LORAL SPACE & COMMUNICATIONS LTD
FORM 10-K (Annual Report)
Filed 3/31/1997 For Period Ending 12/31/1996
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM APRIL 1, 1996 TO
DECEMBER 31, 1996
Commission file number 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
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 or such shorter period as the registrant was required to file such reports 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 definitive proxy statement incorporated by reference in Part III of this Form 10-K.
At February 28, 1997, 191,092,308 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 $3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 definitive proxy statement are incorporated by reference into Part III.
The financial statements required by Rule 3.05 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. PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. and its subsidiaries ("Loral" or the "Company") is one of the world's leading satellite communications companies, with substantial interests in both the manufacture and operation of geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Advances in technology which have dramatically improved satellites' price/performance ratios and increasing demand for telecommunications services worldwide are accelerating the integration of space-based communications systems with terrestrial wireless and wireline communications networks. Loral believes that it is well-positioned to capitalize on the numerous satellite communications service opportunities resulting from this trend.
Loral was formed to effectuate the distribution of Loral Corporation's ("Old Loral") space and telecommunications businesses (the "Distribution") to shareholders of Old Loral pursuant to a merger agreement ("the Merger") dated January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). The Distribution was made on April 23, 1996.
Loral manages and will soon own 100% of Space Systems/Loral, Inc. ("SS/L"), one of the world's leading manufacturers of space systems. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), which is building and preparing to launch and operate a constellation of LEO satellites expected to be placed in service in 1998 that will support digital telephone service to handheld and fixed terminals worldwide. Loral, together with partners, will act as the Globalstar service provider in Canada, Brazil and Mexico and, with QUALCOMM Incorporated ("Qualcomm"), holds the exclusive right to provide in-flight phone service using Globalstar in the United States.
On March 14, 1997, Loral acquired Skynet Satellite Services ("Skynet"), the third largest domestic satellite service provider from AT&T. The Skynet acquisition will advance the Company's strategy of becoming a global provider of satellite-based services and will complement the Company's existing satellite manufacturing capabilities. The Company believes that Skynet is positioned to benefit from the Company's focus on satellite-related businesses and intends to expand Skynet, which has heretofore limited its operations to the U.S. market, to become a worldwide satellite communications service provider.
Loral intends to pursue additional satellite-based communications services opportunities, including CyberStar, a proposed worldwide high- speed broadband communications system comprised of three GEO satellites designed to provide interactive multimedia data transmission. Loral holds FCC orbital position assignments, subject to final licensure, for two of the necessary CyberStar orbital slots covering Asia, Europe and the Middle East. Loral and the other FCC applicants have reached an agreement for CyberStar's orbital assignment in the Americas region. FCC licensure for all of CyberStar's orbital locations is anticipated during 1997. Loral is also exploring opportunities to participate in offerings of domestic and international direct-to-home services ("DTH").
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 communications service opportunities.
1 The following table presents a brief description of the orbital slots that the Company and Skynet are authorized to use. The Telstar 402R satellite is currently in service at 89 degreesW. The Company intends to use its LoralSat authorizations at 77 degreesW and 129 degreesW in connection with Skynet's business. All of its CyberStar authorizations are subject to final licensure.
ORBITAL SLOTS COVERAGE AREA FUNCTION ------Telstar: 69degreesW North America 89degreesW United States Video and data at C- and Ku-bands 93degreesW North America 97degreesW United States LoralSat: 77degreesW(1) North America Video and data at C- and Ku-bands 129degreesW(1) North America CyberStar: 105.5d greesE(2)(3) Asia 28d greesE(2)(3) Europe, Middle East Interactive broadband multimedia at Ka-band 115degreesW(2) North and South America
(1) Loral's authority to use these orbital locations has been challenged in a proceeding before the FCC. The Company has also applied to expand coverage to South America subject to successful international coordination.
(2) FCC licensure for all of CyberStar's orbital locations is anticipated during 1997.
(3) While the FCC has associated these orbital slots with the Company for purposes of international coordination and is supporting the Company's position before the International Telecommunication Union ("ITU"), these orbital slots are subject to prior claims by third parties who have received the support of their respective countries before the ITU. There is no assurance that this international coordination will be successful.
COMPETITION
The space and communications industry is highly competitive and many of the Company's competitors have significantly greater financial, technical and regulatory resources than those of the Company. The Company will compete with such parties for customers and for local regulatory approval in jurisdictions in which the Company or such third parties may wish to operate. In addition, the Company will have to compete for allocation of scarce frequency assignments and geosynchronous orbital slots in order to pursue its business plan. There is no assurance that the Company will be able to compete effectively against such parties. In addition, the Company may face additional competition from new entrants in the future.
SPACE SYSTEMS/LORAL
SS/L is a worldwide leader in the design, manufacture and integration of telecommunications, weather and direct broadcast satellites with over 35 years experience. 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. At March 31, 1997, Loral has a 75.5% ownership interest in SS/L and agreements in principle to acquire the remaining 24.5%.
SS/L is the leading supplier of satellites to Intelsat, an international consortium of 135 member nations and the world's largest operator of commercial communications satellites. Other significant customers include APT Satellite, Chinasat, Globalstar, MCI, PanAmSat, Skynet and TCI. SS/L has an impressive track record of successful satellite programs, possesses a broad range of technological capabilities in spacecraft design, as well as all critical spacecraft subsystems, and maintains a completely integrated complex of satellite manufacturing, assembly, integration and testing facilities. The satellites built by SS/L have accumulated more than 600 years of service in space. This 600-year milestone represents the combined success of 82 communications and weather satellites built by SS/L during the past three and a half decades.
2 SS/L has built a strong reputation for excellence in its field, with a history of technical innovation that includes producing the first three-axis stabilized satellites, introducing bipropellant propulsion systems for commercial satellites that permit significant increases in the satellites' payload and extend the satellites' on-orbit lifetime, introducing rechargeable nickel-hydrogen batteries with a life span of 10 years or more, pioneering the use of advanced composites to significantly enhance satellite performance at lighter weights and delivering the first communications satellite with more than ten kilowatts of power. SS/L also created the first multi-mission geostationary satellite. Since 1993, SS/L has shortened delivery schedules significantly, increased spacecraft reliability by 30% and increased spacecraft power by 60%. When combined with recent improvements in transmission technology, the total communications capacity of an SS/L satellite has increased 20-fold during this four-year period.
Three major European space systems manufacturers, Aerospatiale, Alcatel and Finmeccanica (the "Alliance Partners"), currently hold or shortly will hold, in exchange for their SS/L common stock, Loral securities. SS/L and the Alliance Partners have agreed generally to operate as a team on satellite programs worldwide, to coordinate research and development activities and to share technological resources. SS/L believes that this strategic alliance has enhanced its technological and manufacturing capabilities and marketing resources and affords it access to international government and commercial customers more effectively than its U.S.-based competitors. For example, through the Alliance, SS/L has been able to enter the payload business in support of Aerospatiale's prime contract under the Eutelsat, Thaicom and Sirius programs.
Loral made a strategic decision to increase its ownership in SS/L to 100%. The first step in implementing this strategy was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with Lehman Brothers Inc. 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 ownership of SS/L from 32.7% to 51%. In March 1997, Loral increased its ownership to 75.5% by acquiring the SS/L common stock held by DASA and Finmeccanica for $93.5 million in cash and $93.5 million market value of Loral convertible preferred securities, respectively. In order to acquire the remaining 24.5% of SS/L, Loral shortly expects to complete similar transactions with Aerospatiale and Alcatel, who will each exchange their SS/L common stock for a combination of Loral common stock and Loral convertible preferred securities with a market value of $93.5 million.
PROGRAMS
Some of SS/L's current programs include:
Telecommunications
Telstar. These telecommunications satellites being built for Skynet will be among the most powerful satellites in the industry. Telstar 5 and Telestar 6 will provide service to the United States, the Caribbean, Mexico and Southern Canada. Carrying a total of 52 transponders each, the satellites will generate about 50% more radio frequency power than any other fixed-service satellites. Telstar's increased payload capability will be achieved through the use of highly efficient techniques for dissipating thermal energy and for generating and storing electricity, together with extensive use of advanced composites such as high efficiency silicon cells and nickel-hydrogen batteries.
Intelsat/FOS-II. In March 1997, SS/L entered into a contract with Intelsat to build two high-powered, high-capacity satellites, called the Follow-on Series ("FOS") II program. The FOS-II satellites will allow Intelsat to provide the Indian Ocean region with advanced communications and digital services to customers equipped with small earth stations. The FOS-II spacecraft will carry a significantly greater percentage of high-power amplifiers and solar array power than the Intelsat VIIA series. Each of the FOS-II satellites will operate 44 C-band transponders and 12 Ku-band transponders.
3 Apstar-IIR. Using its proven standard three-axis configuration, SS/L is building a telecommunications satellite for a consortium comprised of Chinese state-owned companies and commercial firms based in Taiwan, Thailand, Macau and Singapore, that will provide regional and international telecommunications services to the Asia-Pacific region. Once operational, the Apstar-IIR will provide regional voice, video and data services. The satellite is expected to have a life span of more than 12 years. Its high power transponders are designed to enable the use of small diameter receiving dishes, providing an inexpensive means of establishing a direct-to-home satellite-based telecommunications network in the region.
Chinasat 8. SS/L has contracted with China Telecommunications Broadcast Satellite Corporation ("Chinasat") to construct Chinasat 8, a high- powered communications satellite that will provide video, data and digital voice service throughout China.
Mabuhay. SS/L is currently under contract with the Mabuhay Philippines Satellite Corp. to build the Mabuhay satellite, a telecommunications satellite that will provide commercial telephone, broadcasting and data services in the Philippines and the South China region. SS/L is the effective owner of the eight high-powered Ku-band transponders on Mabuhay and has interests in a partnership with Mabuhay to market DTH services in the region using this payload.
M2A. In December 1996, SS/L entered into a contract with P.T. Pasifik Satelit Nusantara of Jakarta, Indonesia to build a high-powered satellite, the Multi-Media Satellite System ("M2A") and provide long lead parts for an optional second satellite. The contract also includes options to provide five additional satellites. M2A will provide multimedia and telephony services throughout Asia and will be the most powerful C-band satellite launched. The spacecraft also will have the ability to operate 54 transponders in the standard C-band, extended C- band and the X-band and will have seven shaped spot beams and one global beam. The satellite is designed to permit customers to use small, inexpensive terminals to receive and transmit both data and voice.
PAS-7 and PAS-8. SS/L has a contract with PanAmSat for the PAS-7 and PAS-8 spacecraft which will be used for various applications.
DTH Satellites
SS/L has entered the new and growing direct-to-home satellite business through its contracts with MCI/News Corp., Tempo Satellite Inc., PanAmSat and Asia Broadcasting and Communications Network. DTH television, with hundreds of channels of digital programming, will be received by anyone with a satellite dish having diameters ranging between 18-36 inches. SS/L is currently building DTH satellites for MCI/News Corp. and Tempo to serve the U.S. markets, for PanAmSat to serve the Central and South American markets and for ABCN to serve Asian markets. These satellites will be high-powered, high-capacity satellites optimized for digital broadcast service. By using video compression technology, SS/L expects its customers to generate an 8-fold increase in the number of channels and programs available to viewers.
Globalstar
SS/L has designed and is prime contractor for the manufacture of Globalstar's constellation of 48 LEO satellites and 16 spare satellites (8 on- orbit) and will obtain launch services and launch insurance. These satellites will provide voice, data, fax and position-location services to public and private users worldwide.
Weather and Environment
GOES Weather Satellites. SS/L is the leader in the design and manufacture of weather satellites. SS/L is currently the principal supplier for the National Oceanic and Atmospheric Administration ("NOAA"), the world's largest buyer of weather satellites, and is prime contractor for NOAA's next generation of advanced weather -watching and environmental GOES satellites. The current GOES K, L and M satellites being built by SS/L for NOAA mark a new era in U.S. weather-watching. These satellites will be the first to provide 24-hour monitoring and measurement of dynamic weather events in real time. These satellites are the first three-axis, body stabilized, meteorological spacecraft to be used by NOAA, and will also be the first to provide simultaneous, independent imaging and sounding in geostationary orbit. The first satellite in the five-member series, GOES-8, was launched in April 1994 and GOES-9 was launched in May 1995.
4 MTSAT. SS/L is manufacturing for Japan's Ministry of Transport the Multifunctional Transport Satellite, an advanced geostationary satellite that will play a crucial role in Japan's next generation of satellite-enhanced air traffic management systems. The MTSAT will provide enhancement of communication and position information to Japan's air traffic capability. These enhancements are provided through the use of satellite communications and navigational aids. Communication blind spots created by rugged terrain and buildings are expected to be virtually eliminated. The navigational and surveillance aid provided by the MTSAT will also make it possible to optimize aircraft routes which should result in greater air traffic capacity, planning and more economical travel. MTSAT will also provide weather observation and meteorological data transmission for the region. In addition to its advanced imaging capability, MTSAT is a complete data collection and dissemination system. MTSAT will broadcast processed data and imagery to users through the Asia-Pacific region, including airports, weather forecasting agencies and ships at sea.
International Space Station Alpha
SS/L is supplying the Rocketdyne Division of Boeing Corporation on-board electrical power systems for International Space Station Alpha. The program includes the design, development and production of nickel-hydrogen batteries, power control and power conditioning electronics equipment, and consolidated procurement of electronic parts for the entire power system.
TECHNICAL CAPABILITIES
Active research and development projects are underway for both communications and payload equipment and supporting bus elements. 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 handling state-of-the-art multiplexers and antennas that can be customized for various customer requirements within a year of satellite delivery. 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, thereby further reducing production time.
SS/L's capabilities in spacecraft bus technologies are also evident in its composite structural design, which, with certain exceptions, allows structural components to be manufactured of light-weight/high-strength composite materials. SS/L was also the first to employ heat pipes in its bus 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, provide one of the most efficient space batteries ever produced. A new technology currently being developed by SS/L could result in the doubling of such efficiency within the next three years. A new telemetry and command system employing serial interfaces is also being introduced in 1997.
SS/L, in conjunction with a French traveling wave tube manufacturer, developed a new generation of traveling wave tubes that radiate heat directly to space rather than through the spacecraft structure. This technique has now become the worldwide standard for high-powered broadcast satellites.
One of the primary factors affecting mission life and satellite costs is the design of the propulsion system. Typically, half of the launch weight of a satellite is related to the propulsion system and its fuel. Thus, continued advances in propulsion technology are essential to reducing the total cost of a satellite in orbit, to extending system life and to increasing payloads. SS/L pioneered the now-accepted industry standard use of integrated bipropellant propulsion systems for achieving orbit and on-orbit control.
5 In 1992, SS/L became the first U.S. company licensed to exchange flight hardware with a Russian company. Through this joint venture, SS/L has developed a fully qualified electric propulsion system for on-orbit stationkeeping that is five times as efficient as its bipropellent predecessors.
FACILITIES
To support its position as a leader in the commercial satellite marketplace, SS/L has designed and constructed advanced manufacturing and testing facilities. With more than 20 buildings covering nearly one million square feet, SS/L offers a full spectrum of satellite capabilities. Through its Alliance Partners, SS/L also provides joint development, manufacturing and testing of spacecraft and subsystems at facilities in France and Italy. Its comprehensive engineering, manufacturing and integration facilities range from laboratories focused on attitude-control systems, high-technology materials, solar arrays, batteries and power electronics, to enclosed test ranges for all-weather testing of antenna subsystems.
High Bay Facility. A High Bay Facility provides a clean-room environment that prevents contamination during the satellite assembly process. This facility was recently doubled in size to provide greater capacity. The High Bay Facility is the focal point for all system-level activity, serving as the fabrication and assembly point for selected subsystems. By putting integration, assembly and testing activity in one large contiguous complex, SS/L was able to improve product quality and cost efficiency.
Space Simulation Chamber. SS/L's 39-foot Space Simulation Chamber simulates the space environment, allowing testing of the satellite's ability to perform under on-orbit conditions. Thermal vacuum testing, in which the chamber is evacuated to 1/10,000,000 of atmospheric pressure, is conducted as well as temperature and operational testing. Banks of infrared heat lamps inside the chamber simulate radiated solar energy and liquid nitrogen pumped through tubing maintains the chamber walls at -196 degrees Celsius.
Test Range. SS/L constructed a Compact Antenna Test Range ("CATR") that permits SS/L to test satellite radio frequency waves as they would appear 22,300 miles in space. This facility was designed for satellite testing and includes two precision machined 40- and 60-ton reflectors housed in a radio frequency quiet testing area. The CATR replaces outdoor test ranges twenty miles or more in length to test the beam shape produced by beam forming antenna arrays that focus the satellite's limited available transmitting power over the target region. The Company believes that SS/L's on-site CATR allows it to reduce its average time to delivery by more than two months. To supplement the CATR and to maximize use of the test range for complete antennae systems, SS/L has constructed a smaller near-field on-site test range for antennae subsystems, also in an enclosed, protected environment.
Mission Control Center. The on-orbit lifetime of a modern spacecraft may be up to 15 years. Mission control centers, which may be used for the positioning of the spacecraft in its final orbit and the operation or monitoring of the spacecraft on a permanent basis, are available at SS/L and may be used for control during any of the mission phases, depending upon the customer's wishes. This self-contained center uses state-of- the-art communications, data processing, and display technology to maintain contact with launch sites and remote tracking stations during launch, orbit transfer, and checkout. It is used for all space flight programs requiring on-orbit delivery. It can monitor satellite telemetry and transmit satellite commands in order to maintain the satellite's position in space, control the performance of its mission and respond promptly to unanticipated anomalies. The operational experience gained from these co-located facilities is used to provide feedback to the spacecraft designers so that "user friendliness" can be incorporated into the design of future spacecraft.
Solar Array Facility. This facility allows SS/L to perform in-house fabrication, integration and acceptance testing of solar arrays for its satellite program. It is capable of handling up to a five-panel array, and up to four different arrays can be integrated and tested concurrently.
Materials Manufacturing Technology Center. Graphite composite parts that are used in satellite designs because of their advantageous combination of low weight, high strength and dimensional stability over thermal gradients are being assembled in-house at SS/L's materials laboratory.
6 Battery and Power Electronics Facility. One of the most extensive U.S. space battery assembly and test facilities, this laboratory was designed and developed in conjunction with work performed by SS/L in connection with the International Space Station Alpha.
Vibration Facility. Vibration modal surveys and random vibration tests are conducted at SS/L via vibration shakers, amplifiers and control facilities. SS/L's satellites are subjected to vibration testing which simulates the extreme stress of lift off.
CUSTOMERS
Sales to the U.S. government represented 8%, 10% and 23% of revenues for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively. Sales to foreign customers, primarily in Asia, represented 25%, 27% and 15% of revenues for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively. For the nine months ended December 31, 1996, two commercial customers represented 28% and 15% of revenues. For the year ended March 31, 1996, two commercial customers represented 30% and 13% of revenues. Four commercial customers represented 23%, 20%, 15% and 13% of revenues for the year ended March 31, 1995.
COMPETITION
Competition in the commercial satellite industry is intense. Among SS/L's significant competitors are Hughes, Lockheed Martin, Matra Marconi and TRW, many of whom have significantly greater financial, manufacturing, marketing and technical resources than those of SS/L. To the extent these companies offer products and services that are more sophisticated, cost-effective, efficient or reliable than those now offered or to be offered by SS/L, it could have a material adverse effect on SS/L. Further, SS/L's telecommunications satellites face competition from alternative technologies, including fiber optic cable technology, which could reduce demand for the services of SS/L's customers and thus for SS/L's telecommunications products.
SATELLITE CONTRACTS
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. Under fixed-price contracts requiring work with lead times in excess of six months prior to delivery, SS/L may receive progress payments, generally in an amount equal to between 80% and 95% of monthly costs, 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 in terms of the criteria stated in the contract.
Many of SS/L's contracts and subcontracts provide that such contracts and subcontracts may be terminated at will by the customer or the prime contractor, respectively. In the event of a termination at will, SS/L is normally entitled to recognize the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for profit thereon or adjustment for loss if completion of performance would have resulted in a loss. While SS/L has not experienced material contract terminations in the past, no assurance can be given that such terminations will not occur in the future.
7 RESEARCH AND DEVELOPMENT
The Company believes that SS/L's future success will depend to a large degree on its ability to continue to conceive and develop new products and services and enhance existing products on a more rapid and less expensive basis than its competitors. Accordingly, SS/L expects to continue to invest in product-related research and development, to create new products and to seek customer and strategic partner investments in these products. These strategic relationships have included, and may include in the future, joint development arrangements, equity investments in joint ventures and acquisitions of strategic product lines and businesses.
SS/L's internally-funded research and development expenditures were approximately $16.3 million, $11.2 million and $9.5 million, respectively, for the nine months ended December 31, 1996 and the fiscal years ended March 31, 1996 and 1995.
INSURANCE
SS/L carries liability insurance and is indemnified under certain contracts with respect to certain potential liabilities to third parties arising from operation of SS/L's products. There can be no assurance, however, that such insurance and indemnification would be applicable to and adequate to cover SS/L's potential liabilities to third parties. Furthermore, SS/L cannot predict whether third-party liability insurance will continue to be available at premium levels that justify purchase of such insurance or whether insurance or indemnification will be available at all.
BACKLOG
As of December 31, 1996, SS/L's funded backlog was approximately $1.5 billion. Total backlog was $2.2 billion. Backlog consists of aggregate contract values for firm product orders, excluding the portion previously included in operating revenues on the basis of percentage of completion accounting and priced options not awarded. Approximately $1.1 billion of funded backlog as of December 31, 1996 is currently scheduled to be performed within the next 12 months. Because many factors affect the conclusion of definitive agreements for contracts awarded and the production and delivery of SS/L's products, no assurance can be given as to whether or when revenues will be recognized from SS/L's backlog. Year-to-year comparisons of backlog are not necessarily indicative of future operations.
GLOBALSTAR
The Company owns, directly and indirectly, approximately 34% of Globalstar's outstanding equity and has overall management responsibility for the design, construction, deployment and operation of the Globalstar System.
Globalstar is building and preparing to launch and operate a worldwide, LEO satellite-based digital telecommunications system. The Globalstar System(TM) is designed to enable local service providers to offer low-cost, high quality wireless voice telephony and data services in virtually every populated area of the world. To date, Globalstar's designated service providers have agreed to offer Globalstar service and seek to obtain all necessary local regulatory approvals in more than 100 nations, accounting for approximately 88% of the world's population.
