements to a Registration Statement or the prospectus included therein or for additional information (provided, however, that with respect to any requests prior to the effectiveness of the Registration Statement, the Company shall be required to give written notice only to the Initial Purchasers and their counsel, Cravath, Swaine & Moore);
(iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose;
(iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the Company to make changes in the Registration Statement or the prospectus in order that the Registration Statement or the prospectus does not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(c) The Company shall make every reasonable effort to obtain the withdrawal at the earliest possible time of any order suspending the effectiveness of the Registration Statement.
(d) The Company shall furnish to each Holder of Securities included within the coverage of the Shelf Registration, without charge, at least one copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference).
(e) The Company shall deliver to each Exchanging Dealer and each Initial Purchaser, and to any other Holder who so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any Initial Purchaser or any such Holder requests, all exhibits thereto (including those incorporated by reference).
(f) The Company shall deliver to each Holder of Securities included within the coverage of the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto included in the Shelf Registration Statement by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by such prospectus, or any such amendment or supplement. (g) The Company shall deliver to each Initial Purchaser, any Exchanging Dealer and such other persons required to deliver a prospectus during the Exchange Offer Registration Period and/or Shelf Registration Period, as applicable, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such persons may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by any Initial Purchaser, if necessary, any Exchanging Dealer and such other persons as are required to deliver a prospectus following the Registered Exchange Offer in connection with the offering and sale of the Exchange Notes covered by the prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement, in each case in the form most recently provided to each party by the Company.
(h) Prior to any public offering of the Securities, pursuant to any Registration Statement, the Company shall use its reasonable efforts to register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or "blue sky" laws of such states of the United States as any Holder of the Securities reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Registration Statement; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified, (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject, (iii) register or qualify Securities or take any other action under the securities or "blue sky" laws of any jurisdiction if, in the judgment of the Board of Directors or such other governing body of the Company, the consequences of such registration, qualification or other action would be unduly burdensome to the Company or (iv) make any changes to its organizational documents or any agreement with its equity holders. (i) The Company shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request a reasonable period of time prior to sales of the Securities pursuant to such Registration Statement.
(j) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 3(b) above during the period for which the Company is required to maintain an effective Registration Statement, the Company shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Notes or purchasers of Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Initial Purchasers, the Holders of the Securities and any known Exchanging Dealer in accordance with paragraphs (ii) through (v) of Section 3(b) above to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Initial Purchasers, the Holders of the Securities and any such Exchanging Dealers shall suspend use of such prospectus, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended (i) by the number of days from and including the date of the giving of such notice to and including the date when the Initial Purchasers, the Holders of the Securities and any known Exchanging Dealer shall have received such amended or supplemented prospectus pursuant to this Section 3(j) or (ii) if earlier, until the date when none of the Securities represent Transfer Restricted Notes (as defined in Section 6(e)). (k) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Transfer Restricted Notes, the Exchange Notes or the Private Exchange Notes, as the case may be, and provide the applicable trustee with printed certificates for the Notes, the Exchange Notes or the Private Exchange Notes, as the case may be, in a form eligible for deposit with The Depository Trust Company.
(l) The Company will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange Offer or a Shelf Registration, and the Company will make generally available to its security holders (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of its first fiscal quarter commencing after the effective date of the Registration Statement, which statement shall cover such 12-month period.
(m) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture.
(n) The Company may require each Holder of Securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of the Securities as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement, and the Company may exclude from such registration the Securities of any Holder that unreasonably fails to furnish such information within a reasonable time after receiving such request. Each such Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Holder to the Company or of the occurrence of any event, in either case, as a result of which any prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding such Holder or such Holder's intended method of distribution of such Securities, or omits to state a material fact regarding such Holder or such Holder's intended method of distribution of such Securities, required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain, with respect to such Holder or the distribution of such Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each such Holder shall comply with the provisions of the Securities Act applicable to such Holder with respect to the disposition by such Holder of Securities, covered by such registration statement in accordance with the intended methods of disposition by such Holder set forth in such registration statement.
(o) The Company shall enter into such customary agreements (including if requested an underwriting agreement in customary form) and take all such other action, if any, as Holders of a majority in aggregate principal amount of Securities being sold or the managing underwriters shall reasonably request in order to facilitate the disposition of the Securities pursuant to any Shelf Registration; provided, however, that in the case of actions that facilitate the disposition of a particular Holder's Securities, only such Holders request is required; provided further, that the Company shall not be required to enter into any such agreement more than once with respect to all of the Securities and may delay entering into such agreement until the consummation of any underwritten public offering which the Company shall have then undertaken.