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. The Globalstar System has been designed to provide services at prices comparable to today's cellular service and substantially lower than the prices announced by Globalstar's anticipated principal competitors. Globalstar service providers will set their own retail pricing in their assigned service territories and will pay Globalstar approximately $0.35 to $0.55 per minute on a wholesale basis.
Globalstar users will make and receive calls through a variety of Globalstar phones, including hand-held and vehicle-mounted units similar to today's cellular telephones, fixed telephones similar either to phone
8 booths or ordinary wireline telephones, and data terminals and facsimile machines. Dual-mode and tri-mode Globalstar Phones will provide access to both the Globalstar System and the subscriber's land-based cellular service. Each Globalstar Phone will communicate through one or more satellites to a local Globalstar service provider's interconnection point (known as a gateway) which will, in turn, connect into existing telecommunications networks.
As of February 1997, each of the elements of the Globalstar System -- space and ground segments, digital communications technology, handset supply, service provider arrangements and licensing -- is on schedule to begin launching satellites in the second half of 1997, to commence commercial operations in the second half of 1998 and to have a full constellation of 48 operational satellites, plus eight in-orbit spares, launched by the end of 1998:
Space Segment. The first Globalstar satellite has been fully-assembled and is now in pre-flight testing, and another four satellites are currently being assembled. Production is proceeding on schedule for the remaining satellites. Three different launch providers have signed definitive agreements for the launch of the Globalstar satellite constellation, providing a variety of launch options and considerable launch flexibility. Mission operations preparations and launch vehicle production and dispenser development are on schedule.
Ground Segment. The first four Globalstar gateways, which are currently in advanced development and are to be located in Australia, France, South Korea and the United States, are currently under construction. These gateways will support Globalstar's data network, monitor the initial launch and orbital placement of Globalstar's first satellites, and serve as prototypes for production gateways that will support Globalstar service. In addition, Globalstar's satellite operations control center ("SOCC") facility has been completed.
Digital Communications Technology. Qualcomm's Code Division Multiple Access ("CDMA") technology has now been successfully deployed in South Korea, Hong Kong and cities in the United States supporting terrestrial personal communications services ("PCS") and digital cellular service, and its CDMA implementation for Globalstar has been successfully demonstrated in a simulated satellite environment. This demonstration validated Globalstar's encoding, modulation, control software, time and frequency distribution and up/down links between satellites and handsets.
Handset Supply. Qualcomm and two other manufacturers, Ericsson and TELITAL, are on schedule in their design and development of Globalstar's handset.
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. For example, in November 1996, ChinaSat, a subsidiary of China's Ministry of Posts and Telecommunications, agreed to act as the exclusive distributor of Globalstar services in China and to support four Globalstar gateways, the first of which is expected to be operational by 1998. Globalstar has also formed a joint venture with the principal Russian long distance carrier, Rostelecom, to provide Globalstar service in that country and is negotiating a service provider agreement with that joint venture. Globalstar believes that these relationships with in-country service providers will facilitate the granting of local regulatory approvals -- particularly where, as is the case in China, the service provider and the licensing authority are one and the same -- as well as providing local marketing and technical expertise.
Licensing. In January 1995, the Federal Communications Commission ("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 ("WRC95") allocated feeder link spectrum on an international basis for mobile satellite services ("MSS") systems such as Globalstar, and in November of 1996 the FCC authorized Globalstar's feeder links.
Globalstar has raised or received commitments for approximately $2.0 billion in equity, debt and vendor financing, representing 78% of the total financing currently expected to be required to complete the system and to achieve worldwide operations. As a result of several recent decisions designed to assure and upgrade system performance and maintain schedule -- including procurement of three launches on the Starsem Soyuz launch
9 vehicle, additional communications system integration testing procedures, development of additional and enhanced service features, cost growth and other factors -- Globalstar currently estimates the cost for the design, construction and deployment of the Globalstar System, including working capital, cash interest on anticipated borrowings and operating expenses, to be approximately $2.5 billion, as compared with approximately $2.2 billion estimated at December 31, 1995. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost estimated at approximately $175 million.
The Globalstar System has been designed to address the substantial and growing demand for telecommunications services worldwide, particularly in developing countries. More than 3 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 number of worldwide fixed phone lines has increased from 469 million in 1988 to 753 million in 1996 and is projected to increase to 1.2 billion by 2002. Nonetheless, during the same period, waiting lists for fixed service have increased from 30 million to 45 million, resulting in an average waiting time before installation of approximately one and a half years. Similarly, the cellular market has grown from four million worldwide subscribers in 1988 to an estimated 123 million in 1995 and is projected to increase to 334 million by 2001. At that time, it is projected that only 40% of the world's population will live in areas with cellular coverage. The remaining 60% of the world's population will have access to wireless telephone service principally through satellite-based systems like the Globalstar System. Globalstar believes that its addressable market exceeds 30 million people.
The Globalstar System has been designed with attributes which the Company believes compare favorably to other proposed global MSS systems including: (i) Globalstar's unique combination of CDMA technology and path diversity through multiple satellite coverage, which will reduce call interruptions and signal blockage from obstructions and will use satellite power more efficiently; (ii) a proven space segment design without complex intersatellite links or on-board call processing and a ground segment with flexible, low-cost gateways and competitively priced Globalstar Phones; (iii) lower average wholesale prices than other proposed MSS systems and (iv) gateways installed in most major countries, minimizing tail charges (i.e. amounts charged by carriers other than the Globalstar service provider for connecting a Globalstar call through its network), resulting in low costs for domestic and regional calls, which will account for the vast majority of Globalstar's anticipated usage.
STRATEGIC PARTNERS
Globalstar has selected strategic partners whose marketing, operating and technical expertise will enhance Globalstar's capabilities. These partners are playing key roles in the construction, operation and marketing of the Globalstar System. Globalstar's founding partners are Loral and Qualcomm, the leading supplier of CDMA digital telecommunications technology. Globalstar's other strategic partners are:
TELECOMMUNICATIONS TELECOMMUNICATIONS EQUIPMENT SERVICE PROVIDERS AND AEROSPACE SYSTEMS MANUFACTURERS ------AirTouch - Alcatel - - Dacom - Alenia - - France Telecom - DASA - - Vodafone - Finmeccanica - Hyundai - SS/L
SS/L is providing the system's satellites under a fixed-price contract that also requires SS/L to obtain launch services and launch insurance. Qualcomm is designing and will manufacture Globalstar Phones and gateways and certain ground support equipment.
BUSINESS STRATEGY
Globalstar's strategy for successful operation is based upon: (i) providing potential users worldwide with high quality telecommunications services, (ii) employing a system architecture designed to minimize cost and
10 technological risks and (iii) leveraging the marketing, operating and technical capabilities of its strategic partners.
WORLDWIDE HIGH QUALITY SERVICE
To achieve rapid and sustained customer acceptance of the system, the Globalstar System has been designed to provide a high quality, worldwide service that combines the best of existing cellular service with the technological advantages of the Globalstar System as described herein to meet the needs of individual end users.
Worldwide Coverage and Access. The Globalstar System's worldwide coverage has been designed to enable its service providers to extend modern telecommunications services rapidly and economically to significant numbers of people who currently lack basic telephone services and to enhance wireless telecommunications in areas underserved or not served by existing or contemplated cellular systems. Globalstar expects to provide a communications solution in parts of the world where the build-out of terrestrial systems cannot be economically justified. The Globalstar System has also been designed to enable international travelers to make and receive calls at a unique telephone number through their mobile Globalstar Phone anywhere in the world where Globalstar service is authorized by local regulatory authorities.
Multiple Satellite Coverage; Soft Handoff. CDMA digital communications technology combined with continuous multiple satellite coverage and signal path diversity (a patented SS/L method of signal reception not available to competing systems) will enable the Globalstar System to provide service to a wide variety of locations, with less potential for signal blockage from buildings, terrain or other natural features. Globalstar Phones have been designed to operate with a single satellite in view, although typically signals from two to four satellites overhead will be combined to provide service. Therefore, the loss of an individual satellite is not expected to result in any gap in global coverage. Each mobile Globalstar Phone has been designed to communicate with as many as three satellites simultaneously, combining the signals received to ensure maximum service quality. As satellites are constantly moving in and out of view, they will be seamlessly added to and removed from the calls in progress, thereby reducing the risk of call interruption.
Superior Call Quality; Increased Privacy. Based on terrestrial simulations of the Globalstar System, Globalstar expects that Qualcomm's CDMA digital technology will enable Globalstar to provide digital voice services which will have clarity, quality and privacy similar to those of existing digital land-based cellular systems. Qualcomm's CDMA technology, which is available to Globalstar on an exclusive basis for commercial MSS applications, has also been selected for digital cellular service by 12 of the 15 largest U.S. cellular service providers and the two largest holders of PCS services in the U.S. (by population served).
Efficient Use of Satellite Resources. The Globalstar System's use of multiple satellites to communicate with each Globalstar Phone (a patented SS/L method of signal reception not available to competing systems) has been designed to allow its communications signals to bypass obstructions. Path diversity is expected to permit Globalstar to maintain its desired level of service quality while using less power and satellite resources than would be required in a system using single path satellites, which attempt to penetrate obstructions by using higher single satellite power and overall higher link margins.
No Voice Delay. Globalstar satellites' LEO of 750 nautical miles is expected to result in no perceptible voice delay, as compared with the noticeable time delay of calls utilizing geosynchronous satellites, which orbit at an altitude of 22,500 nautical miles. Globalstar believes that its system will also entail noticeably less voice delay than mid-medium orbit MSS systems and, in many cases, than LEO systems requiring on- board satellite call processing to support satellite-to-satellite switching systems.
EMPLOYING A SYSTEM ARCHITECTURE DESIGNED TO MINIMIZE COST AND RISK
Simple, Cost-Effective System Architecture. To achieve low cost, reduce technological risk and accelerate its deployment, Globalstar has devised a system architecture using small satellites incorporating well-established design features, and located the system's call processing and switching operations on the ground, where they are accessible for maintenance and can benefit from continuing technological advances. Hand- held and vehicle-mounted Globalstar Phones are anticipated to be priced comparably and will be similar in
11 function to current digital cellular telephones. Dual-mode and tri-mode Globalstar Phones will be able to access both Globalstar and a variety of local land-based analog and digital cellular services, where available. Multiple manufacturers will be licensed to manufacture Globalstar Phones in order to promote competition and reduce prices. Globalstar gateways have been competitively priced in order to encourage the placement of one or more gateways in each country served, thus reducing tail charges for the terrestrial portion of each call.
Low-Cost Service. Globalstar intends to offer its service providers effective average prices substantially lower than those announced by its anticipated principal competitors. Globalstar's service providers will set their own retail pricing and will pay to Globalstar wholesale prices generally expected to range between $0.35 and $0.55 per minute. Another proposed satellite-based system has proposed retail pricing of more than $3.00 per minute. As a result of its pricing commitments to its service providers or as a result of competitive pressures, Globalstar may not be in a position to pass on to its service providers unexpected increases in the cost of constructing the Globalstar System. However, Globalstar believes that its low system and operating costs and high gross margins at target pricing and usage levels provide it with substantial additional pricing flexibility if necessary to meet competition.
Simple Space Segment of Proven Design. Globalstar believes its system will cost less to design and construct and may be the first of the proposed worldwide systems to provide commercial service. To achieve low cost, reduce technological risk and accelerate deployment of the Globalstar System, Globalstar's system architecture uses small satellites incorporating a well-established repeater design that acts essentially as a simple "bent pipe," relaying signals received directly to the ground. All of the system's call processing and switching operations are on the ground, where they are accessible for maintenance and can benefit from continuing technological advances. The Globalstar space segment is being manufactured under a fixed-price contract with SS/L. The contract provides for the construction of 56 satellites meeting designated performance specifications and for SS/L to obtain launch services and launch insurance.
Flexible, Low-Cost Ground Segment. Globalstar has been designed to offer local governments and service providers affordable telephone infrastructure where the cost of build-out of land-based wireline or wireless telephone systems is either too great or not economically justifiable. By purchasing a single gateway for approximately $3 million to $8 million (depending on the capacity desired), a service provider can extend basic telephone service to fixed terminals on a national basis in countries as large as Saudi Arabia and mobile service to cover an area almost as large as Western Europe. As a result of the low cost of its gateways, Globalstar expects that its service providers will install gateways in most of the major countries in which they offer service. Each country with a Globalstar gateway will have access to domestic service without the imposition of international tail charges on in-country calls, thereby offering subscribers the lowest possible cost for domestic calls, which account for the vast majority of all cellular calls today.
Competitively Priced Globalstar Phones. Hand-held and vehicle-mounted Globalstar Phones are anticipated to be priced comparably and will be similar in function to current digital cellular telephones. Moreover, mobile Globalstar Phones will use less power on average than conventional analog cellular telephones and are therefore expected to enjoy longer battery life. Dual-mode and tri-mode Globalstar Phones will be able to access both Globalstar and a variety of local land-based analog and digital cellular services, where available. Mobile and fixed Globalstar Phones are expected to cost less than $750 each, and Globalstar public telephone booths are expected to cost between $1,000 and $2,500, depending upon desired capacity and the number of units sharing a fixed antenna. Qualcomm is required to license three additional manufacturers of Globalstar Phones and has recently granted a license to each of Ericsson and TELITAL for such purpose; Globalstar believes that licensing multiple manufacturers will spur competition, which will reduce prices. As is the case with many cellular systems today, service providers may subsidize the cost of Globalstar Phones to generate additional usage revenue. In addition, national and local governments may subsidize some or all elements of system cost, particularly in rural areas, thereby reducing the cost of access to subscribers.
LEVERAGING THE CAPABILITIES OF GLOBALSTAR'S STRATEGIC PARTNERS
Loral has overall management responsibility for the design, construction, deployment and operation of the Globalstar System. Globalstar's strategic partners will play key roles in the design, construction, operation and marketing of the Globalstar System.
12 Telecommunications service providers AirTouch, Dacom, France Telecom and Vodafone are providing in-country marketing and telephony expertise to Globalstar. Globalstar's strategic partner service providers have been granted exclusive rights to provide Globalstar service in 71 countries around the world in which they have particular marketing strength and experience and access to an established customer base of 60 million subscribers. Six additional service providers have agreed to offer Globalstar service in 32 additional countries. To maintain their service provider rights on an exclusive basis, these service providers and additional service providers are required to make minimum payments to Globalstar equal to 50% of target revenues. Based upon current targets (which are subject to adjustment in 1998 based upon an updated market analysis), such minimum payments total approximately $5 billion through 2005. In order to accelerate the deployment of gateways around the world prior to the In-Service Date, Globalstar and the service providers intend to jointly finance the procurement of 33 gateways for resale to service providers. Globalstar expects to recover its investment in this gateway financing program from such resales. There can be no assurance that the service providers will elect to retain their exclusivity and make such payments or place such orders for Globalstar Phones and gateways.
Globalstar expects to add additional service providers in order to provide coverage throughout the world. Each service provider will, subject to obtaining required local regulatory approvals, market and distribute Globalstar service in its designated territories and own and operate the gateways necessary to serve its markets.
Telecommunications equipment and aerospace systems manufacturers SS/L, Alcatel, Alenia, DASA, Finmeccanica and Hyundai have contracted to design, build and deploy the Globalstar System. Qualcomm, using its CDMA technology, is designing and will manufacture Globalstar Phones and gateways and has primary responsibility, along with Globalstar, for the design and implementation of the ground operations control centers ("GOCCs"). Qualcomm's CDMA technology is available to Globalstar on an exclusive basis for commercial MSS satellite applications. SS/L is performing under a fixed-price contract for the construction of Globalstar's satellites in conjunction with its alliance partners, Aerospatiale, Alcatel, DASA and Finmeccanica, and with Hyundai.
THE GLOBALSTAR SYSTEM
Globalstar intends to offer low-cost, high quality telecommunications services throughout the world. The Globalstar System will be comprised of its 48-satellite LEO constellation (together with eight on-orbit and eight additional spare satellites) and a Ground Segment consisting of two SOCCs and two GOCCs, Globalstar gateways in each region served, and mobile and fixed Globalstar Phones. Globalstar will own and operate the satellite constellation, the SOCCs and the GOCCs, as well as four gateways; the remaining elements of the system will be owned by Globalstar's service providers and their subscribers. The descriptions of the Globalstar System are based upon current design and are subject to modification in light of future technical and regulatory developments.
Globalstar Services and Globalstar Phones. Globalstar's most important service will be voice telephony service, which Globalstar is expected to offer through telephone booth-like installations and other fixed telephones located in areas without any landline or cellular telephone coverage, and through hand-held and vehicle-mounted Globalstar Phones, similar to existing cellular telephones. Globalstar is also expected to offer paging, facsimile and messaging services and position location capabilities, which may be integrated with its voice services or marketed separately, as well as environmental and asset monitoring from remote locations and other forms of data transmission.
Voice Services
Based on terrestrial simulations of the Globalstar System, Globalstar expects that its digital voice services will have clarity, quality and privacy similar to those of existing digital land-based cellular systems. Moreover, the system has been designed to minimize call interruptions ("dropped calls") resulting from movements on the part of the user or the satellites. Globalstar is expected to offer the full range of voice services provided by modern land-based telephone networks, including options such as call forwarding, conferencing, call waiting, call transfer and reverse charging ("collect calls"). Globalstar's voice services will be digital in nature and therefore difficult for unauthorized listeners to intercept and decode and, as a result, will be more secure than
13 those offered by analog systems such as existing cellular telephones. The Globalstar System will function best when there is an unobstructed line-of-sight between the user and one or more of the Globalstar satellites overhead. Competing systems without Globalstar's path diversity depend on each user maintaining contact with a single satellite. Obstacles such as buildings, trees or mountainous terrain may degrade service quality, more so than would be the case with terrestrial cellular systems, and service may not be available in the core of high-rise buildings.
By planning for volume production and utilizing commercially available off-the-shelf components where possible, Globalstar expects that its Globalstar Phones, unlike those of certain other proposed MSS systems, will be priced comparably to current state-of-the-art digital cellular telephones. Qualcomm has agreed to design and manufacture a number of versions of Globalstar Phones. It has granted a license to manufacture Globalstar Phones to each of Ericsson and TELITAL and has agreed to license at commercially reasonable royalty rates at least one additional qualified Globalstar Phone manufacturer.
Fixed Globalstar Phones for No-Telephone Areas. The majority of the world's population does not have access to any of the basic telephone services that are available to most residents of developed nations. Public installations of one or more Globalstar Phones, configured as telephone booths and powered by local generators or solar panels connected to a directional antenna aimed at the satellites overhead, would be important resources for remote villages currently lacking basic telephone service. Government officials, among other individuals, as well as commercial enterprises in remote areas such as mining and logging operations, are expected to utilize fixed Globalstar Phones which will operate like landline telephones, but will be connected to directional Globalstar antennas. Directional antennae also provide for more efficient use of the system's capacity.
Mobile Globalstar Phones for No-Cellular Areas. In certain regions, land-based cellular systems cannot be economically justified because of their population density or geographic characteristics. As a satellite-based system with worldwide coverage, Globalstar can efficiently offer both hand-held and vehicle-mounted mobile service in these areas through its single-mode mobile Globalstar Phones. These units are expected to be similar in function and cost to today's full-featured cellular telephones. Unlike any cellular telephone in existence today, however, these units will have the ability to operate (both for making and receiving calls) in virtually every inhabited area of the world where Globalstar service is authorized.
Globalstar mobile terminals will all be equipped with omnidirectional antennas, similar to cellular telephone antennas, that connect equally well regardless of the direction in which they are pointed. Each mobile terminal will communicate with all satellites in view and will have the built-in signal processing intelligence to constantly seek out and select the strongest signal transmitted from overhead, combining the signals received to ensure maximum service quality. Further, Globalstar Phones will automatically vary their power output as necessary to maintain call quality and connectivity. As a result of this efficiently-managed power system, mobile Globalstar Phones are expected to draw less power, on average, than conventional cellular telephones and are therefore expected to enjoy longer battery life.
Dual-Mode and Tri-Mode Globalstar Phones for Local and Global Roaming. Current cellular system subscribers who need a mobile telephone that also works when they travel to areas without compatible cellular coverage (or that have no cellular coverage at all) will be offered Globalstar service through dual-mode and tri-mode handsets and vehicle-mounted units. Dual-mode and tri-mode telephones will also permit the user to access Globalstar service when cellular access is temporarily blocked by interference, terrain or over-capacity. Like Globalstar's single-mode mobile telephones, dual-mode and tri-mode telephones will enable the user to make and receive calls through a unique access number anywhere in the world where service is authorized.
Dual-mode and tri-mode Globalstar Phones can be programmed by the service provider to automatically utilize the chosen land-based cellular service whenever it is available and to otherwise process the call through Globalstar; they can also be programmed for manual selection between Globalstar and the land-based cellular system. Dual-mode and tri-mode Globalstar Phones are being developed for the most widely- based conventional cellular modulation. The dual-mode pairs are expected to include: Globalstar/CDMA, Globalstar/Advanced Mobile Phone Systems (AMPS) and Globalstar/Global System for Mobile Communications (GSM).
14 Other Services
Messaging and Paging Services. In addition to supporting voice services, the Globalstar System is also expected to function as a worldwide paging and alphanumeric messaging service. Hand-held or vehicle-mounted Globalstar Phones are currently being designed with a built-in paging and messaging feature that allows the user to receive a page or a short alphanumeric message while the unit is in a very-low-power "quiet listening only" mode. Separate Globalstar messaging and paging units may also be developed by Globalstar or by third party vendors. The Globalstar System can readily support these functions without taxing system resources since, as compared with voice services, messages and pages have a relatively low data content and do not require instantaneous, two-way transmission.
Remote Monitoring. Globalstar data terminals integrated with automatic sensing equipment of various kinds can provide a continuous stream of valuable information concerning natural events such as weather conditions, seismic shifts and forest fires, as well as the condition of remote assets, such as oil and gas pipelines and electric utility transmission lines.
Facsimile and Other Data Services. The Globalstar System is expected to support fax traffic, as well as transmissions of digital computer data.
Position Location. Frequent, accurate readings of position location for large numbers of vehicles is critical information for the efficient management of fleets of trucks and railcars. Qualcomm's OmniTRACS system, which relays position location information to a central location and offers messaging capabilities, is expected to be deployed on the Globalstar System and offered to Globalstar service providers to address this need.
GLOBALSTAR SYSTEM CAPACITY
The estimated capacity of the Globalstar System is anticipated to be in the range of approximately 800 million to 1 billion call minutes per month assuming equal fixed and mobile usage. However, Globalstar's total effective system capacity will depend on a number of variables. The number of call minutes per month the system can support will depend primarily on (i) the total bandwidth available to CDMA MSS systems, (ii) the number of systems sharing that bandwidth, (iii) the total number of subscribers, (iv) the type of Globalstar Phones (fixed or mobile) used and (v) the level of average system availability required. Capacity will also depend upon a number of other variables, including (i) the peak hour system utilization pattern, (ii) average call length and (iii) the distribution of Globalstar Phones in use over the surface of the Earth.
COMPETITION
Competition in the telecommunications industry is intense, fueled by rapid and continuous technological advances and alliances between industry participants on an international scale. Although no present participant is currently providing the same global personal telecommunications service proposed by Globalstar, it is anticipated that one or more additional competing MSS systems will be launched and that the success, or anticipated success, of Globalstar and its competitors could attract other entrants. If any of Globalstar's competitors succeed in marketing and deploying its system substantially earlier than Globalstar, Globalstar's ability to compete in areas served by such competitor may be adversely affected. A number of satellite-based telecommunications systems not involved in the MSS Proceeding have also been proposed using geosynchronous satellites and, in one case, the 2 GHz band for a MEO system.
Globalstar's most direct competitors are the two other MSS applicants which received FCC licenses, Iridium and Odyssey. Although Iridium has announced plans to launch its first satellites within the upcoming months, Globalstar does not believe that Iridium will be in service substantially earlier than Globalstar's In-Service Date. Odyssey's launch date is unknown. ICO was not an applicant or a licensee in the MSS proceeding or any other proceedings before the FCC; it is seeking to operate in a different frequency band not available for use by MSS systems under current international guidelines in place until 2000. Comsat, the U.S. signatory to Inmarsat, has applied to the FCC to participate in the procurement of facilities of the system proposed by ICO. It has also sought FCC approval of a proposal to extend the scope of services provided by
15 Inmarsat, currently limited to maritime services, to include telecommunication services to land-based mobile units. These applications are currently pending before the FCC. Comsat has been instructed in the past by the U.S. government to seek to ensure that ICO does not receive preferred access to any market and that nondiscriminatory access to such areas for all mobile satellite communications networks be established, subject to spectrum coordination and availability. Nonetheless, because ICO is affiliated with Inmarsat and because its investors include the state-owned telecommunications monopolies in a number of countries, there can be no assurance that ICO might not be given preferential treatment in the local licensing process in those countries. It is also possible that one or more of the two pending MSS applicants will demonstrate financial qualifications sufficient to obtain an FCC license and become a competitor of Globalstar.
Geostationary-based satellite systems, including American Mobile Satellite Corporation ("AMSC"), Asia Pacific Mobile Telecom ("APMT"), Afro-Asia Satellite ("ASC"), PTAsia Cellular Satellite ("ACeS"), Lockheed Martin's Satphone and Comsat's Planet-1, plan to provide satellite- based telecommunications services in areas proposed to be serviced by Globalstar. Certain of these systems are being proposed by governmental entities. Because some of these systems involve relatively simple ground control requirements and are expected to deploy no more than two satellites, they may succeed in deploying and marketing their systems before Globalstar. In addition, coordination of standards among regional geostationary systems could enable these systems to provide worldwide service to their subscriber base, thereby increasing the competition to Globalstar.
It is expected that as land-based telecommunications service expands to regions currently not served by wireline or cellular services, demand for Globalstar service in those regions may be reduced. If such systems are constructed at a more rapid rate than that anticipated by Globalstar, the demand for Globalstar service may be reduced at rates higher than those assumed by Globalstar. Globalstar may also face competition in the future from companies using new technologies and new satellite systems. New technology could render Globalstar obsolete or less competitive by satisfying consumer demand in alternative ways, or through the introduction of incompatible telecommunications standards. A number of these new technologies, even if they are not ultimately successful, could have an adverse effect on Globalstar as a result of their initial marketing efforts. Globalstar's business would be adversely affected if competitors began operations or expanded existing operations in Globalstar's target markets before completion of its system.
RESEARCH AND DEVELOPMENT
Globalstar has entered into a contract with Qualcomm whereby Qualcomm is performing certain development tasks related to the Globalstar System. In addition, Globalstar is performing certain in-house engineering tasks that are classified as development costs. Total development expenses incurred for the years ended December 31, 1996 and 1995 and the period from March 23 (commencement of operations) to December 31, 1994 were $42 million, $63 million and $21 million, respectively.
16 SKYNET
On March 14, 1997, the Company acquired Skynet for $478 million in cash. Skynet is a leading U.S. satellite communications service provider that owns and operates the Telstar satellite network. Skynet's customers lease transponder capacity to distribute network television programming to local affiliate stations, collect live video feeds for the reporting of news and sporting events, and to offer direct-to-home subscription and pay-per-view television programming, distance learning and educational television, as well as business services such as VSAT networks, data distribution for information services and other business television services. The Company intends to expand Skynet, which has heretofore limited its operations to the U.S. market, to become a worldwide satellite service provider.
Skynet currently has one high-powered satellite operating in orbit. This satellite provides coverage over the continental U.S., Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands and is equipped with 24 C-band and 24 Ku-band transponders. Skynet also owns and operates Telstar 302 and Telstar 303. These satellites have already exceeded their 10-year design life and are now in inclined orbits, generating modest revenues from customers that have tracking antennas or do not require continuously-available service.
Skynet holds FCC licenses to construct, launch and operate three additional high-powered C/Ku band satellites. The addition of these satellites will substantially increase Skynet's capacity within the United States, and will extend its coverage area to Canada and Mexico, subject to obtaining rights from regulatory authorities in those countries. Telstar 5 is expected to be in service in 1997. Skynet has entered into a contract with SS/L for on-orbit delivery (including launch and launch insurance) of Telstar 5 and Telstar 6, with options for Telstar 7 and a ground spare. These satellites are each expected to be equipped with 24 C-band and 28 Ku-band transponders. Skynet expects to expend approximately $200 million in 1997 under this contract.
The following table sets forth certain data concerning Skynet's existing and planned satellites.
MAXIMUM IN SERVICE SATELLITE TRANSPONDERS BANDWIDTH EIRP DATE ------Telstar 302* 24 C-band 36 MHz 35 dBW 11/84 Telstar 303* 24 C-band 36 MHz 35 dBW 9/85 Telstar 402R 24 C-band 36 MHz 35.2 dBW 11/95 8 Ku-band 54 MHz 44.3 dBW 16 Ku-band 27 MHz Telstar 5 24 C-band 36 MHz 37 dBW 1997 4 Ku-band 54 MHz 46.5 dBW 24 Ku-band 27 MHz Telstar 6 24 C-band 36 MHz 37 dBW 1999 4 Ku-band 54 MHz 46.5 dBW 24 Ku-band 27 MHz
* Currently operating in inclined orbit. Telstar 302 and Telstar 303 are operating beyond their designed lives, and, subject to FCC approval, can be expected to continue to generate modest revenues for approximately two years.
Transponders on Telstar 402R are used by ABC and Fox television networks and the Public Broadcasting System. As a result, local affiliates of these networks, as well as schools and universities that wish to receive PBS broadcasts directly, have antennas pointed at Skynet's satellite. This configuration creates a "neighborhood" attractive to other users requiring similar distribution channels, giving the Company a competitive advantage in serving both television networks and television programming syndicates and for distance learning.
Although Skynet has generally leased transponder capacity to its customers, it had in the past sold some of its transponder capacity to third parties. In the future, Skynet intends to make its transponders available only on a leased basis. Due to the on-orbit failure of Telstar 401 in January 1997, a total of 8 C-band and 11 Ku-band transponders on Telstar 402R and Telstar 5 will be used to restore service to Skynet customers who had previously purchased transponders on Telstar 401. If such customers choose not to be restored on Telstar 402R or Telstar 5, these transponders will then be available for lease at prevailing market rates and Skynet will refund the unamortized portion of the purchase price.
17 COMPETITION
Skynet is subject to significant competition. Skynet's competitors in the U.S. domestic satellite services industry have significantly greater financial, manufacturing, marketing and technical resources than those of the Company. As the Company expands into international markets, it will have to compete, in addition, with international operators including Intelsat and PanAmSat. Further, Skynet's satellites face competition from alternative technologies, including fiber optic cable technology and other terrestrial alternatives, which could reduce demand for its services.
AT&T has agreed for a period of three years from the acquisition not to compete with the Company in providing and marketing certain satellite services as well as in the operation of certain satellites, and to afford the Company preferred supplier status with respect to its purchase of certain satellite services for a period of five years following the acquisition.
K&F INDUSTRIES, INC.
Loral owns 22.5% of K&F, which through its wholly owned subsidiary, Aircraft Braking Systems Corporation, is one of the world's leading manufacturers of aircraft wheels, brakes and anti-skid systems for commercial transport, general aviation and military aircraft. K&F sells its products to virtually all major airframe manufacturers and most commercial airlines and to the United States and certain foreign governments. In addition, K&F through its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"), believes it is the leading worldwide manufacturer of aircraft fuel tanks, supplying approximately 90% of the worldwide general aviation and commercial transport market and over one-half of the domestic military market. Engineered Fabrics also manufactures and sells iceguards and specialty coated fabrics used for storage, shipping, environmental and rescue applications for commercial and military uses. Some of K&F's customers include American Airlines, Delta Air Lines, Alitalia, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines, United Airlines, USAirways and Continental Airlines. Its products are also used in a number of military aircraft, including the F-14, F-16, F-18 and the C-130. Backlog at December 31, 1996 amounted to approximately $167 million. Backlog consists of firm orders for K&F's products which have not been shipped. Approximately 84% of such total backlog is expected to be shipped by December 31, 1997, with the balance expected to be shipped over the subsequent two-year period.
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 127 patents in the U.S. and 138 patents abroad and has applications for 45 patents pending in the U.S. and 176 patents pending abroad. SS/L holds patents 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 1997 and 2015.
In connection with the Globalstar System, Globalstar's design and development efforts have yielded ten patents issued and 22 patents pending in the United States, as well as four patents issued and more than 130 patents pending internationally for various aspects of communication satellite system design and implementation of CDMA technology relating to the Globalstar System. Qualcomm has obtained 87 issued patents and 251 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.
There can be no assurance that any of the pending patent applications by Globalstar or SS/L will be issued. Moreover, because the U.S. patent application process is confidential, there can be no assurance that third parties, including competitors of Globalstar and SS/L, do not have patents pending that could result in issued patents which Globalstar or SS/L would infringe. In such an event, Globalstar or SS/L 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.
18 EMPLOYEES
As of December 31, 1996, the Company had approximately 60 full-time employees, none of whom is subject to any collective bargaining agreement.
As of December 31, 1996, SS/L had approximately 3,600 full-time employees none of whom is subject to any collective bargaining agreement.
As of December 31, 1996, Globalstar had approximately 140 full-time employees, none of whom is subject to any collective bargaining agreement.
At March 14, 1997, Skynet had approximately 140 full-time employees, some of whom are subject to collective bargaining agreements.
CERTAIN FACTORS THAT MAY EFFECT 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.
THE COMPANY
Risks Inherent in New Satellite Services. The Company's ability to successfully develop and provide a variety of satellite-based services will depend upon various factors, many of which may be beyond the control of the Company. The Company's prospects and financial condition will depend on its ability, among other things, to operate in a regulated environment, compete with others for customers, frequency assignments and orbital slots, fund the capital needs of the programs that it is pursuing, design, launch and operate satellite systems effectively, market its services and keep pace with technological advances and innovations.
U.S. Regulation. The FCC regulates the use of radio spectrum in the United States, including the licensing of satellites designed to provide domestic or international service. The Company has a number of applications pending before the FCC for licenses to construct, launch and operate various satellite systems. While the Company has received FCC authorization with respect to several of its proposed programs, such authorizations remain subject to petitions for reconsideration. There can be no assurance that the Company's authorizations will not be challenged, or that, if challenged, the petitioners will not be successful in persuading the FCC to rescind the Company's authorizations. Moreover, applicable statutes and regulations permit judicial appeals of the authorizations. There can be no assurance that such appeals will not be filed, or, if filed, that such appeals will not be granted and the Company's authorizations revoked.
The Company's pending FCC application for two extended Ku-band systems and its authorization for two fixed satellite service ("FSS") orbital slots have been challenged by third parties before the FCC. In determining whether to grant the Company authorization, the FCC must evaluate whether the Company satisfies certain FCC standards and meets financial qualification requirements. There is no assurance that the FCC will find the Company qualified as a licensee for the extended Ku-band systems, the FSS orbital slots, or for future systems that may be proposed by the Company. Moreover, there can be no assurance that the FCC will act on the Company's pending applications in a timely manner. Regulatory delays could adversely affect the Company or result in significant cost increases. In addition, even if the FCC were to grant the Company its requested authorizations, such authorizations are subject to petitions for reconsideration and judicial review as described above. The failure by the Company to meet construction and other milestones established with the FCC may also result in the revocation of its authorizations.
19 The FCC may, at any time, modify its rules, policies and the Company's authorizations, which may include adopting modifications that impose restrictions or limitations on the operation of the Company's satellites, with a corresponding material adverse effect on the Company's prospects and financial condition.
International Coordination and Regulation. The Company's operations are subject to international coordination. The failure to successfully coordinate its satellites on an international basis may adversely affect the Company's ability to provide services outside the United States. Two of the Company's Ka-band orbital slots for Cyberstar are located in positions that are subject to prior claims of parties from other countries. There is no assurance that the Company and such parties will be able to reach a satisfactory accommodation. Regulatory schemes in countries in which the Company seeks to operate may also impede the Company's operations. There is no assurance that necessary approvals will be granted on a timely basis in the jurisdictions in which the Company wishes to operate, if at all, or that restrictions applicable thereto will not be unduly burdensome.
Competition. The space and communications industry is highly competitive and is dominated by companies with significantly greater financial, technical and regulatory resources than those of the Company. The Company will compete with such parties for customers and for local regulatory approval in jurisdictions in which the Company or such third parties may wish to operate. In addition, the Company will have to compete for allocation of scarce frequency assignments and geosynchronous orbital slots in order to pursue its business plan. There is no assurance that the Company will be able to compete effectively against such parties. In addition, the Company may face additional competition from new entrants in the future.
Additional Financing Requirements. The Company is currently considering a number of opportunities that will involve significant capital expenditures by the Company, many of which will not be expected to generate revenues until years after such capital outlay. In addition, the capital requirements of SS/L and Globalstar are also significant. In order to fully fund all such opportunities or to make additional investments in SS/L and Globalstar, the Company may need to issue debt or equity securities or engage in other financing activities, which may include offerings of debt or equity securities of Globalstar. There can be no assurance that such financing may be obtained on favorable terms, if at all. In addition, any issuance of equity securities by Globalstar may result in a dilution of the Company's equity interest to the extent the Company does not participate therein. A shortfall in meeting such capital needs could prevent completion of some or all of the projects currently being pursued by the Company or SS/L and Globalstar.
Limited Control over Globalstar. While the Company manages Globalstar, the Globalstar partnership agreement limits the ability of the Company to take certain actions without the approval of at least one Independent Representative to the General Partners' Committee. As a result, the Company may be unable to cause Globalstar to take actions which the Company might deem to be in its best interests.
Risks Inherent in Foreign Operations. The Company expects that a substantial portion of its business will be conducted outside of the United States. Such operations are subject to certain risks such as changes in domestic and foreign government regulations and telecommunications standards, tariffs or taxes and other trade barriers. Accordingly, government actions in foreign countries could have a significant effect on the Company's operations. Political, economic or social instability or other developments in such countries, including currency fluctuations and the inability to convert foreign currencies to U.S. dollars, could also adversely affect the Company's operations. In addition, the Company's agreements relating to local operations may be governed by foreign law or enforceable only in foreign jurisdictions. As a result, in the event of a dispute, it may be difficult for the Company to enforce its rights under such agreements.
Risks Associated with Changing Technology. The space and communications industries are characterized by rapid technological advances and innovations. There is no assurance that one or more of the technologies utilized or under development by the Company may not become obsolete, or that its services will be in demand by the time they are offered. The Company will be dependent upon technologies developed by third parties to implement key aspects of its strategy to integrate its satellite systems with terrestrial networks, and there can be no assurance that such technologies will be available to the Company on a timely basis or on reasonable terms.
20 Conflicts of Interest. Partners of Globalstar and shareholders of the Company are principal suppliers to, subcontractors for, and customers of or service providers for SS/L and Globalstar. In addition, SS/L is the prime contractor for Globalstar's satellite constellation and for Skynet's Telstar satellites. SS/L and its subcontractors have provided vendor financing to Globalstar. As a result, conflicts of interest may arise with respect to such contracts and arrangements. The Globalstar partnership agreement provides for certain procedures relating to the approval of agreements entered into by Globalstar and its partners.
Reliance on Key Personnel. The success of the Company's business will be partially dependent upon the ability of the Company, SS/L, Globalstar and Skynet to attract and retain highly qualified technical and management personnel. Except for Mr. Bernard L. Schwartz, the Company's Chairman and Chief Executive Officer, none of the officers of the Company has an employment contract with the Company nor does the Company expect to maintain "key man" insurance with respect to any such individuals. The loss of any of these individuals and the subsequent effect on business relationships could have a material adverse effect on the Company's business.
Rights of Shareholders under Bermuda Law. The Company is incorporated under the laws of Bermuda. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of the Company's management, directors and controlling shareholders, and the rights of its shareholders, are governed by Bermuda law and the Company's Memorandum of Association and Bye-Laws. Such principles of law may differ from those that would apply if the Company were incorporated in a jurisdiction in the United States. In addition, there is uncertainty as to whether the courts of Bermuda would enforce (i) judgments of United States courts obtained against the Company or its officers and directors resident in foreign countries predicated upon the civil liability provisions of the securities laws of the United States or (ii) in original actions brought in Bermuda, liabilities against the Company or such persons predicated upon the securities laws of the United States or any state.
Tax Considerations. Special U.S. tax rules apply to U.S. taxpayers who own stock in a "passive foreign investment company" (a "PFIC"). Although the Company believes that it will not be a PFIC because it expects through Globalstar, SS/L, Skynet and other businesses to earn sufficient active business income and to hold sufficient active business assets to avoid PFIC status, there is a risk that it may be a PFIC. In such an event, a U.S. shareholder would be subject at his election to either (i) a current tax on undistributed earnings or (ii) a tax deferral charge on certain distributions and on gains from a sale of shares of the Common Stock (taxed as ordinary income).
The Company expects that a significant portion of its worldwide income will not be subject to tax by the United States, Bermuda or by the countries from which it derives its income. However, the extent to which certain jurisdictions may require the Company to pay tax or to make payments in lieu of tax cannot be determined in advance.
Certain Antitakeover Provisions. The Company's classified Board of Directors, voting provisions with respect to certain business combinations and the Company's rights plan, may have the effect of making more difficult or discouraging an acquisition of the Company deemed undesirable by the Board.
SPACE SYSTEMS/LORAL
Dependence on Limited Number of Customers and Programs. SS/L historically has derived a large portion of its total revenues from a limited number of customers. Sales to the U.S. Government represented 8%, 10%, 23% of revenues for the nine months ended December 31, 1996 and the years ended March 31, 1996, and 1995 respectively. Sales to foreign customers, primarily in Asia, represented 25%, 27% and 15% of revenues for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively. For the nine months ended December 31, 1996, two commercial customers represented 28% and 15% of revenues. For the year ended March 31, 1996, two commercial customers represented 30% and 13% of revenues. Four commercial customers represented 23%, 20%, 15% and 13% of revenues for the year ended March 31, 1995.
21 Although SS/L is currently pursuing a significant number of new programs, there can be no assurance that SS/L will be successful in capturing any of these new programs to replace the revenue lost by the completion of its current programs. Certain of SS/L's customers prefer to alternate satellite manufacturers they employ in order to reduce dependence on any single manufacturer. This may have an adverse effect on SS/L's ability to obtain future program awards from its current customers. Loral's acquisition of Skynet, and the resulting affiliation between SS/L and Skynet, which is a competitor to a number of SS/L's existing and potential customers, may adversely affect SS/L's ability to win satellite contracts from such customers in the future.
Competition. Competition in the commercial satellite industry is intense. Among SS/L's significant competitors are Hughes, Lockheed Martin, Matra Marconi and TRW. Some of SS/L's competitors have significantly greater financial, manufacturing, marketing and technical resources than those of SS/L. To the extent these companies offer products and services that are more sophisticated, cost-effective, efficient or reliable than those now offered or to be offered by SS/L, they could have a material adverse effect on SS/L. Further, SS/L's communications satellites face competition from alternative technologies, including fiber optic cable technology, which could reduce demand for the services of SS/L's customers and thus for SS/L's products.
Risk of Satellite Malfunction or Launch Failure. Certain of SS/L's contracts provide that a portion of the total contract price is payable in the form of orbital payments, earned during the life of the satellite in orbit as its mission is performed. Although SS/L generally receives the present value of orbital payments in the event of launch failure or a failure caused by an operator error by the customer, it forfeits orbital revenues in the event of a loss caused by system failure or an error on its part. While insurance against loss of orbital revenues has been available in the past, its cost and availability are subject to substantial fluctuations. In addition, SS/L is prohibited under agreements with certain of its customers from insuring its orbital incentives. Moreover, certain of SS/L's contracts call for on-orbit delivery, allocating launch risk to SS/L. It is SS/L's intention to obtain insurance for this exposure. However, SS/L cannot predict whether, and there can be no assurance that, insurance against launch failure and loss of orbital revenues will continue to be available on commercially reasonable terms. Satellite malfunctions may also damage a manufacturer's reputation for quality and its relationship with the affected customers.