(p) In the case of a Shelf Registration, the Company shall (i) make reasonably available for inspection by the Holders of the Securities, any underwriter participating in any disposition pursuant to the Shelf Registration Statement and any attorney, accountant or other agent retained by the Holders of the Securities or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Holders of the Securities or any such underwriter, attorney, accountant or agent in connection with the Shelf Registration Statement, in each case, as shall be reasonably necessary, in the judgment of the Holder or any such underwriter, attorney, accountant or agent referred to in this paragraph, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that the foregoing inspection and information gathering shall be coordinated on behalf of the Initial Purchasers by you and on behalf of the other parties by one counsel designated by and on behalf of such other parties as described in Section 4 hereof and shall be expressly subject to the confidential treatment by such parties as to all proprietary information of the Company.
(q) In the case of a Shelf Registration, the Company, if requested by (i) Holders of a majority in aggregate principal amount of Securities, (ii) such Holder's counsel, or (iii) the managing underwriter (if any), covered thereby, shall use reasonable efforts to cause (x) its counsel to deliver an opinion and updates thereof relating to the Registration Statement and the Securities in customary form addressed to such Holders and the managing underwriters, if any, thereof and dated the effective date of such Shelf Registration Statement covering the matters customarily covered in opinions of counsel requested in underwritten offerings and such other matters as may be reasonably requested by the managing underwriter or underwriters; (y) its officers to execute and deliver all customary documents and certificates and updates thereof reasonably requested by any underwriters of the applicable Securities; and (z) its independent public accountants to provide to the selling Holders of the applicable Securities and any underwriter therefor a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72.
(r) In the case of the Registered Exchange Offer, if requested by any Initial Purchaser or any known Exchanging Dealer, the Company shall use reasonable efforts to cause (i) its counsel to deliver to such Initial Purchaser or such Exchanging Dealer a signed opinion in the form as is customary in connection with such a Registration Statement and (ii) its independent public accountants to deliver to such Initial Purchaser or such Exchanging Dealer a comfort letter, in customary form.
(s) If the Registered Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Transfer Restricted Notes by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, the Company shall mark, or cause to be marked, on the Transfer Restricted Notes so exchanged that such Transfer Restricted Notes are being canceled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; in no event shall the Transfer Restricted Notes be marked as paid or otherwise satisfied.
(t) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Conduct Rules of the By-Laws of the National Association of Securities Dealers, Inc. (the "NASD")) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of such Rules and By-Laws.
(u) The Company will use its reasonable efforts to cause the Securities or the Exchange Securities, as applicable, covered by a Registration Statement to continue to be rated, during the period for which
such Registration Statement is required to be effective, by the rating agencies that initially rated the Securities, if so requested by Holders of a majority in aggregate principal amount of Securities covered by such Registration Statement or the Exchange Securities, as the case may be, or the managing underwriters, if any.
(v) The Company shall use its reasonable efforts to take all other steps reasonably necessary to effect the registration of the Securities covered by a Registration Statement contemplated hereby.
4 Registration Expenses. The Company shall bear all fees and expenses incurred in connection with the performance of the Company's obligations under Sections 1 through 3 hereof (including the reasonable fees and expenses of one counsel to the Initial Purchasers, incurred in connection with the Registered Exchange Offer), whether or not the Registered Exchange Offer or a Shelf Registration is filed or becomes effective, and, in the event of a Shelf Registration, shall bear, or reimburse the Holders of the Securities covered thereby for, the reasonable fees and disbursements of one firm of counsel designated by the Holders of a majority in principal amount of the Securities covered thereby to act as counsel for the Holders of the Securities in connection therewith, it being understood that the Company shall not be responsible for the fees and expenses of more than one counsel employed at any one time; provided, however, that in an underwritten offering, the Company shall not be responsible for any fees or expenses of any underwriter, including any underwriting discounts or commissions, or any legal fees or expenses of counsel to any underwriter. Notwithstanding the foregoing, the Holders of Securities being registered shall pay all agency or brokerage fees and commissions and underwriting discounts and commissions attributable to the sale of such Securities and the fees and disbursements of any counsel or other advisors or experts retained by such Holders (severally or jointly), other than the one counsel specifically referred to above.