Regulation. The ability of SS/L and its customers to pursue their business activities is regulated by various agencies and departments of the U.S. government. Operation of commercial communications satellites requires licenses from the FCC and, where international operations are contemplated, may require the approval of foreign regulatory authorities as well. Exports of space-related products, services and technical information frequently require licenses from the Department of State or the Department of Commerce. There is no assurance that SS/L or its customers will be able to obtain necessary licenses or regulatory approvals. The inability of SS/L or its customers to secure any necessary licenses or approvals could have a material adverse effect on its business.
SS/L and the Alliance Partners have entered into a memorandum of agreement with the DOD with respect to security matters. In addition, because the Alliance Partners are foreign entities, two of which are owned and controlled by foreign governments, SS/L is subject to certain regulations and to U.S. government oversight to which it would not be subject if substantially all of its stockholders were United States citizens.
Dependence on Subcontractors and Alliance Partners. SS/L depends on other companies, including its Alliance Partners, for the development and manufacture of various products that are material to its business. The failure of a subcontractor to perform at expected levels could under certain circumstances have an adverse effect on SS/L's business operations.
Dependence on Long-Term Fixed-Price Contracts. The financial results of long-term fixed-price contracts are recognized using the cost-to-cost percentage-of-completion method. Revisions in revenue and profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. Adjustments for profits or losses may therefore have a material effect on results for the period in question. The risks inherent in long-term fixed-price contracts include the forecasting of costs and schedules,
22 contract revenues related to contract performance (including revenues from orbital payments) and the potential for component obsolescence in connection with long-term procurements.
Competitive Bidding. SS/L generally obtains its contracts through the process of competitive bidding. There can be no assurance that SS/L will continue to be successful in having its bids accepted or, if accepted, that awarded contracts will generate sufficient revenues to result in profitability for SS/L. SS/L has in the past submitted bids which would result in minimal or no profitability due to a high level of non-recurring engineering costs. Such contracts are generally bid with the expectation of more profitable follow-on satellite contracts as to which there is generally no contractual assurance in advance. To the extent that actual costs exceed the projected costs on which bids or contract prices were based, SS/L's profitability could be materially adversely affected.
Launch Vehicle Access. SS/L's ability to perform its on-orbit delivery contracts depends on the timely availability of appropriate launch vehicles and the availability of the requisite launch insurance. In the past, launch slots have been in limited supply, and the launch insurance market has been subject to considerable fluctuation. Moreover, the availability and pricing of launch vehicles from the republics of the former Soviet Union and the People's Republic of China are affected by U.S. government policies and international agreements. To the extent appropriate launch services and insurance become unavailable or prohibitively expensive to the satellite industry, including SS/L, SS/L's business would be materially adversely affected.
Technological Developments. The nature of the commercial satellite industry is such that, with each new generation of satellites, satellite manufacturers are expected to offer substantial improvements and innovations at lower effective cost. SS/L's success therefore depends on its ability to design, manufacture and introduce innovative new products and services on a cost-effective and timely basis. There can be no assurance that SS/L will be able to continue to achieve the technological advances necessary to remain competitive or that its products will not be subject to technological obsolescence.
GLOBALSTAR
Development Stage Company
Globalstar is a development stage company and has no operating history. From its inception, Globalstar has incurred net losses and expects such losses to continue. Globalstar will require expenditures of significant funds for development, construction, testing and deployment before commercialization of the Globalstar System. Globalstar does not expect to launch satellites until the second half of 1997, to commence operations before the second half of 1998 or to have positive cash flow before 1999. There can be no assurance that Globalstar will achieve its objectives by the targeted dates.
As of February 1997, Globalstar estimates the cost for the design, construction and deployment of the Globalstar System, including working capital, cash interest on anticipated borrowings and operating expenses, to be approximately $2.5 billion. Actual amounts may vary from this estimate. Additional funds would be required in the event of unforeseen delays, cost overruns, launch failures, technological risks, adverse regulatory developments, or to meet unanticipated expenses and for system enhancements and measures to assure system performance and readiness for the space and ground segments. As of February 13, 1997, Globalstar had raised or received commitments for approximately $2.0 billion. Globalstar believes that its current capital, vendor financing commitments, the availability of the Globalstar credit agreement and the proceeds from the exercise of the warrants, are sufficient to fund its requirements into the first quarter of 1998. Globalstar intends to raise the remaining funds required from a combination of sources including debt issuance (which may include an equity component), financial support from the Globalstar partners, projected service provider payments, projected net service revenues from initial operations and anticipated payments received from the sale of gateways and Globalstar Phones. 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. If there are unforeseen delays, if technical or regulatory developments result in a need to modify the design of all or a portion of the Globalstar System, if service provider agreements for additional territories are not entered into at the times or on the terms anticipated by Globalstar or if other additional costs are incurred, the risk of which is substantial, additional capital will be required. The ability of
23 Globalstar to achieve positive cash flow will depend upon the successful and timely design, construction and deployment of the Globalstar System, the successful marketing of its services by service providers and the ability of the Globalstar System to successfully compete against other satellite-based telecommunications systems, as to which there can be no assurance. If Globalstar fails to commence commercial operations in the second half of 1998 or achieve positive cash flow in 1999, additional capital will be needed.
Globalstar believes it will be able to obtain the additional financing it requires, but there can be no assurance that the capital required to complete the Globalstar System will be available from public or private capital markets or from its existing partners on favorable terms or on a timely basis, if at all. A substantial shortfall in meeting its capital needs would prevent completion of the Globalstar System.
Many of the problems, delays and expenses encountered by an enterprise in Globalstar's stage of development may be beyond Globalstar's control. These may include, but are not limited to, problems related to technical development of the system, testing, regulatory compliance, manufacturing and assembly, the competitive and regulatory environment in which Globalstar will operate, marketing problems and costs and expenses that may exceed current estimates. Delay in the timely design, construction, deployment, commercial operation and achievement of positive cash flow of the Globalstar System could result from a variety of causes. These include delays in the regulatory process in various jurisdictions, delay in the integration of the Globalstar System into the land -based network, changes in the technical specifications of the Globalstar System made to enhance its features, performance or marketability or in response to regulatory developments or otherwise, delays encountered in the construction, integration or testing of the Globalstar System by Globalstar vendors, delayed or unsuccessful launches, delays in financing, insufficient or ineffective service provider marketing efforts, slower-than-anticipated consumer acceptance of Globalstar service and other events beyond Globalstar's control. Substantial delays in any of the foregoing matters would delay Globalstar's achievement of profitable operations.
Regulation
The operations of the Globalstar System are and will continue to be subject to United States and foreign regulation. In order to operate in the United States and on an international basis, the Globalstar System must be authorized to provide MSS in each of the markets in which its service providers intend to operate. Even though a Globalstar affiliate has received a FCC authorization, there can be no assurance that the further regulatory approvals required for worldwide operations will be obtained, or that they will be obtained in a timely manner or in the form necessary to implement Globalstar's proposed operations. Globalstar's business may also be significantly affected by regulatory changes resulting from judicial decisions and/or adoption of treaties, legislation or regulation by the national authorities where the Globalstar System plans to operate.
Globalstar's FCC license, as modified on November 19, 1996, authorizes the construction, launch and operation of the satellite constellation and assigns the system user links and feeder links in the United States. Globalstar's feeder link frequencies were allocated internationally at WRC95, and have been assigned by the FCC for use in the United States in accordance with the international allocation. However, use of the feeder link frequencies remains subject to restrictions that may be adopted in a potential FCC proceeding to adopt the international allocations into the U.S. Table of Frequency Allocations. The FCC recently adopted rules for the use of a portion of the frequencies allocated at WRC95 for MSS feeder links (such as Globalstar's) to a proposed high-speed wireless data service. Although these rules are intended to preclude harmful interference with other uses of these bands, they may ultimately permit uses of these frequencies that could diminish their usefulness for MSS feeder links. Separate licenses must also be obtained from the FCC for operation of gateways and Globalstar Phones in the United States.
To the extent that additional MSS systems are authorized by the FCC or other national regulatory bodies to use the spectrum for which Globalstar has been authorized, the Globalstar System's capacity would be reduced. In addition, Globalstar's FCC license is subject to two pending judicial appeals. While Globalstar believes that these appeals are without merit, there can be no assurance that these appeals would not result in either reversal or stay of the FCC's decision to grant Globalstar's FCC license to LQP or ultimately result in
24 the granting of additional licenses by the FCC or its adoption of an auction procedure to award licenses, which might materially increase the cost of obtaining such licenses.
Authorization will be required in each country in which Globalstar Phones are used and in which Globalstar's gateways are located. Local regulatory approval for operation of the Globalstar System is the responsibility of the service providers in each territory. Although many countries have moved to privatize the provision of telecommunications service and to permit competition in the provision of such service, some countries continue to require that all telecommunications service be provided by a government-owned entity. While service providers have been selected, in part, based upon their perceived qualifications to obtain the requisite local approvals, there can be no assurance that they will be successful in doing so, and if they are not successful, Globalstar service will not be available in such territories. In that event, depending upon geographical and market considerations, Globalstar may or may not have the ability to redirect the system capacity that such territories would have otherwise used to serve markets in which service is authorized.
Regulatory schemes in countries in which Globalstar or its service providers seek to operate may impose impediments on Globalstar's operations. There can be no assurance that such restrictions would not be unduly burdensome.
Glonass, the Russian Global Navigation Satellite System, operates worldwide in a portion of the frequency band proposed to be used by Globalstar and other MSS systems for user uplinks. Although Glonass has proposed to migrate to lower frequencies, there can be no assurance that such migration will be implemented in a manner fully acceptable to Globalstar. In addition, there are requirements for interference protection between Globalstar and Glonass under consideration, which, if adopted, may render a segment of the MSS spectrum unusable for MSS user uplinks. While any likely limitation is not expected to have a material adverse effect upon Globalstar's capacity, nevertheless, these actions may have the effect of reducing Globalstar capacity in some markets.
European Union competition law proscribes agreements that restrict or distort competition in the European Union. Globalstar and others have responded to an inquiry from the Commission of the European Union requesting information regarding their activities. A violation of European Union competition law could subject Globalstar to fines or enforcement actions that could delay service in western Europe, and/or depending on the circumstances, adversely affect Globalstar's contractual rights vis-a-vis its European strategic partners. In addition, the Commission has proposed legislation which, if adopted, would give the Commission broad regulatory authority over satellite telecommunications systems such as the Globalstar System.
Technological Factors
The Globalstar System is exposed to the risks inherent in a large-scale complex telecommunications system employing advanced technologies which must be adapted to the Globalstar application and which have never been used as a commercial whole. Deployment of the Globalstar satellite constellation will involve volume production and testing of satellites in quantities significantly higher than those previously prevailing in the industry. The integration of a worldwide LEO satellite-based system like Globalstar has never occurred; there is no assurance that such integration will be successfully implemented. The operation of the Globalstar System will require the detailed design and integration of advanced digital communications technologies in devices from personal handsets and public telephone networks to gateways in remote regions of the globe and satellites operating in space. The failure to develop, produce and implement the system, or any of its diverse and dispersed elements, as required, could delay the In-Service or Full Constellation Date of the Globalstar System or render it unable to perform at levels required for commercial success.
Satellite launches are subject to significant risks, including disabling damage to or loss of the satellites. Historically, launch failure ("hot failure") rates on low-earth orbit and geostationary satellite launches have been approximately 10%. However, launch failure rates may vary depending on the particular launch vehicle. The McDonnell-Douglas Delta launch vehicle, scheduled to launch the first eight satellites (four per launch) of the Globalstar satellite constellation, suffered a launch failure on January 17, 1997. The United States government is currently investigating the cause of this launch failure, the second in this rocket's last 62 launches. Globalstar's first launch, which is currently scheduled for September 1997 aboard a Delta II rocket,
25 could be delayed by this investigation. Nevertheless, Globalstar does not expect that such delay, if any, in the initial launch date would result in a delay in the In-Service Date or the Full Constellation Date. The Ukrainian Zenit launch vehicle, which is proposed to launch 36 Globalstar satellites (12 per launch), has never been used in commercial applications. Satellite launches of groups of more than eight commercial satellites have not been attempted before. Globalstar intends to launch the last 12 satellites of its constellation in groups of four on three separate launches of the Russian Starsem Soyuz rocket. There is no assurance that Globalstar satellite launches will be successful or that its launch failure rate will not exceed the industry average.
The Zenit launch contracts provide for relaunches at no additional charge in the event of a hot failure. However, the launch provider may, because of financial reasons or otherwise, be unable to provide such relaunches. A single launch failure would result in a loss of either four or 12 Globalstar satellites. Although the cost of replacing such satellites and launch vehicles will in most cases be covered by insurance, a launch failure could result in delays in the In-Service or the Full Constellation Date.
SS/L has agreed to obtain launch vehicles for Globalstar and arrange for the launch of all 56 satellites, subject to pricing adjustments in light of future market conditions, which may, in turn, be influenced by international political developments. An adverse change in launch vehicle market conditions which prohibits Globalstar from utilizing the launch vehicles for which it has contracted could result in an increase in the launch cost payable by Globalstar, which may be substantial. In addition, there can be no assurance that replacement launch vehicles will be available in the future at a cost or on terms acceptable to Globalstar.
Two of the launch operators are subject to U.S. export control regulations. Yuzhnoye, based in Ukraine, has certain ties with Russia and intends to launch the Zenit rocket from the Baikonur launch site in Kazakhstan. Arianespace, which will be providing the Soyuz rockets, also intends to launch from Baikonur. Changes in governmental policies or political leadership in the United States, Ukraine, Russia or Kazakhstan could affect the cost, availability, timing or overall advisability of utilizing these launch providers. While there is no assurance that the necessary export licenses will be obtained, Globalstar has provided against the risk that such licenses will not be granted or that the deterioration in the relationships between the United States and these countries may make the use of such launch providers inadvisable by procuring options on sufficient launches with a U.S.-based launch provider to launch all the remaining satellites of the Globalstar constellation. If Globalstar were to exercise these options for U.S. launches in the wake of the failure to obtain any necessary export licenses or as a result of adverse developments in U.S. relations with these countries, the cost of launching the Globalstar satellite constellation would be significantly increased.
A number of factors will affect the useful lives of Globalstar's satellites, including the quality of construction, expected gradual environmental degradation of solar panels and the durability of component parts. Random failure of satellite components could result in damage to or loss of a satellite ("cold failures"). In rare cases, satellites could also be damaged or destroyed by electrostatic storms or collisions with other objects. As a result of these factors, the first-generation satellite constellation (including spares) is designed to operate at full performance for a minimum of 7 1/2 years, after which performance is expected to gradually decline. However, there can be no assurance of the constellation's specific longevity. Globalstar's operating results would be adversely affected in the event the useful life of the satellites were significantly shorter than 7 1/2 years. Globalstar anticipates using funds generated from operations to develop a second generation of satellites. If sufficient funds from operations are not available and Globalstar is unable to obtain external financing for the second-generation constellation, Globalstar will not be able to deploy a second-generation satellite constellation to replace first-generation satellites at the end of their useful lives. In that event, the Globalstar System would cease operations at that time.
Globalstar intends to obtain insurance against launch failure which would cover the cost of relaunch and the replacement cost of lost satellites in the event of hot failures for 56 satellites in its constellation. SS/L has agreed to obtain on Globalstar's behalf insurance for the cost of replacing satellites lost in hot failures, and for any relaunch costs not covered by the applicable launch contract, in certain circumstances subject to pricing adjustments in light of future market conditions. An adverse change in insurance market conditions may result in an increase in the insurance premium paid by Globalstar, which may be substantial. In addition, there is no
26 assurance that launch insurance will be available or that, if available, would be at a cost or on terms acceptable to Globalstar.
Globalstar may self-insure for hot failures for up to 12 such satellites. Globalstar's contract with SS/L provides for the construction and launch of eight spare satellites to minimize the effect of any launch or orbital failures. However, there can be no assurance that additional satellites and launches will not be required. In such an event, in addition to the replacement costs incurred by Globalstar, Globalstar's In-Service or Full Constellation Date may be delayed. In addition, unless otherwise required, Globalstar does not currently intend to purchase insurance to cover cold failures that may occur once the satellites have been successfully deployed from the launch vehicle.
The space and communications industries are characterized by rapid technological advances and innovations. There is no assurance that one or more of the technologies utilized or under development by Globalstar may not become obsolete, or that its services will be in demand by the time they are offered. Globalstar will be dependent upon technologies developed by third parties to implement key aspects of its strategy to integrate its satellite systems with terrestrial networks, and there can be no assurance that such technologies will be available to Globalstar on a timely basis or on reasonable terms.
Future Operating Factors
The availability of Globalstar service in each region or country will depend upon the cooperation, operational and marketing efficiency, competitiveness, finances and regulatory status of Globalstar's service provider in that region or country. The willingness of companies to become service providers will depend upon a variety of factors, including pricing, local regulations and Globalstar's competitiveness with other satellite-based telecommunications systems. Globalstar believes that enlisting the support of established telecommunications service providers, some of which are the dominant carriers in their markets, will be essential both to obtaining necessary local regulatory approvals and to rapidly accessing a broad market of potential users. Globalstar's strategic service providers have agreed to act as exclusive service providers in 71 countries although it is anticipated that in many cases these partners will enter into strategic alliances with local service providers to provide Globalstar service in these countries. In addition, Globalstar expects to raise additional funds prior to the Full Constellation Date in the form of service provider payments from prospective service providers in other territories throughout the world. Globalstar's business plan assumes that Globalstar will contract with service providers to provide service in the remaining territories of the world, in certain cases, on terms more favorable to Globalstar than those contained in its founding service provider agreements. There can be no assurance that additional service provider agreements will be entered into in the future or that this plan will be achieved. If such service provider payments are not realized, Globalstar will be required to obtain other sources of financing in order to complete the Globalstar System.
If the service providers fail to obtain the necessary local regulatory approval or to adequately market and distribute Globalstar's services, Globalstar's business could be adversely affected. There can be no assurance that enough service providers will contract for Globalstar service and procure and install the gateways and obtain the regulatory licenses necessary for complete global service. Failure to offer service in any particular region will eliminate that area's market potential and reduce Globalstar's ability to service its global roamer market.
Certain strategic partners and other third parties are designing and constructing the component parts of the Globalstar System. In the event such parties are unable to perform their obligations, Globalstar's In-Service and Full Constellation Date may be delayed and its costs may be increased.
Globalstar expects that a substantial portion of its business will be conducted outside of the United States. Such operations are subject to certain risks such as changes in domestic and foreign government regulations and telecommunications standards, tariffs or taxes and other trade barriers. Accordingly, government actions in foreign countries could have a significant effect on Globalstar's operations. Political, economic or social instability or other developments in such countries, including currency fluctuations, could also adversely affect Globalstar's operations. In addition, Globalstar's agreements relating to local operations may
27 be governed by foreign law or enforceable only in foreign jurisdictions. As a result, in the event of a dispute, it may be difficult for Globalstar to enforce its rights under such agreements.
Globalstar's largest potential markets are in developing countries or regions that are substantially underserved and not expected to be served by existing telecommunications systems. In doing business in such markets, Globalstar and its local service providers may face market, inflation, interest rate and currency fluctuation, government policy, price and wage, exchange control, taxation and social instability, expropriation and other economic, political or diplomatic conditions that are significantly more volatile than those commonly experienced in the United States and other industrialized countries. Although Globalstar anticipates that it will receive payments from its service providers in U.S. dollars, limited availability of U.S. currency in these local markets may prevent a service provider from making payments in U.S. dollars. Moreover, exchange rate fluctuations may affect the price Globalstar will be entitled to receive for its services.
Globalstar's pricing to service providers will, under certain circumstances, not be automatically adjusted for inflation; in such cases, Globalstar will be able to increase its pricing to service providers only if the service provider increases its prices to subscribers, and it may be required to lower its pricing if the service provider lowers its prices to subscribers. In recent years, pricing in the telecommunications industry has trended downward, in some cases making it difficult for service providers to raise their prices to compensate for cost inflation. Although Globalstar expects future service provider agreements to contain pricing terms more favorable to Globalstar than those contained in its agreements with founding service providers, there can be no assurance that such terms will be achieved.
Globalstar has entered into an agreement with a bank syndicate for a $250 million credit facility expiring December 15, 2000, and also expects to utilize $310 million of committed vendor financing. The Globalstar credit agreement permits Globalstar to incur up to $950 million of indebtedness on a senior basis, including the $500 million aggregate principal amount of Globalstar's 11 3/8% Senior Notes sold in February 1997, to finance the build-out of the Globalstar System; an unlimited amount of indebtedness may be incurred by Globalstar on a subordinated basis. Significant additional debt is expected to be incurred in the future. As a result, Globalstar is expected to be highly leveraged. Globalstar will be dependent on its cash flow from operations to service this debt. Any delay in the commencement of Globalstar operations will adversely affect Globalstar's ability to service its debt obligations. The discretion of Globalstar's management with respect to certain business matters will be limited by covenants contained in the Globalstar credit agreement, the Indenture related to the Senior Notes and future debt instruments. Among other things, the covenants contained in the Globalstar credit agreement and the Indenture restrict, condition or prohibit Globalstar from paying cash distributions on its ordinary partnership interests, creating liens on its assets, making certain asset dispositions, conducting certain other business and entering into transactions with affiliates and related persons. In the event the Globalstar credit agreement ceases to be guaranteed, it will also contain certain financial covenants limiting the ability of Globalstar to incur additional indebtedness. There can be no assurance that Globalstar's leverage and such restrictions will not materially and adversely affect Globalstar's ability to finance its future operations or capital needs or to engage in other business activities. Moreover, a failure to comply with the obligations contained in the Globalstar credit agreement, the Indenture and or any agreements with respect to additional financing could result in an event of default under such agreements, which could permit acceleration of the related debt and acceleration of debt under future debt agreements that may contain cross-acceleration or cross-default provisions.
Competition in the telecommunications industry is intense, fueled by rapid and continuous technological advances and alliances between industry participants on an international scale. Although no present participant is currently providing the same global personal telecommunications service proposed by Globalstar, it is anticipated that one or more additional competing MSS systems will be launched and that the success, or anticipated success, of Globalstar and its competitors could attract other entrants. If any of Globalstar's competitors succeeds in marketing and deploying its system substantially earlier than Globalstar, Globalstar's ability to compete in areas served by such competitor may be adversely affected. A number of satellite-based telecommunications systems not involved in the MSS Proceeding have also been proposed using geostationary satellites and, in one case, the 2 GHz band for a MEO system.