5 Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of the Securities and each person, if any, who controls such Holder or such Exchanging Dealer within the meaning of the Securities Act or the Exchange Act (each Holder, any Exchanging Dealer and such controlling persons being referred to collectively as the "Indemnified Parties") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that (i) the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein, (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any prospectus relating to the registration statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any person as to which there is a prospectus delivery requirement (a "Delivering Seller") that sold the Securities to the person asserting any such losses, claims, damages or liabilities to the extent that any such loss, claim, damage or liability of such Delivering Seller results from the fact that there was not sent or given to such person, on or prior to the written confirmation of such sale, a copy of the relevant prospectus, as amended and supplemented, provided that (A) the Company shall have previously furnished copies thereof to such Delivering Seller in accordance with this Agreement and (B) such furnished prospectus, as amended and supplemented, would have corrected any such untrue statement or omission or alleged untrue statement or omission, and (iii) this indemnity agreement will be in addition to any liability which the Company may otherwise have to such Indemnified Party. The Company shall also indemnify underwriters, their officers and directors and each person who controls such persons within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders; provided, however, that the Company shall not indemnify any such party to the extent its liability arises from its failure to comply with the requirements described in Annexes A, B, C and D hereto, as updated.
(b) Each Holder of the Securities (and, if requested by the Company, each placement agent or underwriter in connection with the registration), severally and not jointly, will indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act and the directors, officers, agents and employees of such controlling persons from and against any losses, claims, damages or liabilities or any actions in respect thereof to which the Company, any such controlling person or director, officer, agent or employee of such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information pertaining to such Holder or such underwriter, as the case may be, and furnished to the Company by or on behalf of such Holder or such underwriter, as the case may be, specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Company for any legal or other expenses reasonably incurred by the Company or any such controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder or such underwriter, as the case may be, may otherwise have to the Company or any such controlling persons.
(c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action or proceeding (including a governmental investigation), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above, except to the extent that it is prejudiced or harmed in any material respect by failure to give such prompt notice. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with one counsel (and local counsel as necessary) reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party will not be liable to such indemnified party under this Section 5 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. No indemnifying party shall, without the prior written consent of the indemnified party, not to be unreasonably withheld, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. No indemnifying party shall be liable for any amounts paid in settlement of any action or claim without its written consent, which consent shall not be unreasonably withheld, but if settled in accordance with its written consent or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 5 is unavailable or insufficient to hold harmless an indemnified party under subsections (a) or (b) above for any reason other than as provided in subsection (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other from the exchange of the Notes, pursuant to the Registered Exchange Offer, or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party or parties on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or such Holder or such other indemnified person, as the case may be, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding any other provision of this Section 5(d), the Holders of the Securities shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to a Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each officer, director, employee, representative and agent of an indemnified party and each person, if any, who controls such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party, and each officer, director, employee, representative and agent of the Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company.
(e) The agreements contained in this Section 5 shall survive the sale of the Securities pursuant to a Registration Statement and shall remain in full force and effect, regardless of any termination or cancelation of this Agreement or any investigation made by or on behalf of any indemnified party.
6 Liquidated Damages Under Certain Circumstances. (a) Additional cash interest (the "Liquidated Damages") with respect to the Securities shall be assessed against the Company as follows if any of the following events occurs (each such event in clauses (i) through (iv) below a "Registration Default"):
(i) if the Company fails to file either the Exchange Offer Registration Statement or Shelf Registration Statement on or before the date specified for the filing thereof in Sections 1 and 2 hereof, respectively;
(ii) if any such Registration Statement so required to be filed is not declared effective by the Commission on or before, in the case of the Exchange Offer Registration Statement, the date that is 210 days after the Issue Date, and in the case of the Shelf Registration Statement, the date that is 210 days after the obligation to file such Shelf Registration Statement arises (each such date being hereinafter referred to as an "Effectiveness Target Date"); (iii) if the Company fails to consummate the Registered Exchange Offer within 30 business days after the Effectiveness Target Date with respect to such Registered Exchange Offer; or
(iv) if after either an Exchange Offer Registration Statement or a Shelf Registration Statement is declared effective (A) such Registration Statement thereafter ceases to be effective; or (B) such Registration Statement or the related prospectus ceases to be usable (except as permitted in paragraph (b)) in connection with resales of Transfer Restricted Notes during the periods specified herein because either (1) any event occurs as a result of which the related prospectus forming part of such Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (2) it shall be necessary to amend such Registration Statement or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder.