28 Globalstar's most direct competitors are the two other MSS applicants which received FCC licenses, Iridium and Odyssey. ICO was not an applicant or a licensee in the MSS Proceeding or any other proceedings before the FCC; it is seeking to operate in a different frequency band not available for use by MSS systems under current international guidelines in place until 2000. Comsat, the U.S. signatory to Inmarsat, has applied to the FCC to participate in the procurement of facilities of the system proposed by ICO. It has also sought FCC approval of a proposal to extend the scope of services provided by Inmarsat, currently limited to maritime services, to include telecommunications services to land- based mobile units. These applications are currently pending before the FCC. Comsat has been instructed in the past by the U.S. government to seek to ensure that ICO does not receive preferred access to any market and that non-discriminatory access to such areas for all mobile satellite communications networks be established, subject to spectrum coordination and availability. Nonetheless, because ICO is affiliated with Inmarsat and because its investors include state-owned telecommunications monopolies in a number of countries, there can be no assurance that ICO might not be given preferential treatment in the local licensing process in those countries. It is also possible that one or more of the two pending MSS applicants will demonstrate financial qualification sufficient to obtain an FCC license and become a competitor of Globalstar.
In addition to competing for investment capital, subscribers and service providers in markets all over the world, the MSS systems, including Globalstar, also compete with each other for the limited spectrum available for MSS operations. Unlike CDMA systems such as Globalstar and Odyssey, which permit multiple systems to operate within the same band, the design of Iridium's TDMA system requires a separate frequency segment dedicated specifically for its use. If more than two CDMA systems become operational, CDMA systems like Globalstar will effectively have a smaller spectrum segment within which to operate their user uplinks in the U.S. While CDMA does permit spectrum sharing among competing systems, the capacity of the systems operating within that spectrum will decrease as the number of systems operating in the band increases. For example, Globalstar's capacity over a given area would decrease by approximately 25% if the total number of licensed MSS systems increased from three to four, assuming that Iridium is one of the licensed systems and the two other CDMA systems receiving licenses have technical characteristics similar to Globalstar's and experience the same level of usage.
The FCC has no authorization to extend the U.S. band plan for CDMA and TDMA Big LEO systems to other countries. However, it has stated that it plans to express the view in discussions with other administrations that global satellite systems are more likely to succeed if individual administrations adopt complementary systems for licensing them.
Geostationary-based satellite systems, including AMSC, APMT, ASC, ACeS, Lockheed Martin's Satphone and Comsat's Planet-1, plan to provide satellite-based telecommunications services in areas proposed to be serviced by Globalstar. Because some of these systems involve relatively simple ground control requirements and are expected to deploy no more than two satellites, they may succeed in deploying and marketing their systems before Globalstar. In addition, coordination of standards among regional geostationary systems could enable these systems to provide worldwide service to their subscriber bases, thereby increasing the competition to Globalstar. For example, Comsat has announced a global mobile satellite service (Planet-1) using existing Inmarsat satellites, a six-pound, laptop-size phone, costing $3,000 with an expected per-minute usage rate of $3.00.
Some of these potential competitors have financial, personnel and other resources substantially greater than those of Globalstar. Many of these competitors are raising capital and may compete with Globalstar for service providers and financing. Technological advances and a continuing trend toward strategic alliances in the telecommunications industry could give rise to significant new competitors. There can be no assurance that some of these competitors will not provide a more efficient or less expensive service. However, Globalstar believes that based upon the public statements and other publicly available information of the other MSS applicants, Globalstar will be a low-cost provider. Depending on the competitive environment, however, pricing competition could require Globalstar to reduce its anticipated pricing to service providers, thus adversely affecting its financial performance.
Satellite-based telecommunications systems are characterized by high up-front costs and relatively low marginal costs of providing service. Several systems are being proposed and, while the proponents of these
29 systems foresee substantial demand for the services they will provide, the actual level of demand will not become known until such systems are constructed, launched and operational. If the capacity of Globalstar and any competing systems exceeds demand, price competition could be particularly intense.
Teledesic, Spaceway and Cyberstar have each applied to the FCC for licenses to operate satellite-based telecommunications and video transmission systems in the 28 GHz Ka-band. Certain MSS applicants, not including Globalstar, have applied to use this band for their feeder uplinks, as have proponents of land-based local multipoint distribution system ("LMDS") for cellular television services. The FCC is in the process of developing a band-width allocation plan for use of the available Ka-band spectrum by these services. Globalstar's primary business will be voice telephony, and its data transmission business will be focused on small data packet services such as paging and messaging. It therefore does not regard the television or broadband data services to fixed terminals proposed by Teledesic, Spaceway and Cyberstar or the wireless cable and fixed telephony services proposed by the LMDS applicants as competing services.
It is expected that as land-based telecommunications services expand to regions currently underserved or not served by wireline or cellular services, demand for Globalstar service in those regions may be reduced. If such systems are constructed at a more rapid rate than that anticipated by Globalstar, the demand for Globalstar service may be reduced at rates higher than those assumed in Globalstar's market analysis. Globalstar may also face competition in the future from companies using new technologies and new satellite systems. New technology could render Globalstar obsolete or less competitive by satisfying consumer demand in alternative ways or through the introduction of incompatible telecommunications standards. A number of these new technologies, even if they are not ultimately successful, could have an adverse effect on Globalstar as a result of their initial marketing efforts. Globalstar's business would be adversely affected if competitors begin operations or existing or new telecommunications service providers penetrate Globalstar's target markets before completion of the Globalstar System.
Subscriber acceptance of the Globalstar System (both in terms of placement of Globalstar Phones and subscriber usage thereof) will depend upon a number of factors, including price, demand for service and the extent of availability of alternative telecommunications systems. If the level of actual subscriber demand and usage for Globalstar service is below that expected by Globalstar, Globalstar's cash flow will be adversely affected. Globalstar's hand-held phone is expected to be larger and heavier for the same talk time than today's smaller and lighter pocket-sized, hand-held cellular telephones and is expected to have a significantly longer and thicker antenna than hand-held cellular telephones. The Globalstar System will function best when there is an unobstructed line-of-sight between the user and one or more of the Globalstar satellites. Obstacles such as buildings, trees or mountainous terrain may degrade service quality, more so than would be the case with terrestrial cellular systems, and service may not be available in the core of high-rise buildings. There is no assurance that these characteristics of the hand-held Globalstar Phone will not adversely affect subscriber demand for Globalstar service.
There has been adverse publicity concerning alleged health risks associated with the use of portable hand-held telephones with transmitting antennas integrated into handsets. On August 1, 1996, the FCC announced new guidelines for evaluating environmental radio frequency radiation from FCC-regulated transmitters based primarily on the exposure criteria recommended in 1986 by the National Council on Radiation Protection Measurements ("NCRP"). Guidelines applicable to certain portable transmitting devices are based on the NCRP criteria and the exposure criteria developed by the Institute of Electrical and Electronic Engineers and recommended in 1992 by the American National Standards Institute. These guidelines were to become effective as to applications filed after January 1, 1997; the FCC, however, has deferred the effective date until September 1, 1997. The handsets Globalstar has contracted with Qualcomm to develop for use by mobile subscribers will have antennas for communication with the satellites and, in the case of the dual-mode and tri-mode hand-held Globalstar Phones, with the land-based cellular system. Because hand-held Globalstar Phones will use on average lower power to transmit signals than traditional cellular units, Globalstar does not believe that the proposed new guidelines will require any significant modifications of the Globalstar System or of the mobile hand-held Globalstar Phones designed to be used with the Globalstar System. There can, however, be no assurance that the guidelines, as adopted, or any associated health concerns, would not have an adverse effect on Globalstar's mobile handset business.
30 The success of Globalstar's business will be partially dependent upon the ability of Globalstar to attract and retain highly qualified technical and management personnel. None of the employees of Globalstar has an employment contract with Globalstar nor does Globalstar expect to maintain "key man" insurance with respect to any such individuals. The loss of any of these individuals and the subsequent effect on business relationships could have a material adverse effect on Globalstar's business.
Other Factors
Partners of LQSS, the managing general partner of Globalstar, or their affiliates are principal suppliers to Globalstar of the major components of the Globalstar System, and are also expected to engage in the manufacture of system elements to be sold to service providers and subscribers. During the design, development and deployment of the Globalstar System, Globalstar will be substantially dependent upon the management skills of Loral and certain technologies developed by Loral, Qualcomm and SS/L to design and manufacture the Globalstar satellite constellation, SOCCs, GOCCs, gateways and Globalstar Phones. Globalstar has entered into contracts for the design of various segments of the Globalstar System with affiliates of LQSS, including a fixed-price satellite production contract with SS/L and a cost-plus-fee contract with Qualcomm to design the gateways, GOCCs and Globalstar Phones. To the extent that such contracts have been or will be awarded to partners of Globalstar or LQSS or their affiliates, such parties will have a conflict of interest with respect to the terms thereof.
Partners and affiliates of Globalstar, including companies affiliated with or controlled by Loral, will be among Globalstar's principal service provider customers and may therefore have conflicts of interest with respect to the terms of Globalstar's service provider agreements and any proposed amendments thereto. In addition, if Globalstar is unable to offer Globalstar service to a service provider on competitive terms in a particular country or region, such a service provider, which may be a partner of Globalstar, can act as a service provider to a competing MSS system in such region or country while at the same time serving as a Globalstar service provider in other markets.
SKYNET
Competition. Skynet is subject to significant competition. Skynet's competitors in the U.S. domestic satellite services industry have significantly greater financial, manufacturing, marketing and technical resources than those of the Company. As the Company expands into international markets, it will have to compete, in addition, with international operators including Intelsat and PanAmSat. Further, Skynet's satellites face competition from alternative technologies, including fiber optic cable technology and other terrestrial alternatives, which could reduce demand for its services.
Regulation. The Skynet operations are subject to the Communications Act and are regulated by the FCC. The FCC licenses all radio facilities used in the United States including satellites and earth station facilities used to communicate with satellites. Such licenses are limited in duration and must be renewed (or new licenses obtained) at the expiration of the license term if the licensee intends to continue providing services. There can be no assurance that the authorizations for Telstar 5 and Telstar 6 will not be challenged or, if challenged, that such challenges will not be successful. Because Skynet's operations are subject to FCC regulation, Skynet's prospects and financial condition may be adversely affected by the adoption of new laws, policies or regulations that have the effect of modifying the regulatory environment under which Skynet currently operates or the conditions of the licenses granted by the FCC. In addition, as part of the regulatory process for orbital slot allocation of its satellites, Skynet is required to engage in frequency coordination with other satellite operators. Although Skynet has in the past been able to coordinate its existing satellites, there can be no assurance that satisfactory coordination will be achieved for any of Skynet's future satellites.
Any expansion of Skynet's operations beyond the domestic U.S. market will subject Skynet to the regulatory authority of the national communications authorities of the countries in which it will operate. Skynet, its customers or customers with which Skynet will do business, will be required to have authorization for each country in which Skynet will do business. There can be no assurance that such approvals will be
31 granted on a timely basis in all jurisdictions in which Skynet wishes to operate in the future or that restrictions applicable thereto will not be unduly burdensome.
Risk of Delays and Cost Overruns. A significant delay in the delivery or launch of any of Skynet's future satellites would adversely affect the Company's marketing plan for such satellite. There can be no assurance that increases in cost due to change orders or delay will not occur. If such additional costs are incurred, and if internally generated cash flow is not sufficient to fund such costs, the Company may need to obtain additional financing. There can be no assurance that such financing will be available.
Risk of Satellite Loss, Reduced Performance or Malfunction. Satellites are subject to significant risks, including satellite defects, launch failure, destruction and damage that may result in incorrect orbital placement and prevent proper commercial operation. Approximately 15% of all commercial GEO satellite launches have resulted in a total or constructive total loss although there is a significant difference in mission success rates of the various launch service providers. Skynet intends to launch Telstar 5 on the Russian Proton launch vehicle, which has a launch success rate of 92%. In addition, satellites, even when properly placed into orbit, are thereafter subject to risk of loss, destruction or damage resulting from design or manufacturing defects, military actions or acts of war, electrostatic storm or collision with space debris. In 1994 and 1997, Skynet experienced loss of its Telstar 402 and Telstar 401 satellites, respectively, resulting in lost service and a corresponding adverse effect on Skynet's results of operations. The Company intends to maintain insurance covering Skynet's satellites as is customary in the industry. There can be no assurance, however, that such insurance can be purchased on favorable terms, if at all.
Limited Life of Satellites. Satellites have limited useful lives. A number of factors will affect the useful life of a satellite, including the quality of its construction, the durability of its component parts and its station-keeping fuel supply. The Telstar 4 series was built by Lockheed Martin Astro-Space. Telstar 402R has an expected remaining useful life of approximately 13 years; however, Telstar 402R is a similar flight model to Telstar 401 and Telstar 402, which have experienced total loss of service. Telestar 5,6 and 7 are entirely different satellites being built by SS/L. Skynet's operating results would be adversely affected to the extent the useful lives of its satellites are significantly shorter than expected.
Risks Related to Russian Launch Provider. Skynet plans to launch Telstar 5 on a Russian-built Proton rocket from the Baikonur launch site in Kazakhstan. The governmental, political, social and legal structures within Russia and Kazakhstan are evolving and may be subject to additional changes. Changes in governmental policies or political leadership in the United States, Russia or Kazakhstan could affect the cost, availability, timing and/or overall advisability of using a Russian launch provider.
Technological Developments. Technology in the satellite industry is in a rapid and continuing state of change as new technologies develop. There can be no assurance that Skynet will be able to keep pace with such technological developments.
ITEM 2. PROPERTIES
The Company sub-leases office space from Lockheed Martin at 600 Third Avenue, New York, New York 10016.
SS/L's research, production and testing facilities are carried on in SS/L-owned facilities covering approximately 28.4 acres in Palo Alto, California. In addition, SS/L leases 797,000 square feet of space from various third parties.
Globalstar leases approximately 56,000 square feet of office space from Lockheed Martin in San Jose, California and 12,000 square feet for its back-up GOCC in El Dorado Hills, California.
Management believes that all facilities are sufficient to allow the Company to carry on its operations.
Skynet maintains two telemetry, tracking and control stations located in Hawley, Pennsylvania and Three Peaks, California.
32 ITEM 3. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral Fairchild"), a subsidiary of 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 but the Court has not yet ruled on the matter.
Lockheed Martin has agreed in connection with the Merger to grant to the Company the right to all proceeds or awards resulting from the CCD Lawsuit as well as complete and exclusive control and management thereof. The Company has agreed to pay all fees and expenses relating to the CCD Lawsuit and to indemnify Lockheed Martin and Old Loral from any losses relating thereto.
Neither SS/L or Globalstar is a party to any pending legal proceedings material to its financial condition or results of operation.
Environmental Regulation. Operations at SS/L, Skynet 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 and its subsidiaries or Globalstar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
33 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 sets forth, for each of the periods indicated, the reported high and low sales prices per share of the Company's common stock as reported on the NYSE:
HIGH LOW ------PERIOD ENDING DECEMBER 31, 1996 Quarter ended June 30, 1996...... $18 1/2 $10 1/2 Quarter ended September 30, 1996...... 16 5/8 11 1/8 Quarter ended December 31, 1996...... 19 5/8 15 1/4
The Company does not currently anticipate paying any dividends or distributions on its common stock or on the Series A Convertible Preferred Stock held by Lockheed Martin. Neither Globalstar nor SS/L has paid any dividends or distributions since their respective dates of inception or acquisition by Loral, as the case may be. The Globalstar credit agreement and the indenture related to the Globalstar senior notes and the SS/L credit facility impose restrictions on Globalstar's and SS/L's respective ability to pay distributions or dividends to its partners and stockholders, including to the Company. To the extent that the Company or SS/L and Globalstar incur debt financing in the future, similar limitations will likely be imposed.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 28, 1997, there were approximately 6,600 holders of record of the Company's common stock.
34 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 information prior to April 23, 1996 for Loral Space & Communications Ltd. represents the space and communications operations of Old Loral.
LORAL SPACE & COMMUNICATIONS LTD.
PRO FORMA COMBINED OPERATIONS INCLUDING AFFILIATES (In thousands, except per share data)
(Unaudited)
Loral currently reports the results of operations of its affiliates, SS/L, Globalstar and K&F, using the equity method of accounting. To provide an understanding of the operations managed by Loral, the following pro forma combined financial data have been prepared to aggregate the results of Loral and its affiliates for the nine months ended December 31, 1996 and 1995.
NINE MONTHS ENDED DECEMBER 31, 1996 ------PRO FORMA SS/L GLOBALSTAR K&F LORAL(1) COMBINED(2) ------Revenues...... $1,017,653 $212,703 $ 5,088 $ 949,729 ======Operating income (loss) before Globalstar system development and start up costs and K&F program investment...... $ 54,011 $ 62,399 $(12,201) $ 104,209 Globalstar system development and start up costs and K&F program investment...... -- $ 45,624 20,239 -- 65,863 ------Operating income (loss) after Globalstar system development and start up costs and K&F program investment...... 54,011 (45,624) 42,160 (12,201) 38,346 Interest income (expense), net...... 6,081 (10,969)(3) (27,197) 28,699 (3,386) ------Income (loss) before taxes...... 60,092 (56,593)(3) 14,963 16,498 34,960 Income taxes...... (27,643) -- 81 (2,912) (30,474) Equity in loss of affiliates...... (1,549) -- -- (4,709) -- Other shareholders' interest...... 125 ------4,391 ------Income (loss) before extraordinary item...... 31,025 (56,593) 15,044 8,877 8,877 Loss on retirement of debt...... -- -- (9,142) ------Net income (loss)...... $ 31,025 $(56,593) $ 5,902 $ 8,877 $ 8,877 ======Weighted shares outstanding...... 229,396 229,396 ======Earnings per share...... $ 0.04 $ 0.04 ======
NINE MONTHS ENDED DECEMBER 31, 1995 ------PRO FORMA SS/L GLOBALSTAR K&F LORAL(1) COMBINED(2) ------Revenues...... $768,121 $199,784 $ 3,841 $ 745,539 ======Operating income before Globalstar system development and start up costs and K&F program investment...... $ 16,832 $ 56,380 $ 1,575 $ 74,787 Globalstar system development and start up costs and K&F program investment...... -- $ 60,831 22,674 -- 83,505 ------Operating income (loss) after Globalstar system development and start up costs and K&F program investment...... 16,832 (60,831) 33,706 1,575 (8,718) Interest income (expense), net...... 5,280 9,830 (31,288) (7,563) (23,741) ------Income (loss) before taxes...... 22,112 (51,001) 2,418 (5,988) (32,459) Income taxes...... (11,745) -- -- 2,093 (9,652) Equity in loss of affiliates...... (1,009) -- -- (11,360) -- Other shareholders' interest...... 115 ------26,856 ------Income (loss) before extraordinary item...... 9,473 (51,001) 2,418 (15,255) (15,255) Loss on retirement of debt...... -- -- (1,913) ------Net income (loss)...... $ 9,473 $(51,001) $ 505 $(15,255) $ (15,255) ======Weighted shares outstanding...... 175,133 175,133 ======Earnings (loss) per share...... $ (0.09) $ (0.09) ======
(1) As reported.
(2) Net of intercompany eliminations.
(3) Includes a preferred distribution on Globalstar's Redeemable Preferred Partnership Interests of $15,899.
35 LORAL SPACE & COMMUNICATIONS LTD.
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 1994 1993 ------
STATEMENT OF OPERATIONS DATA: Management fee from affiliate...... $ 5,088 $ 5,608 $ 3,169 $ 2,981 $ 2,576 Equity in net income (loss) of affiliates(1)...... (4,709) (8,628) (8,988) 1,174 663 Income loss before cumulative effect of accounting change(2)...... 8,877 (13,785) (7,873) (3,694) (5,242) Net income (loss)...... 8,877 (13,785) (7,873) (3,694) (12,001) Earnings (loss) per share...... 04 (.08) N/A N/A N/A
CASH FLOW DATA: Used in operating activities...... $ 3,003 $ 1,319 $ 8,439 $ 587 $ 5,905 Used in (provided by) investing activities...... 1,962 115,031 92,055 25,288 (2,697) Provided by equity transactions...... 602,413 116,362 100,494 25,875 3,208 Provided by Convertible Preferred Equivalent Obligations ("Convertible preferreds")...... 583,292 ------Dividends paid per share...... -- N/A N/A N/A N/A
MARCH 31, ------DECEMBER 31, 1996 1996 1995 1994 1993 ------BALANCE SHEET DATA: Cash and cash equivalents...... $ 1,180,752 $ 12 $ -- $ -- $ -- Investment in Globalstar(1)...... 175,639 195,221 110,970 25,288 -- Investment in SS/L...... 267,418 144,051 140,007 138,191 137,017 Total assets...... 1,699,326 354,396 251,819 163,479 137,017 Convertible preferreds...... 583,292 ------Shareholders' equity(3)/Invested equity...... 1,070,069 354,396 251,819 159,198 137,017
(1) Globalstar commenced operations on March 23, 1994. (2) Before the effect of adopting Statement of Financial Accounting Standards No. 106 "Accounting for Postretirement Benefits Other than Pensions," in fiscal 1993 net of related income taxes. (3) As of December 31, 1996, 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 $4.52 and $4.51, respectively. Book value per share represents the quotient obtained by dividing shareholders' equity 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.
SPACE SYSTEMS/LORAL, INC. (IN THOUSANDS)
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 1994 1993 ------STATEMENT OF OPERATIONS DATA: Revenues...... $1,017,653 $1,121,619 $633,717 $596,267 $517,242 Gross profit...... 64,157 34,406 27,785 24,964 19,855 Income before cumulative effect of change in accounting(1)...... 31,025 12,367 5,554 3,591 2,594 Net income (loss)...... 31,025 12,367 5,554 3,591 (18,076)
MARCH 31, ------DECEMBER 31, 1996 1996 1995 1994 1993 ------BALANCE SHEET DATA: Cash and cash equivalents...... $ 19,181 $ 126,863 $ 52,222 $ 26,578 $ 10,121 Total assets...... 1,059,064 908,677 766,475 743,016 640,499 Long-term debt...... 127,586 65,052 34,040 92,249 73,000 Shareholders' equity...... 478,893 447,868 435,501 429,947 426,356
(1) Before the effect of adopting Statement of Financial Accounting Standards No. 106 "Accounting for Postretirement Benefits Other than Pensions" in fiscal 1993 net of related income taxes.