Liquidated Damages shall accrue on the Transfer Restricted Notes with respect to the first 90-day period immediately following such Registration Default in an amount equal to $.05 per week per $1,000 principal amount of Transfer Restricted Notes held by each Holder (over and above the interest set forth in the title of the Transfer Restricted Notes) from and including the date on which any such Registration Default shall occur until the date on which all such Registration Defaults have been cured. The Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount of the Notes held by each Holder during each subsequent 90-day period until the date on which all such Registration Defaults have been cured; provided, however, that the rate of Liquidated Damages shall not exceed a maximum of $.50 per week per $1,000 principal amount of the Notes held by each Holder at any time.
(b) A Registration Default referred to in Section 6(a)(iv)(B) shall be deemed not to have occurred and be continuing in relation to a Shelf Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post - effective amendment to such Shelf Registration Statement to incorporate annual audited or, if required by the rules and regulations under the Securities Act, quarterly unaudited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events or developments with respect to the Company that would need to be described in such Shelf Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company is proceeding promptly and in good faith to amend or supplement such Shelf Registration Statement and related prospectus to describe such events; provided, however, that in no event shall the Company be required to disclose the business purpose for such suspension if the Company determines in good faith that such business purpose must remain confidential. Notwithstanding the foregoing, the Company shall not be required to pay Liquidated Damages with respect to the Securities of a Holder if the failure arises from the Company's failure to file, or cause to become effective, a Shelf Registration Statement within the time periods specified in this Section 6 by reason of the failure of such Holder to provide such information as (i) the Company may reasonably request, with reasonable prior written notice, for use in the Shelf Registration Statement or any prospectus included therein to the extent the Company reasonably determines that such information is required to be included therein by applicable law, (ii) the Commission may request in connection with such Shelf Registration Statement or (iii) is required to comply with the agreements of such Holder as contained in Section 3(n) to the extent compliance thereof is necessary for the Shelf Registration Statement to be declared effective.
(c) The parties hereto agree that the Liquidated Damages provided for in this Section constitute a reasonable estimate of and are intended to constitute the sole damages that will be suffered by Holders of Securities by reason of the failure of the applicable Registration Statement to be filed, to be declared effective or to remain effective, or of the Exchange Offer to be consummated, as the case may be, to the extent required by this Agreement.
(d Any Liquidated Damages accruing on the Transfer Restricted Notes will be payable in cash on the regular interest payment dates (each a "Damages Payment Date") with respect to the Transfer Restricted Notes to the holders of record on the applicable record date.
(e "Transfer Restricted Notes" means each Security until (i) the date on which such Transfer Restricted Note has been exchanged by a person other than a broker-dealer for a freely transferrable Exchange Note in the Registered Exchange Offer, (ii) following the exchange by a broker- dealer in the Registered Exchange Offer of a Transfer Restricted Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Transfer Restricted Note has been effectively registered under the Securities Act and disposed of in accordance with a Shelf Registration Statement or (iv) the date on which such Transfer Restricted Note is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act.
7. Rules 144 and 144A. The Company shall use its reasonable efforts to file the reports required to be filed under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, will, upon the request of any Holder of Transfer Restricted Notes, make publicly available other information so long as necessary to permit sales of its securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Transfer Restricted Notes may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Notes without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Notes identified to the Company by the Initial Purchasers upon request. Upon the request of any Holder of Transfer Restricted Notes, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act.
8. Underwritten Registrations. If any of the Transfer Restricted Notes covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("Managing Underwriters") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Notes to be included in such offering (subject to the approval (which approval shall not be unreasonably withheld) of the Company, provided, however, that the Company shall not be obligated to arrange for more than one underwritten offering during the period that such Shelf Registration is required to be effective pursuant to this Agreement).
No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Notes on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, lock-up agreements, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements.
9. Miscellaneous. (a) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by the Company and the written consent of the Holders of a majority in principal amount of the Securities affected by such amendment, modification, supplement, waiver or consents.