36 GLOBALSTAR, L.P. (In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994 CUMULATIVE ------PRE-CAPITAL SUBSCRIPTION PERIOD(1) MARCH 23 MARCH 23, 1994 ------(COMMENCEMENT YEARS ENDED DECEMBER (COMMENCEMENT YEAR ENDED JANUARY 1 TO OF OPERATIONS) TO 31, OF OPERATIONS) TO DECEMBER 31, MARCH 22, DECEMBER 31, ------DECEMBER 31, 1993 1994 1994 1995 1996 1996 ------STATEMENT OF OPERATIONS DATA: Revenues...... $ -- $ -- $ -- $ -- $ -- $ -- Operating expenses...... 11,510 6,872 28,027 80,226 61,025 169,278 Interest income...... -- -- 1,783 11,989 6,379 20,151 Net loss applicable to ordinary partnership interests...... 11,510 6,872 26,244 68,237 71,969 166,450 Net loss per weighted average ordinary partnership interest outstanding...... 0.73 1.50 1.53 Cash distributions per ordinary partnership interest...... ------OTHER DATA: Deficiency of earnings to cover fixed charges(2)...... N/A N/A 71,969 CASH FLOW DATA: Used in operating activities.... -- -- (23,052) (38,368) (46,622) (108,042) Used in investing activities.... -- -- (50,549) (280,345) (384,264) (715,158) Provided by partners' capital transactions...... -- -- 147,161 318,630 284,714 750,505 Provided by (used in) other financing activities...... ------(1,875) 95,750 93,875
DECEMBER 31, ------1996 1995 1994 ------BALANCE SHEET DATA: Cash and cash equivalents...... $ 21,180 $ 71,602 $ 73,560 Working capital (deficiency)...... (53,481) 17,687 35,423 Globalstar System under construction...... 891,033 400,257 71,996 Total assets...... 942,913 505,391 151,271 Vendor financing liability...... 130,694 42,219 -- Borrowings under long-term revolving credit facility...... 96,077 -- -- Redeemable preferred partnership interests...... 302,037 -- -- Ordinary partners' capital...... 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.
37 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 the following Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company, Globalstar, SS/L and Skynet, and elsewhere in this Form 10-K, 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 Space & Communications Ltd. and its subsidiaries (the "Company" or "Loral") is one of the world's leading satellite communications companies, with substantial interests in both the manufacture and operation of geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Loral manages and will soon own 100% of Space Systems/Loral, Inc. ("SS/L"), one of the world's leading manufacturers of space systems. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), a system of LEO satellites expected to be placed in service in 1998 that will support digital telephone service to handheld and fixed terminals worldwide. In addition, on March 14, 1997, Loral purchased Skynet Satellite Services ("Skynet"), the third largest domestic satellite service provider, from AT&T.
Loral was formed to effectuate the distribution of Loral Corporation's ("Old Loral") space and telecommunications businesses (the "Distribution") to shareholders of Old Loral pursuant to a merger agreement (the "Merger") dated January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed Martin").
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Loral had $1.2 billion of cash and cash equivalents. Loral intends to utilize its existing capital base and access to the capital markets to initially fund the Skynet acquisition, make additional investments in Globalstar and Globalstar service provider opportunities, increase its ownership in SS/L and invest in additional satellite telecommunications opportunities. In connection with the Merger between Old Loral and 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 and SS/L are currently financed without recourse to Loral other than the indemnification described above.
It is anticipated that Loral will fund its operating requirements from available cash balances and interest income generated from the temporary investment of cash balances. Globalstar has no history of making distributions on its ordinary partnership interests and is not expected to make distributions until after commencement of full commercial operations. The Globalstar Credit Agreement imposes restrictions on Globalstar's ability to make distributions on its ordinary partnership interests.
Skynet. The Company intends to initially fund the Skynet purchase with its available cash. The $478 million purchase price is subject to adjustment based on net assets delivered on the closing date. Skynet currently has one high-powered satellite operating in orbit and has a contract with SS/L for the construction of two satellites and an option for one additional satellite and one ground spare. Although short term borrowings may be required depending on the timing of cash receipts and expenditures, Loral believes, based on current projections, that Skynet's internal cash flows should be adequate to fund these capital expenditures for the satellites under construction, the satellite under option and related ground equipment.
Globalstar. As of February 1997, Globalstar estimates the cost for the design, construction and deployment of the Globalstar System, including working capital, cash interest on anticipated borrowings and operating expenses, to be approximately $2.5 billion, as compared with approximately $2.2 billion estimated at December 31, 1995. This increase arose primarily from a change in launch vehicles and additional integration testing procedures to support system readiness on schedule, scope changes to add features, capabilities and functions, cost growth and other factors. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost of approximately $175 million. Actual amounts may vary from these estimates and additional funds would be required in the event of unforeseen delays, cost overruns, launch
38 failures, technological risks, adverse regulatory developments, or to meet unanticipated expenses and for system enhancements and measures to assure system performance and readiness for the space and ground segments.
As of February 13, 1997, Globalstar had raised or received commitments for approximately $2.0 billion. Globalstar believes that its current capital, vendor financing commitments, the availability of the Globalstar Credit Agreement and proceeds from the exercise of warrants issued in connection with the Globalstar Credit Agreement are sufficient to fund its requirements into the first quarter of 1998. Globalstar intends to raise the remaining funds required from a combination of sources, including debt issuance (which may include an equity component), financial support from the Globalstar Partners, projected service provider payments, projected net service revenues from initial operations and anticipated payments from the sale of gateways and Globalstar phones. 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.
SpaceSystems/Loral. Loral has made a strategic decision to increase its ownership in SS/L to 100%. The first step in implementing this strategy was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by 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%. In February 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. Alliance 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. Accordingly, in 1997, Loral expects to discontinue the use of the equity method of accounting for SS/L and will consolidate SS/L's financial position and results of operations in its financial statements.
SS/L is the prime contractor for the design and construction of Globalstar's satellites. In connection therewith, SS/L and its subcontractors have committed $310 million of vendor financing to Globalstar, of which $121 million of such vendor financing is effectively borne by the subcontractors. The Company believes the operations and capitalization of SS/L are adequate to fund its anticipated growth.
Other Business Opportunities. Loral intends to pursue additional satellite-based communications service opportunities. These opportunities are in formative stages and there can be no assurances that they will be further developed or licensed, or that the necessary capital to complete such opportunities will be available.
Cash Provided and Used. Cash used in operating activities for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995 was $3.0 million, $1.3 million and $8.4 million, respectively, primarily due to the items discussed in Results of Operations, below.
Cash used in investing activities for the nine months ended December 31, 1996 was $2.0 million, primarily due to the purchase of $2.5 million principal amount of GTL Convertible Preferred Equivalent Obligations in April 1996 and $4 million used in connection with the purchase of the Lehman Partnerships' interest in SS/L in August 1996, offset by the sale of property, plant and equipment. Cash used in investing activities for the years ended March 31, 1996 and 1995 was $115.0 million and $92.1 million, respectively, primarily due to investments in Globalstar. Investments in Globalstar totaled $105.2 million and $103.6 million in the years ended March 31, 1996 and 1995, respectively, and include an aggregate of $10.3 million of capitalized costs, principally interest.
Net cash provided by financing activities for the nine months ended December 31, 1996 was $1.2 billion, primarily due to the $600 million net proceeds from the Distribution and $583 million net proceeds from issuance of the Convertible Preferred Equivalent Obligations. Net cash provided by financing activities for the years ended March 31, 1996 and 1995 was $116.4 million and $100.5 million, respectively, representing the advances from Old Loral to fund the above-mentioned activities.
39 RESULTS OF OPERATIONS
The Company operates under a December 31 year-end. For the nine months ended December 31, 1996, the consolidated financial statements include the accounts of Loral Space & and Communications Ltd. and its subsidiaries. As such, the following discussion compares these results of operations with the unaudited nine months ended December 31, 1995. Old Loral operated under a March 31 year-end. For the years ended March 31, 1996 and 1995, the combined financial statements reflect that portion of the space and communications operations included in Old Loral's historical financial statements that were spun off to Loral. Except for Globalstar, which since inception has had a December 31 year- end, the following discussion compares the results of operations for the years ended March 31, 1996 and 1995. For Globalstar, the year ended December 31, 1995 is compared with the period March 23, 1994 (commencement of operations) to December 31, 1994.
The results of operations for the periods through 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. The amount of corporate office expenses for such periods has been estimated based primarily on the allocation methodology prescribed by government regulations pertaining to government contractors, which management of Loral believes is a reasonable allocation method.
For the periods through March 31, 1996, interest was allocated to Loral based upon Old Loral's historical weighted average debt cost applied to the average investment in affiliates, which management of Loral believes to be a reasonable allocation method. Interest related to Old Loral's investment in Globalstar has been capitalized because Globalstar has not commenced its principal operations.
Taxation. Loral is 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 foreign sources and will not be effectively connected with a U.S. trade or business; some portion of its 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.
Comparison of Results for the Nine Months ended December 31, 1996 and 1995
The results of operations reflect net income of $8.9 million for the nine months ended December 31, 1996 as compared with a loss of $15.3 million for the same period in the prior year. This change is primarily attributable to interest earned during 1996 on the investment of available cash balances as compared with interest expense allocated from Old Loral during 1995. Total interest income, net for the nine months ended December 31, 1996 was $28.7 million.
Management fees earned from SS/L of $5.1 million for the nine months ended December 31, 1996 represent an increase of $1.2 million over the nine months ended December 31, 1995. The management fees are based on SS/L sales which increased $250 million, or 32%, to $1.0 billion.
Costs and expenses increased to $17.3 million for the nine months ended December 31, 1996 from $2.3 million for the nine months ended December 31, 1995. The primary reason for this increase is that 1996 expenses reflect the Company's operations on a stand-alone basis without the benefit of economies of scale under Old Loral.
Equity in net loss of affiliates decreased to $4.7 million for the nine months ended December 31, 1996 from $11.4 million for the comparable period in the prior year. This improvement is primarily due to increased net income of SS/L, partially offset by the loss of tax benefit for Globalstar losses following Loral's formation in Bermuda.
40 The Company's effective income tax rate for the nine months ended December 31, 1996 was 17.7% compared with (35.0)% for the prior period. The current period effective rate is lower than the statutory U.S. Federal income tax rate because, as a Bermuda Company, a substantial portion of the Company's income is foreign source income not subject to Federal taxation.
Pro Forma Combined Operations. Combined revenues of all companies (Loral, Globalstar, SS/L and K&F), after intercompany eliminations, were $950 million for the nine months ended December 31, 1996, up 27 percent from the same period in the prior year. Operating income increased to $104 million, compared to $75 million for the same period in the prior year, before Globalstar system development and start-up costs and K&F program investment of $66 million and $84 million, for the nine months ended December 31, 1996 and 1995, respectively. All operating entities' peformance improved period-to-period.
Comparison of Results for the Years Ended March 31, 1996 and 1995
The results of operations reflect a net loss of $13.8 million for the year ended March 31, 1996 as compared to a net loss of $7.9 million for 1995. The increase in the 1996 loss is primarily due to the 1995 non-recurring gain of $6.9 million net of taxes resulting from the exchange of K&F debentures for cash and equity.
During fiscal 1996, management fees totaled $5.6 million as compared to $3.2 million in 1995 reflecting an increase in SS/L's revenues to $1.1 billion in 1996 from $633.7 million in 1995.
Allocated costs and expenses decreased to $3.0 million in 1996 from $3.2 million in 1995 due to changes in both the level of Old Loral corporate office expenses and changes in the proportional factors within the allocation formula. Allocated interest expense increased to $10.5 million in 1996 from $9.5 million in 1995, primarily as a result of Old Loral's increased effective borrowing rate applied to its investment in SS/L.
For the year ended March 31, 1996, the effective income tax rate was (35.0)% compared to 44.9% in 1995. The change in the effective rate for 1996 as compared to 1995 is primarily a result of the proportionate impact of taxes on undistributed earnings of affiliates (SS/L) for the year.
The equity in net loss of affiliates in 1996 of $8.6 million as compared to $9.0 million in 1995 reflects Loral's proportionate share of higher Globalstar costs for the design, development and construction of the Globalstar System offset by the proportionate share of higher SS/L income.
SUMMARY RESULTS OF OPERATIONS OF AFFILIATES
SPACE SYSTEMS/LORAL
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
During the nine months ended December 31, 1996, revenues from contracts increased to $1.0 billion from $768.1 million during the comparable period of the prior year. The increase in revenues was attributable primarily to higher volume on commercial satellite programs of $260.5 million, including the Globalstar program of $58.3 million, partially offset by lower volume on the GOES weather satellite program of $11.0 million.
Operating income increased to $54.0 million for the nine months ended December 31, 1996 from $16.8 million in the comparable period of the prior year. This improvement resulted from the increase in revenues and a change in program mix with new commercial awards having better margins than the older programs being completed.
Interest income net of interest expense increased slightly to $6.1 million for the nine months ended December 31, 1996 from $5.3 million in the prior year period.
The effective tax rate decreased to 46% for the nine months ended December 31, 1996 from 53% for the comparable period in the prior year. This reduction resulted from a decrease in the impact of non-deductible goodwill amortization.
41 Comparison of Results for the Fiscal Years Ended March 31, 1996 and March 31, 1995
During the year ended March 31, 1996, revenues from contracts increased to $1.1 billion from $633.7 million for the year ended March 31, 1995. The increase in revenues is attributable to higher volume on commercial satellite programs of $521.4 million, including the Globalstar program of $239.7 million, offset by lower volume on both the GOES weather satellite program of $18.9 million and the Space Station program of $14.6 million.
Operating income increased to $22.1 million from $17.9 million in the prior year. The change in operating income primarily results from increased revenues, a change in the current program mix and risk-management on programs requiring in-orbit satellite delivery.
Interest income net of interest expense increased to $6.4 million from $1.3 million for the prior year, primarily attributable to increased investment income of $2.6 million resulting from increased invested cash balances and $2.4 million of interest income associated with orbital receipts.
The effective tax rate decreased to 53.4% in fiscal 1996 from 62.2% in the prior year primarily due to the decreased impact of non-deductible goodwill amortization.
GLOBALSTAR
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
Globalstar is a development stage partnership and has not commenced commercial operations. For the period March 23, 1994 (commencement of operations) to December 31, 1996, Globalstar has recorded cumulative net losses of $149.1 million and net losses applicable to ordinary partnership interests of $166.5 million. The net loss for the nine months ended December 31, 1996 decreased to $40.7 million as compared to $51.0 million for the nine months ended December 31, 1995 due to a decrease in development costs partially offset by a decrease in interest income. The net loss applicable to ordinary partnership interests was $56.6 million during the current period, reflecting $15.9 million of preferred distributions on the redeemable preferred partnership interests. Globalstar is expending significant funds for the design, construction, testing and deployment of the Globalstar System and expects such losses to continue until commencement of commercial operations.
Globalstar has earned interest income of $20.2 million on cash balances and short term investments since commencement of operations. Interest income during the nine months ended December 31, 1996 was $4.9 million as compared to $9.8 million for the nine months ended December 31, 1995. Interest income for the current period decreased as a result of lower average cash balances outstanding during 1996.
Development costs were $30.8 million for the nine months ended December 31, 1996, representing the development of certain technologies under a cost sharing arrangement in Globalstar's contract with Qualcomm, the development of Globalstar phones and Globalstar's continuing in-house engineering. This compares with $46.7 million of development costs incurred during the same period in 1995. The decline during the current year is primarily the result of the cost sharing arrangement in Globalstar's contract with Qualcomm reaching its funding limit in April 1996.
Marketing, general and administrative expenses were $14.8 million for the nine months ended December 31, 1996 as compared to $14.2 million incurred during the nine months ended December 31, 1995.
Globalstar intends to capitalize all costs, including interest as applicable, associated with the design, construction and deployment of the Globalstar System, except costs associated with the development of the Globalstar phones and certain technologies under a cost sharing arrangement with Qualcomm. Globalstar will not record depreciation expense on the Globalstar System Under Construction until the commencement of commercial operations, as assets are placed into service.
Globalstar was organized as a limited partnership. As such, no income tax provision (benefit) is reflected in its results since U.S. income taxes are the responsibility of its partners. Generally, taxable income (loss), deductions and credits of Globalstar will be passed through to its partners.
42 Comparison of Results for the Year Ended December 31, 1995 to the Period March 23, 1994 (commencement of operations) to December 31, 1994
The net loss for the year ended December 31, 1995 increased to $68.2 million from $26.2 million in the period March 23, 1994 (commencement of operations) to December 31, 1994 (the "Prior Period"), primarily due to increased operating expenses partially offset by increased interest income.
Interest income for the year ended December 31, 1995 was $12.0 million as compared to $1.8 million earned during the Prior Period. Interest income increased significantly from the Prior Period as a result of higher cash balances invested due to the sale of 10,000,000 partnership interests to GTL for $185.8 million during the first quarter and the receipt of payments against capital subscriptions of $133.8 million.
Development costs of $62.9 million for the year ended December 31, 1995, represent the development of certain technologies under a cost sharing arrangement in Globalstar's contract with Qualcomm, the development of Globalstar phones and Globalstar's continuing in-house engineering. This compares with $21.3 million of development costs incurred during the Prior Period. The increase as compared to the Prior Period is primarily related to the technologies being developed under the cost sharing arrangement with Qualcomm.
Marketing, general and administrative expenses were $17.4 million for the year ended December 31, 1995 as compared to $6.7 million incurred during the Prior Period. The increase from the Prior Period is a result of both increased marketing and personnel costs consistent with the higher level of activity at Globalstar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
43 PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in the Company's 1997 definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ------Bernard L. Schwartz... 71 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. Michael B. Targoff.... 52 President and Chief Operating Officer since March 1996. Prior to that, Senior Vice President and Secretary of Old Loral since April 1992. Prior to that, held other executive officer positions with Old Loral. Michael P. DeBlasio... 59 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...... 68 Senior Vice President since November 1996 and President of Space Systems/Loral since 1990. Jeanette H. Clonan.... 48 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. Stephen L. Jackson.... 55 Vice President -- Administration since March 1997. Prior to that, Vice President-Administration of Old Loral since 1978. Jerald A. Lindfelt.... 50 Vice President -- Business Operations since March 1997. Prior to that, Division President of Old Loral since July 1991. Nicholas C. Moren..... 50 Vice President and Treasurer since March 1996. Prior to that, Vice President and Treasurer of Old Loral since April 1991. Harvey B. Rein...... 43 Vice President and Controller since April 1996. Prior to that, Assistant Controller of Old Loral since 1985. Thomas B. Ross...... 67 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. Eric J. Zahler...... 46 Vice President, General Counsel and Secretary since March 1996. Prior to that, Vice President and General Counsel of Old Loral since April 1992; prior to that, partner in the law firm of Fried, Frank, Harris, Shriver & Jacobson.
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 set forth in the Company's 1997 definitive proxy statement which is incorporated herein by reference.
44 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, 1996 and March 31, 1996..... F-3 Consolidated Statements of Operations for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995...... F-4 Consolidated Statements of Shareholders' Equity/Invested Equity for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995...... F-5 Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995...... F-6 Notes to Consolidated Financial Statements...... F-7 Space Systems/Loral, Inc. Independent Auditors' Report...... F-18 Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996..... F-19 Consolidated Statements of Income for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995...... F-20 Consolidated Statements of Shareholders' Equity for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995...... F-21 Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995...... F-22 Notes to Consolidated Financial Statements...... F-23
Globalstar, L.P. (A development stage limited partnership) Independent Auditors' Report...... * Consolidated Balance Sheets as of December 31, 1996 and 1995...... * Consolidated Statements of Operations for the period January 1, 1994 to March 22, 1994 (the pre-capital subscription period), the period March 23, 1994 (commencement of operations) to December 31, 1994 and for the years ended December 31, 1996 and 1995 and cumulative...... * Consolidated Statements of Cash Flows for the period March 23, 1994 (commencement of operations) to December 31, 1994, and for the years ended December 31, 1996 and 1995 and cumulative...... * Consolidated Statements of Partners' Capital and Subscriptions Receivable for the period March 23, 1994 (commencement of operations) to December 31, 1996...... * Notes to Consolidated Financial Statements...... *
* Incorporated herein by reference from the Annual Report on Form 10-K of Globalstar Telecommunications Limited for the year ended December 31, 1996, pages F-12 through F-29.
45 (a) 3. Exhibits
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* 2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as of April 15, 1996* 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** 2.4 First Amendment to Agreement for the Purchase and Sale of Assets, dated as of March 14, 1997, by and between AT&T Corp., or Seller, and Loral Space & Communications Ltd., as Buyer****** 3.1 Memorandum of Association* 3.2 Memorandum of Increase of Share Capital* 3.3 Second Amended and Restated Bye-laws* 3.4 Form of Schedule III to Second Amended and Restated Bye-laws relating to Registrant's 6% Series C Convertible Redeemable Preferred Stock+ 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent* 4.2 Indenture dated as of November 1, 1996 between the Registrant and The Bank of New York, as Trustee, relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006+ 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant* 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation* 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation* 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of March 6, 1996 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, San Giorgio S.p.A., Hyundai/Dacom, Loral/DASA Globalstar, L.P., Loral Globalstar L.P., TE.S.AM. and Vodastar Limited*** 10.5 Subscription Agreements by and between Globalstar, L.P. and each of AirTouch Communications, Alcatel SpaceCom, Loral General Partner, Inc., Hyundai/Dacom, Vodastar Limited, Loral/Qualcomm Satellite Services, L.P. and Finmeccanica S.p.A.**** 10.6 Service Provider Agreements by and between Globalstar, L.P. and each of AirTouch Satellite Services, Finmeccanica S.p.A., Loral General Partner, Inc., Loral/DASA Globalstar, L.P., Hyundai/Dacom, TE.S.AM. and Vodastar Limited**** 10.7 Development Agreement by and between Qualcomm Incorporated and Globalstar, L.P.**** 10.8 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.**** 10.9 Revolving Credit Agreement dated as of December 15, 1995, as amended on March 25, 1996, among Globalstar, certain banks parties thereto and Chemical Bank, as Administrative Agent*** 10.10 Lockheed Martin Guarantee of Globalstar Credit Agreement* 10.11 1996 Stock Option Plan*++ 10.12 Common Stock Purchase Plan for Non-Employee Directors*++ 10.13 Employment Agreement dated as of April 5, 1996 between the Registrant and Bernard L. Schwartz*++
46 EXHIBIT NUMBER DESCRIPTION ------10.14 Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Loral SpaceCom Corporation, Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership-Japan L.P.***** 10.15 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.***** 10.16 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006+ 10.17 SS/L Stockholders Agreement* 10.18 Exchange Agreement dated as of December 19, 1996 between the Registrant and Daimler-Benz Aerospace AG and Amendment No. 1 thereto, dated as of February 6, 1997+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+ 27 Financial Data Schedule (for SEC use only)+ 99 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report incorporated by reference in this Annual Report on Form 10-K from the Annual Report on Form 10-K of Globalstar Telecommunications Limited for the year ended December 31,1996. +
*Incorporated by reference to the Registrant's Registration Statement on Form 10 (No. 1-14180).