(b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder of the Securities, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 9(b), which address initially is, with respect to each Holder, the address of such Holder to which confirmation of the sale of the Notes to such Holder was first sent by the Initial Purchasers, with a copy in like manner to you as follows:
Lehman Brothers Inc. 3 World Financial Center 200 Vesey Street New York, NY 10285 Attention: Syndicate Department with a copy to:
Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, New York 10019 Fax No.: (212) 474-3700 Attention: Robert Rosenman
(2) if to the Initial Purchasers, at the addresses specified in Section 9(b)(1);
(3) if to the Company, at its address as follows:
Loral Space & Communications Ltd.
600 Third Avenue New York, NY 10016 Attention: Eric J. Zahler with a copy to:
Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019 Fax No: (212) 728-8111 Attention: Bruce R. Kraus
All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery.
(c) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof.
(d) Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns.
(e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
(h) Jurisdiction; Consent to Service of Process. THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURTS LOCATED IN THE CITY OF NEW YORK FOR ANY LAWSUITS, CLAIMS OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND AGREES NOT TO COMMENCE ANY SUCH LAWSUIT, CLAIM OR OTHER PROCEEDING EXCEPT IN SUCH COURTS. THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY LAWSUIT, CLAIM, OR OTHER PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURTS LOCATED IN THE CITY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH LAWSUIT, CLAIM OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE COMPANY HAS APPOINTED ERIC J. ZAHLER AT 600 THIRD AVENUE, NEW YORK, NEW YORK 10016, U.S.A. (HEREINAFTER REFERRED TO IN SUCH CAPACITY AS THE "PROCESS AGENT"), AS ITS AUTHORIZED AGENT UPON WHOM PROCESS MAY BE SERVED IN ANY SUCH SUIT OR PROCEEDING. THE COMPANY REPRESENTS TO YOU THAT IT HAS NOTIFIED THE PROCESS AGENT OF SUCH DESIGNATION AND APPOINTMENT AND THAT THE PROCESS AGENT HAS ACCEPTED THE SAME IN WRITING. THE COMPANY HAS AUTHORIZED AND DIRECTED THE PROCESS AGENT TO ACCEPT SUCH SERVICE. IF THE PROCESS AGENT SHALL CEASE TO ACT AS THE COMPANY'S AGENT FOR SERVICE OF PROCESS, THE COMPANY SHALL APPOINT WITHOUT DELAY ANOTHER SUCH AGENT AND NOTIFY YOU OF SUCH APPOINTMENT. THE COMPANY FURTHER AGREES THAT SERVICE OF PROCESS UPON THE PROCESS AGENT AND WRITTEN NOTICE OF SAID SERVICE TO THE COMPANY MAILED BY FIRST CLASS MAIL OR DELIVERED TO THE PROCESS AGENT SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON IT IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT YOUR RIGHT OR THE RIGHT OF ANY PERSON CONTROLLING ANY OF YOU TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. THE COMPANY AGREES THAT A FINAL ACTION IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER LAWFUL MANNER.
(i) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.
(j) Securities Held by the Company. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Company or its affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. If the foregoing is in accordance with your understanding of our agreement, please sign and return to Lehman Brothers Inc. a counterpart hereof, whereupon this Agreement will become a binding agreement among the Company and the several Initial Purchasers in accordance with its terms.
Very truly yours,
LORAL SPACE & COMMUNICATIONS LTD.
by
/s/ Richard Townsend ------Name: Title:
The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written.
LEHMAN BROTHERS INC. BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION C.E. UNTERBERG, TOWBIN CIBC OPPENHEIMER CORP. ING BARING FURMAN SELZ LLC by LEHMAN BROTHERS INC. by
/s/ Stephen Mehos ------Name: Stephen Mehos Title: Vice President
ANNEX A
Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this prospectus available to any broker -dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B
Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker- dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution."
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for existing Notes where such existing Notes were acquired as a result of market -making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until [ ], 1999, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. */
The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or
*/ In addition, the legend required by Item 502(e) of Regulation S -K will appear on the back cover page of the Exchange Offer prospectus. negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer for the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the reasonable expenses of one counsel for the Holders of the Notes) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. ANNEX D
_____ /____/ CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ______
Address: ______
If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EXHIBIT 12
LORAL SPACE & COMMUNICATIONS LTD.
COMPUTATION OF DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES
AND RATIO OF EARNINGS TO COVER FIXED CHARGES (in thousands, except ratios)
(Unaudited)
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ------DECEMBER 31, 1998 1997 1996 ------Earnings: Income (loss) before income taxes, equity in net loss of affiliates and minority interest...... $(25,628) $126,982 $16,498 Plus fixed charges: Interest expense...... 111,334 37,871 6,000 Interest component of rent expense(1)...... 6,600 4,400 Less capitalized interest...... 60,125 22,641 ------Earnings available to cover fixed charges...... $ 32,181 $146,612 $22,498 ======Fixed charges(2)...... $172,619 $ 78,568 $ 6,000 ======Deficiency of earnings to cover fixed charges...... $140,438 ======Ratio of earnings to cover fixed charges...... 1.9x 3.7x ======
(1) The interest component of rent expense is deemed to be approximately 25% of total rent expense.
(2) Fixed charges include preferred dividends as adjusted for the Company's effective tax rate. Exhibit 21
LORAL SPACE & COMMUNICATIONS Ltd.
As of February 28, 1999, active subsidiaries, all 100% owned directly or indirectly (except as noted below) consist of the following:
LORAL SPACE & COMMUNICATIONS CORPORATION DELAWARE LORAL GENERAL PARTNER, INC. DELAWARE LORAL HOLDINGS, INC. DELAWARE LORAL COMMUNICATIONS SERVICES, INC. DELAWARE LORAL ORION, INC. DELAWARE LORAL GLOBAL SERVICES, INC. DELAWARE LORAL ORION EUROPE, INC. DELAWARE LORAL ORION ASIA PACIFIC, INC. DELAWARE LORAL ORION AMERICAS, INC. DELAWARE LORAL ORION GLOBAL SERVICES, INC. DELAWARE ORION OLDCO SERVICES, INC. DELAWARE LORAL ORION SERVICES, INC. DELAWARE ORIONNET, INC. DELAWARE ORIONNET FINANCE CORPORATION(6) DELAWARE ORION FINANCE PARTNERSHIP DELAWARE ORION NETWORK SYSTEMS EUROPE GMBH(1) GERMANY LORAL SPACECOM CORPORATION DELAWARE SPACE SYSTEMS/LORAL, INC. DELAWARE INTERNATIONAL SPACE TECHNOLOGY, INC. (9) DELAWARE COSMOTECH (9) RUSSIAN FEDERATION SS/L EXPORT CORPORATION U.S. VIRGIN ISLANDS MABUHAY SPACE HOLDINGS LIMITED (11) BERMUDA EUROPE*STAR LIMITED (8) UNITED KINGDOM EUROPE*STAR GESELLSCHAFT FUR DEN BETRIEB VON NACHRICHTENSATELLITEN MBH (8) GERMANY GLOBALSTAR, L.P.(10) DELAWARE GLOBALSTAR CAPITAL CORPORATION (10) DELAWARE GLOBALTEL (14) RUSSIAN FEDERATION GLOBALTRAK PTY (10) AUSTRALIA GLOBALSTAR SERVICES COMPANY, INC. (10) DELAWARE GLOBALSTAR CORPORATION (10) DELAWARE GLOBALSTAR TELECOMMUNICATION LIMITED (15) BERMUDA LGP (BERMUDA) LTD. BERMUDA LORAL CYBERSTAR LTD. BERMUDA LORAL BROADBAND HOLDINGS, L.P. DELAWARE LORAL CYBERSTAR L.L.C. DELAWARE CYBERSTAR, L.P. (3) DELAWARE CYBERSTAR LICENSEE, L.L.C. (3) DELAWARE LORAL/DASA GLOBALSTAR L.P. (5) DELAWARE LORAL/DASA DO BRASIL LTDA (5) BRAZIL GLOBALSTAR DO BRASIL, S.A. (12) BRAZIL LORAL GLOBAL SERVICES, N.V. NETHERLANDS ANTILLES LORAL GLOBAL SERVICES, B.V. NETHERLANDS EUROPE*STAR GESELLSCHAFT FUR SATELLITENKOMMUNIKATION MBH (13) GERMANY LORAL HOLDINGS LTD. BERMUDA LORAL SPACE DO BRASIL LTDA. BRAZIL LORAL SKYNET DO BRASIL LTDA. BRAZIL LORAL ORION HOLDINGS LTD. BERMUDA ONS-MAURITUS MAURITUS LORAL/QUALCOMM PARTNERSHIP, L.P. (6) DELAWARE LQ LICENSEE, L.L.C. (6) DELAWARE LORAL/QUALCOMM SATELLITE SERVICES, L.P. (4) DELAWARE LORAL SATMEX, LTD. BERMUDA ENLANCES SATELLITE S. DE R.L. DE C.V. (16) MEXICO FIRMAMENTO MEXICANO S. DE R.L. DE C.V. (16) MEXICO SERVICOS CORPORATION SATELITALES S.A. DE C.V. (16) MEXICO SATTELITES MEXICANOS, S.A. DE C.V. (17) MEXICO LORAL SKYNET LTD. BERMUDA LORAL SPACECOM DBS HOLDINGS, INC. DELAWARE R/L DBS COMPANY L.L.C. (7) DELAWARE LORAL SPACECOM DBS, INC. DELAWARE CONTINENTAL SATELLITE CORPORATION (2) CALIFORNIA