**Incorporated by reference to the Registrant's Form 8-K filed on September 25, 1996.
***Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456).
****Incorporated by reference to the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808).
*****Incorporated by reference to the Registrant's Form 8-K filed on August 9, 1996. ******Incorporated by reference to the Registrant's Form 8-K filed on March 28, 1997.
+Filed herewith.
++Management compensation plan.
47 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: BERNARD L. SCHWARTZ ------Bernard L. Schwartz (Chairman of the Board and Chief Executive Officer) Date: March 28, 1997
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.
SIGNATURES TITLE DATE ------
BERNARD L. SCHWARTZ Chairman of the Board, Chief Executive March 28, 1997 ------Officer and Director Bernard L. Schwartz
ROBERT B. HODES Director March 28, 1997 ------Robert B. Hodes
GERSHON KEKST Director March 28, 1997 ------Gershon Kekst
CHARLES LAZARUS Director March 28, 1997 ------Charles Lazarus
MALVIN A. RUDERMAN Director March 28, 1997 ------Malvin A. Ruderman
E. DONALD SHAPIRO Director March 28, 1997 ------E. Donald Shapiro
ARTHUR L. SIMON Director March 28, 1997 ------Arthur L. Simon
THOMAS J. STANTON JR. Director March 28, 1997 ------Thomas J. Stanton Jr.
DANIEL YANKELOVICH Director March 28, 1997 ------Daniel Yankelovich
MICHAEL P. DEBLASIO Principal Financial Officer March 28, 1997 ------Michael P. DeBlasio
HARVEY B. REIN Principal Accounting Officer March 28, 1997 ------Harvey B. Rein
48 INDEX TO FINANCIAL STATEMENTS
Loral Space & Communications Ltd.
Independent Auditors' Report...... F-2 Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996...... F-3 Consolidated Statements of Operations for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995...... F-4 Consolidated Statements of Shareholders' Equity/Invested Equity for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995...... F-5 Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995...... F-6 Notes to Consolidated Financial Statements...... F-7
Space Systems/Loral, Inc. Independent Auditors' Report...... F-18 Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996...... F-19 Consolidated Statements of Income for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995...... F-20 Consolidated Statements of Shareholders' Equity for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995...... F-21 Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995...... F-22 Notes to Consolidated Financial Statements...... F-23
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, 1996 and March 31, 1996 and the related consolidated statements of operations, shareholders' equity/invested equity and cash flows for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995. 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, 1996 and March 31, 1996, and the results of its operations and its cash flows for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP New York, New York February 24, 1997 (March 14, 1997 as to Note 10)
F-2 LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
DECEMBER 31, 1996 MARCH 31, 1996 ------ASSETS Current assets: Cash and cash equivalents...... $ 1,180,752 $ 12 Other current assets...... 29,555 ------Total current assets...... 1,210,307 12 Property, plant and equipment, net...... 17,939 -- Investments in affiliates...... 443,057 339,272 Other assets...... 28,023 9,800 Deferred income taxes...... -- 5,312 ------$ 1,699,326 $354,396 ======
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses...... $ 10,708 $ -- Accrued interest...... 6,000 -- Income taxes payable...... 2,311 -- Deferred income taxes...... 112 ------Total current liabilities...... 19,131 -- Deferred income taxes...... 4,611 -- Pension and other postretirement liabilities...... 19,723 -- Long-term liabilities...... 2,500 -- Convertible preferred equivalent obligations ($600,000 principal amount)...... 583,292 -- Commitments (Notes 3 and 10) Shareholders' equity: Series A convertible preferred stock, par value $.01; 150,000,000 shares authorized, 45,896,977 shares issued and outstanding at December 31, 1996...... 459 -- Series B preferred stock, par value $.01; 750,000 shares authorized and unissued...... -- -- Common stock, par value $.01; 750,000,000 shares authorized, 191,092,308 shares issued and outstanding at December 31, 1996; 12,000 shares at March 31, 1996...... 1,911 -- Paid-in capital...... 1,058,822 354,396 Retained earnings...... 8,877 ------Total shareholders' equity...... 1,070,069 354,396 ------$ 1,699,326 $354,396 ======
See notes to consolidated financial statements.
F-3 LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
YEARS ENDED MARCH NINE 31, MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------Management fee from affiliate...... $ 5,088 $ 5,608 $ 3,169 Costs and expenses, net...... (17,289) -- -- Allocated costs and expenses, net...... -- (3,021) (3,202) Interest income...... 34,699 -- -- Gain on exchange of affiliate's debentures...... -- -- 11,514 Interest expense...... (6,000) -- -- Allocated interest expense...... -- (10,524) (9,456) ------Income (loss) before income taxes and equity in net loss of affiliates...... 16,498 (7,937) 2,025 Provision (benefit) for income taxes...... 2,912 (2,780) 910 ------Income (loss) before equity in net loss of affiliates...... 13,586 (5,157) 1,115 Equity in net loss of affiliates...... (4,709) (8,628) (8,988) ------Net income (loss)...... $ 8,877 $(13,785) $(7,873) ======Earnings (loss) per share: Primary...... $ .04 $ (.08) ======Fully diluted...... $ .04 $ (.08) ======Weighted average shares outstanding: Primary...... 229,396 183,580 ======Fully diluted...... 229,396 183,580 ======
See notes to consolidated financial statements.
F-4 LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/INVESTED EQUITY NINE MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED MARCH 31, 1996 AND 1995
SERIES A CONVERTIBLE PREFERRED COMMON STOCK STOCK ------SHARES SHARES RETAINED PAID-IN INVESTED ISSUED AMOUNT ISSUED AMOUNT EARNINGS CAPITAL EQUITY ------(IN THOUSANDS) Balance March 31, 1994...... $ 159,198 Advances from Old Loral...... 100,494 Net loss...... (7,873) ------Balance March 31, 1995...... 251,819 Advances from Old Loral...... 116,362 Net loss...... (13,785) Incorporation of Loral Space & Communications Ltd...... 12 $ 354,396 (354,396) ------Balance March 31, 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...... $8,877 ------Balance December 31, 1996...... 191,092 $1,911 45,897 $459 $8,877 $1,058,822 $ -- ======
See notes to consolidated financial statements.
F-5 LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE YEARS ENDED MARCH 31, MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------Operating activities: Net income (loss)...... $ 8,877 $ (13,785) $ (7,873) Equity in net loss of affiliates...... 4,709 8,628 8,988 Tax benefit of Globalstar partnership losses...... -- 8,308 7,083 Deferred taxes...... (926) (4,470) (5,123) Depreciation and amortization...... 1,051 -- -- Gain on exchange of affiliate's debentures...... -- -- (11,514) Receivable from SS/L...... (9,252) -- -- Other changes in operating assets and liabilities...... (7,462) ------Cash used in operating activities...... (3,003) (1,319) (8,439) ------Investing activities: Payment for Globalstar service provider rights.... -- (9,800) -- Proceeds from sale of property, plant and equipment...... 5,003 -- -- Cash received on exchange of affiliate's debentures...... -- -- 11,514 Investment in affiliates...... (6,425) (105,231) (103,569) Capital expenditures...... (540) ------Cash used in investing activities...... (1,962) (115,031) (92,055) ------Financing activities: Proceeds from convertible preferred equivalent obligations...... 583,292 -- -- Proceeds from the Distribution...... 612,274 -- -- Transaction costs related to the Distribution..... (12,286) -- -- Advances from Loral Corporation prior to the Distribution...... 2,425 116,362 100,494 ------Cash provided by financing activities...... 1,185,705 116,362 100,494 ------Increase in cash and cash equivalents...... 1,180,740 12 -- Cash and cash equivalents -- beginning of period.... 12 ------Cash and cash equivalents -- end of period...... $ 1,180,752 $ 12 $ -- ======Non-cash investing and financing activities: Assets transferred from Loral Corporation at the Distribution...... $ 31,383 ======Liabilities assumed from Loral Corporation at the Distribution...... $ 27,313 ======Acquisition of the interest in SS/L held by certain partnerships affiliated with Lehman Brothers: Issuance of Loral common stock...... $ 100,313 ======Transfer of GTL common stock, at cost..... $ 5,158 ======Supplemental information: Income taxes paid during the period...... $ 1,528 ======
See notes to consolidated financial statements.
F-6 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF LORAL SPACE & COMMUNICATIONS LTD.
Loral Space & Communications Ltd. and its subsidiaries (the "Company" or "Loral") is one of the world's leading satellite communications companies, with substantial interests in both the manufacture and operation of geosynchronous ("GEO") and low-earth orbit ("LEO") satellite systems. Loral manages and will soon own 100% of Space Systems/Loral, Inc. ("SS/L"), one of the world's leading manufacturers of space systems. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), a system of LEO satellites expected to be placed in service in 1998 that will support digital telephone service to handheld and fixed terminals worldwide. Loral, together with its partners, will act as Globalstar service providers in Canada, Brazil and Mexico and, with Qualcomm, Inc. ("Qualcomm") holds the exclusive right to provide in-flight phone service using Globalstar in the United States. In addition, on March 14, 1997 Loral purchased Skynet Satellite Services ("Skynet"), the third largest domestic satellite service provider, from AT&T (See Note 10). Loral also holds FCC licenses for two orbital slots overlooking the Western Hemisphere, which it intends to use in conjunction with the Skynet business.
Loral was formed to effectuate the distribution of Loral Corporation's ("Old Loral") space and telecommunications 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"). Certain other assets and liabilities of Old Loral were transferred to Loral at the Distribution. The Distribution of approximately 183.6 million shares of Loral common stock was made on April 23, 1996 (the "Distribution Date"). 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. Such stock is subject to certain voting limitations, restrictions on transfer and standstill provisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Loral Space & Communications Ltd. operates under a December 31 year-end. For the nine months ended December 31, 1996, the consolidated financial statements include the accounts of Loral Space & Communications Ltd. and its subsidiaries. All intercompany transactions have been eliminated.
The space and communications operations of Old Loral (the "Space & Communications Operations") operated under a March 31 year-end. For the years ended March 31, 1996 and 1995, the consolidated financial statements reflect that portion of the space and communications assets and operations included in Old Loral's historical financial statements that were spun-off to Loral. Certain other non-operating assets of Old Loral were distributed to Loral on the Distribution Date. However, those assets, consisting of certain fixed assets and other miscellaneous assets, were not included in the March 31, 1996 and 1995 financial statements since those assets had been used principally in the Old Loral operations acquired by Lockheed Martin.
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.
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 interests. Intercompany profits arising from transactions between affiliates are eliminated to the extent of the Company's beneficial interests. Equity in losses of affiliates is not recognized after the carrying value has been reduced to zero, unless guarantees or other obligations exist.
F-7 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Allocation of Certain Expenses
For the years ended March 31, 1996 and 1995, the results of operations include allocations and estimates of certain expenses of Loral based upon estimates of actual services performed by Old Loral on behalf of Loral. The amount of corporate office expenses reflected in these financial statements has been estimated based primarily on the allocation methodology prescribed by government regulations pertaining to government contractors, which management of Loral believes to be a reasonable allocation method. However, the financial position and results of operations, as presented herein may not be the same as would have occurred had the Space & Communications Operations been an independent entity.
Interest Expense
For the years ended March 31, 1996 and 1995, interest was allocated to Loral based upon Old Loral's historical weighted average debt cost applied to the average investment in affiliates, which management believes to be a reasonable allocation method. Interest expense related to Old Loral's investment in Globalstar was capitalized because Globalstar has not commenced commercial operations.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 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".
Income Taxes
Commencing with the Distribution, Loral Space and Communications Ltd. is 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.
For the years ended March 31, 1996 and 1995, the Space & Communications Operations were included in the consolidated U.S. Federal income tax return and certain combined and separate state and local income tax returns of Old Loral. However, for purposes of these financial statements, the provision (benefit) for income taxes is computed as if the Space & Communications Operations were a separate taxpayer. Accordingly, the provision (benefit) for income taxes is based upon reported income (loss) before income taxes. Current income tax liabilities (benefits) are considered to have been paid (received) by Old Loral and are recorded through the invested equity account with Old Loral.
Deferred income taxes for all periods presented 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.
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.
Earnings Per Share
Primary earnings per share is computed based upon the weighted average number of shares of common stock and common equivalent shares (Series A Convertible Preferred Stock) outstanding. For the nine months ended December 31, 1996, the impact on fully diluted earnings per share assuming the conversion of certain convertible securities and giving effect to the resultant reduction in interest costs is antidilutive,
F-8 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) resulting in the fully diluted amount equalling the primary amount. Earnings per share for the year ended March 31, 1996 is computed based on the number of shares issued to Old Loral's shareholders in the Distribution.
3. INVESTMENTS IN AFFILIATES
Investments in affiliates is summarized as follows (in thousands):
DECEMBER 31, 1996 MARCH 31, 1996 ------SS/L...... $ 267,418 $144,051 Globalstar...... 175,639 195,221 K&F...... 23,568 22,937 Deferred K&F gain...... (23,568) (22,937) ------$ 443,057 $339,272 ======
Equity in net income (loss) of affiliates consists of (in thousands):
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------SS/L...... $ 13,396 $ 4,044 $ 1,816 Globalstar...... (18,105) (20,980) (17,887) Tax benefit of Globalstar partnership losses..... -- 8,308 7,083 ------$ (4,709) $ (8,628) $ (8,988) ======
As discussed in Note 6, the tax benefit of Globalstar partnership losses is not applicable for the nine months ended December 31, 1996.
F-9 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED) The following table presents summary financial data for SS/L and K&F at December 31, 1996 and March 31, 1996 and 1995 and for the periods then ended (in thousands):
YEARS ENDED MARCH 31, ------NINE MONTHS ENDED DECEMBER 31, 1996 1996 1995 ------SS/L K&F SS/L K&F SS/L K&F ------STATEMENT OF OPERATIONS DATA: Revenues...... $1,017,653 $212,703 $1,121,619 $264,736 $633,717 $238,756 Operating income...... 54,011 42,160 22,054 41,555 17,872 36,077 Income (loss) before loss on retirement of debt...... 31,025 15,044 12,367 507 5,554 (10,173) Net income (loss)...... 31,025 5,902 12,367 (1,406) 5,554 (10,173)
MARCH 31, ------DECEMBER 31, 1996 1996 1995 ------SS/L K&F SS/L K&F SS/L K&F ------BALANCE SHEET DATA: Cash and cash equivalents...... $ 19,181 $ 1,508 $ 126,863 $ 2,412 $ 52,222 $ 8,493 Working capital...... 143,581 34,189 87,179 36,327 31,277 48,025 Total assets...... 1,059,064 419,115 908,677 416,037 766,475 429,074 Long-term debt...... 127,586 287,000 65,052 294,000 34,040 310,000 Shareholders' equity (deficiency).... 478,893 (33,306) 447,868 (39,701) 435,501 (34,748)
The following table presents summary financial data for Globalstar at December 31, 1996, 1995 and 1994 and for the periods then ended (in thousands):
CUMULATIVE YEAR ENDED MARCH 23, 1994 MARCH 23, 1994 DECEMBER 31, (COMMENCEMENT (COMMENCEMENT ------OF OPERATIONS) TO OF OPERATIONS) TO 1996 1995 DECEMBER 31, 1994 DECEMBER 31, 1996 ------STATEMENT OF OPERATIONS DATA: Revenues...... $ -- $ -- $-- $-- Operating loss...... 61,025 80,226 28,027 169,278 Interest income...... 6,379 11,989 1,783 20,151 ------Net loss...... 54,646 68,237 26,244 149,127 Preferred distributions...... 17,323 -- -- 17,323 ------Net loss applicable to ordinary partnership interests...... $71,969 $68,237 $26,244 $166,450 ======
DECEMBER 31, ------1996 1995 1994 ------Balance sheet data: Cash and cash equivalents...... $21,180 $71,602 $73,560 Working capital (deficiency)...... (53,481) 17,687 35,423 Globalstar System Under Construction...... 891,033 400,257 71,996 Total assets...... 942,913 505,391 151,271 Vendor financing liability...... 130,694 42,219 -- Borrowings under long-term revolving credit facility...... 96,077 -- -- Redeemable preferred partnership interests...... 302,037 -- -- Ordinary partners' capital...... 315,186 386,838 112,944
SS/L
SS/L, a company owned by Loral and four international aerospace and communications companies (the "Alliance Partners"), designs and produces GEO and LEO satellites and subsystems for communications, F-10 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED) remote earth sensing and direct-to-home broadcast television. At March 31, 1996, Loral had an effective 32.7% interest in SS/L. 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%. As of February 12, 1997, Loral had agreed to acquire the 49% interest in SS/L held by the four Alliance Partners for $374 million of which $93 million will be paid in cash and the balance in Loral common stock and convertible preferred equivalent obligations. Following the sale, three of the Alliance Partners will retain their representation on the SS/L Board of Directors. Accordingly, in 1997, Loral expects to discontinue the use of the equity method of accounting for SS/L and will consolidate SS/L's financial position and results of operations in its financial statements.
SS/L, its shareholders and Loral have entered into a 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, $5,608,000 and $3,169,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively.
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, $3,427,000 and $3,287,000 for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively.
At December 31, 1996, Loral has included in other current assets $9,252,000 due from SS/L primarily related to these management fees and overhead reimbursement.
GLOBALSTAR
In March 1994, Loral and seven other partners made capital commitments totaling $275,000,000 to Globalstar, a limited partnership of which Loral is the managing general partner, which is building and preparing to launch and operate a worldwide LEO satellite-based digital telecommunications system (the "Globalstar System"). On January 31, 1995, the U.S. Federal Communications Commission issued a license to construct, launch and operate the Globalstar System. The Globalstar System, consisting of a constellation of 48 LEO satellites and 8 in-orbit spares, will offer voice, data, paging and geolocation services to both handheld and fixed terminals. Loral, as the managing general partner of Globalstar, is entitled to receive a managing partner's allocation, upon commencement of commercial operations, determined in accordance with the partnership agreement.
At March 31, 1996 and 1995, Loral had a 32.3% interest in Globalstar. In 1995, Globalstar received $186 million in equity from GTL, a public company that acts as a general partner of Globalstar in which Loral invested $32,316,000 for 1,674,400 shares of common stock of GTL. In August 1996, 267,256 shares were transferred to the Lehman Partnerships as part of the SS/L transaction described above. At December 31, 1996, the market value, based on the last reported sales price of Loral's GTL common shares, was $88.7 million. At December 31, 1996, Loral had an effective ownership of 14,921,144 ordinary partnership interests of the total 47,000,000 Globalstar ordinary partnership interests outstanding (31.7%). At December 31, 1996, Loral's investment in Globalstar includes $10.3 million of capitalized costs, primarily interest. In March 1996, Loral purchased $100,000,000 principal amount of GTL 6 1/2% Convertible Preferred Equivalent Obligations, due 2006 par value $50 per share, ("GTL CPEOs") for $97,000,000. In April 1996, Loral purchased an additional $2.5 million principal amount of the GTL CPEOs for $2,425,000. Such amounts are included in the investment in Globalstar. The GTL CPEOs must be redeemed by GTL on March 1, 2006. Loral, at its option, may convert its holdings of GTL's CPEO's into 1,576,923 shares of GTL common stock
F-11 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED) subject to adjustment for certain anti-dilution provisions. Loral's interest income for the nine months ended December 31, 1996 includes $5.5 million related to its investment in GTL CPEOs.
On September 14, 1995, Loral, in its capacity as managing general partner of Globalstar, granted certain officers options to purchase 140,000 shares of the GTL common stock owned by Loral at an exercise price of $20.00 per share. On December 12, 1995, Loral, in its capacity as managing general partner, granted non-employee directors of Loral options to purchase 200,000 shares of the GTL common stock owned by Loral at an exercise price of $33.375 per share. These options are immediately exercisable and expire 12 years from date of grant; no options were exercised or cancelled during the year.
On October 9, 1996, Loral, in its capacity as managing general partner, granted certain officers options to purchase 152,000 shares of the GTL common stock owned by Loral at an exercise price of $25.00 per share. Such options vest over a three-year period and expire 10 years from date of grant; no options were exercised or cancelled during the year.
On December 15, 1995, Globalstar entered into a $250 million credit agreement (the "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 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 4,185,318 shares of GTL common stock at $26.50 per share as follows: Loral 942,428 warrants, Lockheed Martin 2,511,190 warrants, SS/L 195,094 warrants and certain other Globalstar partners 536,606 warrants. Proceeds received from the exercise of the warrants will be used to purchase Globalstar ordinary partnership interests under a one-for-one exchange arrangement. As part of this transaction, Globalstar issued warrants to GTL to purchase an additional 1,131,168 ordinary partnership interests of Globalstar at $26.50 per interest.
On February 12, 1997, GTL and the holders of the warrants entered into an arrangement under which GTL agreed to accelerate the vesting and exercisability of the warrants to purchase 4,185,318 shares of GTL common stock at $26.50 per share and the holders agreed to exercise such warrants. GTL agreed to register for resale the GTL common stock issuable upon exercise of the warrants. In addition, GTL announced its intention to distribute to the holders of its common stock rights to subscribe for and purchase 1,131,168 GTL shares for a price of $26.50 per share of which Loral will receive rights to purchase 159,172 shares. Loral agreed to purchase all shares not purchased upon exercise of the rights. Upon the exercise of the warrants and the rights, GTL will receive proceeds of approximately $140.9 million, which it will use to exercise its warrants to purchase 5,316,486 Globalstar ordinary partnership interests at $26.50 per interest.