TABLE
(1) ONLY 99.5% OWNED DIRECTLY OR INDIRECTLY (2) ONLY 86% OWNED DIRECTLY OR INDIRECTLY (3) ONLY 85.6% OWNED DIRECTLY OR INDIRECTLY (4) ONLY 75.2% OWNED DIRECTLY OR INDIRECTLY (5) ONLY 66.7 OWNED DIRECTLY OR INDIRECTLY (6) ONLY 51% OWNED DIRECTLY OR INDIRECTLY (7) ONLY 50% OWNED DIRECTLY OR INDIRECTLY (8) ONLY 46.6% OWNED DIRECTLY OR INDIRECTLY (9) ONLY 42.9% OWNED DIRECTLY OR INDIRECTLY (10) ONLY 42.6% OWNED DIRECTLY OR INDIRECTLY (11) ONLY 35 OWNED DIRECTLY OR INDIRECTLY (12) ONLY 32.7% OWNED DIRECTLY OR INDIRECTLY (13) ONLY 25% OWNED DIRECTLY OR INDIRECTLY (14) ONLY 20.8% OWNED DIRECTLY OR INDIRECTLY (15) ONLY 10.1% OWNED DIRECTLY OR INDIRECTLY (16) ONLY 65% OF THE ECONOMIC INTEREST AND 49% OF THE VOTING INTEREST OWNED DIRECTLY OR INDIRECTLY (17) ONLY 48.8% OF THE ECONOMIC INTEREST AND 49% OF THE VOTING INTEREST OWNED DIRECTLY
OR INDIRECTLY EXHIBIT 23
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statement Nos. 333-26517 and 333-46401 on Form S-3 and Nos. 333-14863, 333- 61723 and 333-49091 on Form S-8 of Loral Space & Communications Ltd. (a Bermuda company) of our reports with respect to the consolidated financial statements of Loral Space & Communications Ltd., Space Systems/Loral, Inc. and Globalstar, L.P. and the financial statement schedule of Loral Space & Communications Ltd., appearing in or incorporated by reference in this Annual Report on Form 10-K of Loral Space & Communications Ltd. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP New York, New York
March 30, 1999 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
ARTICLE 5 This Schedule contains summary financial information extracted from the financial statements of Loral Space & Communications Ltd. for the fiscal year ended December 31, 1998, and is qualified in its entirety by reference to such financial statements. MULTIPLIER: 1,000
PERIOD TYPE YEAR FISCAL YEAR END DEC 31 1998 PERIOD START JAN 01 1998 PERIOD END DEC 31 1998 CASH 546,772 SECURITIES 0 RECEIVABLES 402,322 ALLOWANCES 2,521 INVENTORY 191,245 CURRENT ASSETS 1,241,707 PP&E 1,859,466 DEPRECIATION 191,958 TOTAL ASSETS 5,229,215 CURRENT LIABILITIES 495,591 BONDS 0 PREFERRED MANDATORY 0 PREFERRED 735,896 COMMON 2,439 OTHER SE 2,197,386 TOTAL LIABILITY AND EQUITY 5,229,215 SALES 1,117,721 TOTAL REVENUES 1,301,702 CGS 995,405 TOTAL COSTS 1,129,874 OTHER EXPENSES 0 LOSS PROVISION 0 INTEREST EXPENSE 51,209 INCOME PRETAX (25,628) INCOME TAX (3,871) INCOME CONTINUING (185,223) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET INCOME (185,223) EPS PRIMARY (0.68) (0.68) Note: The adoption of SFAS 128 had no effect EPS DILUTED on reported earnings per share for the year ended December 31, 1998.
End of Filing
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