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.
Globalstar has awarded SS/L the prime contract to design, construct and launch the satellite constellation. SS/L has awarded and expects to award subcontracts to third parties, including other investors in Globalstar, for substantial portions of its obligations under the contract. At December 31, 1996, SS/L had a 4.2% interest in Globalstar.
The Globalstar System has an estimated total cost of $2.5 billion for capital expenditures, development costs and operating costs through the end of 1998, when full commercial service is scheduled to commence. As of February 13, 1997, Globalstar had raised or received commitments for approximately $2.0 billion, including the $310 million of vendor financing arrangements with SS/L and its subcontractors. Globalstar intends to raise the remaining funds required for the Globalstar System from a combination of sources, including debt issuance (which may include an equity component), financial support from the Globalstar
F-12 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED) partners, projected service provider payments, projected net service revenues from initial operations and anticipated payments from the sale of gateways and Globalstar phones.
In addition, Globalstar will purchase from SS/L eight additional spare satellites that will increase Globalstar's ability to have at least 40 satellites in service during 1999, even in the event of launch failures. If the launch program is successful, the additional satellites will serve as ground spares, readily available for launch to replenish the constellation as needed in response to satellite attrition during the first generation, or to increase system capacity as required. If Globalstar were to experience a launch failure, the costs associated with the construction and launch of replacement satellites would be substantially covered by insurance, and in that event the cost of the additional satellites used as replacements, currently estimated at $175 million, would be reimbursed to Globalstar.
K&F
In 1989, Old Loral sold certain of its divisions to K&F for $430,000,000 in cash and a $30,000,000 14.75% pay-in-kind Subordinated Debenture due 2004 (the "Debenture"). K&F was formed specifically to effect the purchase of these divisions through the issuance of approximately $400,000,000 of debt, including the Debenture, and $65,000,000 of equity. Because K&F was highly leveraged, uncertainties existed at the time regarding the ultimate collectibility of the Debenture and, accordingly, Old Loral deferred any gain recognition from the sale relating to the Debenture, as well as any pay-in-kind interest earned on the Debenture. In September 1994, the Debenture was exchanged for $11,514,000 in cash, net of expenses, and a 22.5% voting equity interest in K&F. The cash proceeds were recorded as a non-recurring gain representing the receipt of sale proceeds deferred in the 1989 transaction. The 22.5% voting equity interest was recorded at estimated fair value, determined by independent investment bankers engaged by the Old Loral Board of Directors. Old Loral's interest in K&F was transferred to Loral at the Distribution.
Based on the financial position of K&F at the time of the exchange, Loral has continued to record a deferred gain for the $25,000,000 estimated fair value of the stock received. Loral is using the equity method of accounting for its investment in K&F and accordingly, both the investment in K&F and the related deferred gain have been adjusted by Loral's share of net loss and amortization, over a 35-year period, of goodwill inherent in the fair value recorded. However, no equity income will be recognized until K&F has positive net worth. The Chairman of Loral is a principal shareholder of K&F and after the exchange owns approximately 27% of K&F. In addition, certain executive officers of Loral own rights to purchase approximately 2% of K&F's capital stock.
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1996 ------(IN THOUSANDS) Equipment, furniture and fixtures...... $20,083 Leasehold improvements...... 171 ------20,254 Accumulated depreciation...... (2,315) ------$17,939 ======
Depreciation and amortization expense was $1,051,000 for the nine months ended December 31, 1996. No depreciation expense was allocated to the Space & Communications Operations of Old Loral for the years ended March 31, 1996 and 1995.
5. CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS
On November 1, 1996, the Company sold $600,000,000 of 6% Convertible Preferred Equivalent Obligations (the "CPEOs") which, upon approval of the Company's shareholders, will be mandatorily exchanged into shares of the Company's 6% Series C Convertible Redeemable Preferred Stock ("Series C
F-13 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock") resulting in a reclassification of these amounts into shareholders' equity. The Series C Preferred Stock will have an aggregate liquidation preference equal to the aggregate principal amount of the CPEOs and a mandatory redemption date of November 1, 2006. The Series C Preferred Stock will be convertible into shares of common stock of the Company at any time after 60 days from the date of the original issuance of such stock at a conversion price of $20 per share.
The Series C Preferred Stock will be redeemable in cash or Loral common stock at any time, in whole or in part, at the election of the Company (at a premium which declines over time) commencing November 5, 1999.
6. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------Current: U.S. Federal...... $2,913 $(5,772) $ 3,730 State and local...... 925 (660) 426 ------3,838 (6,432) 4,156 Deferred, principally U.S. Federal...... (926) 3,652 (3,246) ------Total provision (benefit) for income taxes...... $2,912 $(2,780) $ 910 ======
The provision for income taxes excludes a current tax benefit of $186,000 and $5,206,000 for the years ended March 31, 1996 and 1995, respectively, and a deferred tax benefit of $8,122,000 and $1,877,000 for the years ended March 31, 1996 and 1995, respectively, related to the Globalstar partnership loss included in equity in net loss of affiliates.
The effective income tax rate differs from the statutory Federal income tax rate for the following reasons:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------Statutory U.S. Federal income tax rate...... 35.0% (35.0)% 35.0% Foreign source income taxed at lower rate.... (21.3) -- -- State and local income taxes, net of Federal income tax...... 3.0 (4.0) 4.0 Undistributed income of affiliates...... -- 4.0 7.0 Other, net...... 1.0 -- (1.1) ------Effective income tax rate...... 17.7% (35.0)% 44.9% ======
For the nine months ended December 31, 1996, income before income taxes includes approximately $10 million of foreign source income.
At December 31, 1996, the deferred tax liability relates primarily to the tax effect of the temporary differences between the carrying amount of U.S.-based property, plant and equipment for financial and income tax reporting. At March 31, 1996, the deferred tax asset relates primarily to the tax effect of the temporary differences between the carrying amount of investments in affiliates for financial and income tax reporting, which are no longer applicable as a result of the formation of the Company in Bermuda.
7. SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock: The Company has authorized 150,000,000 shares of $.01 par value Series A convertible preferred stock. At December 31, 1996, 45,896,977 shares were issued and outstanding. Significant terms of the Series A Convertible Preferred Stock include voting rights restricted to only selected matters such as merger, liquidation or sale of the Company; 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.
F-14 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY -- (CONTINUED) Series B Preferred Stock: The Company has 750,000 authorized and unissued shares of $.01 par value 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.
Common Stock: The Company has 750,000,000 authorized shares of $.01 par value common stock. There were 191,092,308 and 12,000 shares issued and outstanding at December 31, 1996 and March 31, 1996, respectively.
Stock Plans: In April 1996, the Company established the 1996 Stock Option Plan. An aggregate of 12,000,000 shares of common stock were 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.
In April 1996, the Company established the Common Stock Purchase Plan for Non-Employee Directors. Under the terms of the plan, each non- employee director of Loral is entitled to make an election to defer up to 100% of such director's annual fees and have such amounts credited to a deferral account maintained under the plan. The balance in the deferral account will be used to purchase Loral common stock. Participation in the plan is voluntary, and all amounts are fully vested. 200,000 shares of Loral common stock were reserved for issuance under this plan. As of December 31, 1996, no shares have been issued under this plan.
As discussed in Note 2, the Company continues to account 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. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net income and earnings per share had the Company 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 1996: expected life, 6 months following vesting; stock volatility, 25%; risk free interest rate, 6.25%; 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 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 income would have decreased by $4,229,000 ($.02 per share) to $4,648,000 ($.02 per share) for the nine months ended December 31 1996.
A summary of the status of the Company's stock option plans as of December 31, 1996 and changes during the period then ended is presented below:
WEIGHTED- AVERAGE SHARES EXERCISE (000) PRICE ------Outstanding at March 31, 1996...... -- $ -- Granted (weighted average fair value $2.93 per share)...... 6,412,000 10.60 Exercised...... -- -- Forfeited...... 500 10.50 ------Outstanding at December 31, 1996...... 6,411,500 10.60 ======Options exercisable at December 31, 1996...... 1,200,000 10.50
F-15 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY -- (CONTINUED) The weighted average remaining contractual life of options outstanding as of December 31, 1996 was 9.3 years. All options granted during the year were non-qualified stock options. As of December 31, 1996, 5,588,500 shares of common stock were available for future grant under the Plan.
8. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions: In April 1996, the Company established a noncontributory pension plan and a supplemental retirement plan. Eligibility for participation in these plans vary and benefits are based on members' compensation and 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. The Company's funding policy is to fund the noncontributory pension plan in accordance with the Internal Revenue Code and regulations thereon and to fund the supplemental retirement plan on a pay-as-you-go basis. 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.
Pension cost for the nine months ended December 31, 1996 includes the following components (in thousands):
Service cost-benefits earned during the period...... $ 268 Interest cost on projected benefit obligation...... 1,410 Actual return on plan assets...... (499) Net amortization and deferral...... (77) ------Total pension cost...... $1,102 ======
The following presents the plan's funded status and amounts recognized in the balance sheet at December 31, 1996 (in thousands):
Actuarial present value of benefit obligations: Vested benefits...... $27,831 ======Accumulated benefits...... $27,845 Effect of projected future salary increases...... 694 ------Projected benefits...... 28,539 Plan assets at fair value...... 9,450 ------Projected benefit obligation in excess of plan assets...... 19,089 Unrecognized net gain...... 445 ------Pension liability...... $19,534 ======
The principal actuarial assumptions were:
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 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.
F-16 LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED) Postretirement health care and life insurance costs for the nine months ended December 31, 1996 include the following components (in thousands):
Service cost - benefits earned during the period...... $13 Interest cost on accumulated postretirement benefit obligation...... 9 --- Total postretirement health care and life insurance costs...... $22 ===
At December 31, 1996, the total accumulated postretirement benefit obligation was $178,000. Actuarial assumptions used in determining the accumulated postretirement benefit obligation include a discount rate of 7.75% at December 31, 1996, and an assumed health care cost trend rate of 10.59% decreasing gradually to an ultimate rate of 5.50% by the year 2004. Changing the assumed health care cost trend rate by 1% in each year would not be significant.
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 cash for the nine months ended December 31, 1996 were $55,000.
9. FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet at December 31, 1996 include cash and cash equivalents and Convertible Preferred Equivalent Obligations. Due to their short maturity, the fair value of cash and cash equivalents approximates carrying value. The fair value of the Company's Convertible Preferred Equivalent Obligations, based on quoted market prices, was approximately $681 million.
10. SUBSEQUENT EVENT
On March 14, 1997, Loral purchased Skynet from AT&T for $478 million in cash, subject to a dollar-for-dollar adjustment to the extent that Skynet's net assets delivered on the closing date, measured in accordance with the Asset Purchase Agreement, are more or less than $418 million. The Company used existing cash to initially fund the transaction. Skynet is a leading U.S. satellite communications service provider that owns the Telstar satellite network.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED ------JUNE 30, SEPTEMBER 30, DECEMBER 31, ------(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NINE MONTHS ENDED DECEMBER 31, 1996 Revenues...... $ 1,538 $ 1,837 $ 1,713 Income before income taxes and equity in net loss of affiliates...... 5,998 4,422 6,078 Net income...... 1,301 2,953 4,623 Earnings per share...... 0.01 0.01 0.02 Market Price High...... 18 1/2 16 5/8 19 5/8 Low...... 10 1/2 11 1/8 15 1/4
QUARTER ENDED ------JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, ------YEAR ENDED MARCH 31, 1996 Revenues...... $ 857 $ 1,589 $ 1,395 $ 1,767 Loss, before income taxes and equity in net loss of affiliates...... (2,377) (2,153) (1,458) (1,949) Net income (loss)...... (4,016) (4,778) (6,461) 1,470 Earnings (loss) per share...... (.02) (.03) (.04) .01
F-17 INDEPENDENT AUDITORS' REPORT
Space Systems/Loral, Inc.:
We have audited the accompanying consolidated balance sheets of Space Systems/Loral, Inc. and its subsidiaries as of December 31, 1996 and March 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the nine months ended December 31, 1996 and for each of the two years in the period ended March 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 audits.
We conducted our audits 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 financial position of Space Systems/Loral, Inc. and its subsidiaries at December 31, 1996 and March 31, 1996, and the results of their operations and their cash flows for the nine months ended December 31, 1996 and for each of the two years in the period ended March 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP San Jose, California February 24, 1997 (March 14, 1997 as to the fourth paragraph of Note 4)
F-18 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31, 1996 1996 ------ASSETS Current assets: Cash and cash equivalents...... $ 19,181 $ 126,863 Contracts in process, net...... 376,847 251,271 Inventories...... 74,572 36,582 Deposits and other current assets...... 50,910 11,698 ------Total current assets...... 521,510 426,414 Property, plant and equipment, net...... 166,786 158,239 Cost in excess of net assets acquired, less amortization...... 227,604 232,662 Long-term receivables...... 90,005 63,127 Investments...... 15,000 6,284 Prepaid pension costs and other assets...... 38,159 21,951 ------$1,059,064 $ 908,677 ======
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable...... $ 122,549 $ 132,640 Accrued payroll...... 25,515 24,157 Customer advances...... 163,819 126,318 Income taxes payable...... 3,052 3,529 Deferred income taxes...... 54,360 45,364 Other current liabilities...... 8,634 7,227 ------Total current liabilities...... 377,929 339,235 Long-term debt...... 127,586 65,052 Deferred income taxes...... 37,787 20,944 Postretirement and other liabilities...... 34,879 33,463 Minority interest in ISTI...... 1,990 2,115
Commitments and contingencies (Notes 6, 8 and 9)......
Shareholders' equity: Preferred stock, $.10 par value; 100,000 authorized and unissued shares...... -- -- Common stock, $.10 par value; 100,000 shares authorized, 4,000 shares issued and outstanding...... 466,668 466,668 Retained earnings (accumulated deficit)...... 12,225 (18,800) ------Total shareholders' equity...... 478,893 447,868 ------$1,059,064 $ 908,677 ======
See notes to consolidated financial statements.
F-19 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------1996 1996 1995 ------Revenues...... $1,017,653 $1,121,619 $633,717 Costs and expenses...... 953,496 1,087,213 605,932 ------Gross profit...... 64,157 34,406 27,785 Amortization of cost in excess of net assets acquired...... 5,058 6,744 6,744 Management fee...... 5,088 5,608 3,169 ------Operating income...... 54,011 22,054 17,872 Interest income...... 9,179 9,652 4,538 Interest expense...... 3,098 3,301 3,214 ------Income before income taxes, minority interest and equity in net loss of affiliate...... 60,092 28,405 19,196 Provision for income taxes...... 27,643 15,180 11,946 ------Income before minority interest and equity in net loss of affiliate...... 32,449 13,225 7,250 Minority interest in losses of ISTI...... 125 151 360 Equity in net loss of Globalstar, net of tax benefit...... (1,549) (1,009) (2,056) ------Net income...... $ 31,025 $ 12,367 $ 5,554 ======
See notes to consolidated financial statements.
F-20 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEARS ENDED MARCH 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK RETAINED ------EARNINGS SHARES (ACCUMULATED ISSUED AMOUNT DEFICIT) TOTAL ------Balance March 31, 1994...... 4,000 $466,668 $ (36,721) $429,947 Net income...... -- -- 5,554 5,554 ------Balance March 31, 1995...... 4,000 466,668 (31,167) 435,501 Net income...... -- -- 12,367 12,367 ------Balance March 31, 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-21 SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE YEARS ENDED MARCH 31, MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------Cash flows from operating activities: Net income...... $ 31,025 $ 12,367 $ 5,554 Depreciation and amortization...... 23,242 29,993 29,468 Deferred income taxes...... 26,673 10,237 11,507 Minority interest in losses of ISTI...... (125) (151) (360) Equity in net loss of LQSS...... 1,549 1,009 2,056 Changes in operating assets and liabilities: Contracts in process, including long-term receivables...... (152,454) (58,092) 2,293 Inventories...... (37,990) (26,729) 9,919 Deposits and other current assets...... (39,212) 8,431 (13,359) Prepaid pension cost and other assets...... (16,208) 1,450 2,687 Accounts payable and other current liabilities...... (7,803) 79,450 27,539 Customer advances...... 37,501 10,368 39,685 Postretirement and other liabilities...... 317 (537) (1,150) ------Net cash (used in) provided by operating activities...... (133,485) 67,796 115,839 ------Investing activities: Capital expenditures...... (26,731) (24,167) (23,386) Investment in ABCN...... (10,000) -- -- Investment in Globalstar...... -- -- (3,600) Investment in Orion...... -- -- (5,000) ------Net cash used in investing activities...... (36,731) (24,167) (31,986) ------Financing activities: Proceeds from borrowings...... 290,408 100,740 151,791 Repayment of debt...... (227,874) (69,728) (210,000) ------Net cash provided by (used in) financing activities...... 62,534 31,012 (58,209) ------Net (decrease) increase in cash and cash equivalents...... (107,682) 74,641 25,644 Cash and cash equivalents, beginning of period...... 126,863 52,222 26,578 ------Cash and cash equivalents, end of period...... $ 19,181 $126,863 $ 52,222 ======Supplemental information: Interest paid, net of amounts capitalized...... $ 2,562 $ 2,440 $ 2,099 ======Income taxes paid...... $ 1,449 $ 1,501 $ 439 ======
See notes to consolidated financial statements.
F-22 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 9). 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.
Financial Instruments:
SS/L's financial instruments consist of cash equivalents, foreign exchange contracts, contracts-in-process, long-term receivables and long-term debt. Except as discussed in Note 4, SS/L believes that the carrying value of its financial instruments approximates fair value.
Concentration of Credit Risk and Major Customers:
Financial instruments which potentially subject SS/L to concentrations of credit risk consist principally of cash and cash equivalents, foreign exchange contracts (See Note 4) and contracts in process and long-term receivables ("Contract Receivables"). SS/L's cash and cash equivalents are maintained with high-credit-quality financial institutions. SS/L's customers are U.S. and foreign governments and large multinational corporations. The credit worthiness of such institutions is generally substantial and management believes that its credit evaluation, approval and monitoring processes mitigate potential credit risks. SS/L generally obtains insurance to mitigate collection risk associated with the in-orbit delivery of satellites.
Sales to the U.S. government represented 8%, 10% and 23% of revenues for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively. Sales to foreign customers, primarily in Asia, represented 25%, 27% and 15% of revenues for the nine months ended
F-23 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively. For the nine months ended December 31, 1996 two commercial customers represented 28% and 15% of revenues. For the year ended March 31, 1996, two commercial customers represented 30% and 13% of revenues. Four commercial customers represented 23%, 20%, 15% and 13% of revenues for the year ended March 31, 1995.
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.
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-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 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:
Property, plant and equipment are stated at cost. Generally, when assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in the results of operations. Depreciation 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
F-24 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) 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. Accumulated amortization was $41,882,000 and $36,825,000 at December 31, 1996 and March 31, 1996, respectively.
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 and for the two years ended March 31, 1996, there was no adjustment to the carrying amount of the Cost in Excess of Net Assets Acquired resulting from these evaluations.
2. CONTRACTS-IN-PROCESS:
DECEMBER 31, MARCH 31, 1996 1996 ------(IN THOUSANDS) U.S government contracts: Amounts billed...... $ 11,880 $ 11,374 Unbilled contract receivables...... 11,828 12,927 ------23,708 24,301 ------Commercial contracts: Amounts billed...... 145,447 122,313 Unbilled contract receivables...... 207,692 104,657 ------353,139 226,970 ------$376,847 $ 251,271 ======
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.
F-25 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS-IN-PROCESS: (CONTINUED) Payment terms and conditions vary between contracts, however, SS/L generally requires, for commercial contracts, advance deposits equal to varying percentages of the total contract amount.
Billed receivables relating to long-term contracts shown above are expected to be collected within one year. Upon launch of a satellite, SS/L reclassifies the orbital component of unbilled receivables expected to be collected beyond one year to long term. During the nine months ended December 31, 1996 and the year ended March 31, 1996, $26,878,000 and $10,227,000, respectively, were reclassified to long-term receivables. Long-term receivable balances related to satellite orbitals at December 31, 1996 are scheduled to be received as follows (in thousands):
1998...... $ 11,367 1999...... 11,413 2000...... 10,793 2001...... 10,783 Thereafter...... 45,649 ------$ 90,005 ======
Selling, general and administrative expenses for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995 were $45,231,000, $40,273,000 and $31,163,000 and include independent research and development costs of $16,274,000, $11,171,000 and $9,471,000, respectively.
3. PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31, MARCH 31, 1996 1996 ------(IN THOUSANDS) Land...... $ 22,300 $ 22,300 Buildings and improvements...... 65,448 58,721 Machinery, equipment, furniture and fixtures...... 178,137 167,406 Leasehold improvements...... 5,780 5,317 Construction-in-process...... 22,054 15,788 ------293,719 269,532 Accumulated depreciation...... (126,933) (111,293) ------$166,786 $ 158,239 ======
Depreciation and amortization expense was $18,184,000, $23,249,000 and $22,724,000 and capitalized interest costs were $97,000, $127,000 and $100,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively.
4. FINANCING ARRANGEMENTS:
Foreign currency exchange facilities:
At December 31, 1996 and March 31, 1996, SS/L had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $251,379,000 and $246,483,000, respectively. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed through May 2006. The fair value of these contracts, based on quoted market prices, was $215,625,000 and $217,382,000 at December 31, 1996 and March 31, 1996, respectively. At December 31, 1996, deferred gains on forward contracts to sell foreign currencies, primarily
F-26 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED) yen, were $25,296,000 and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $10,458,000. At March 31, 1996, deferred gains on forward contracts to sell yen were $23,995,000 and deferred losses on forward contracts to purchase foreign currency, primarily yen, were $5,106,000. At March 31, 1995, deferred losses on forward contracts to sell yen were $53,836,000 and deferred gains on forward contracts to purchase yen were $2,088,000. SS/L 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 at December 31, 1996 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 CONTRACT MARKET CONTRACT MARKET TO MATURITY RATE RATE RATE RATE ------1...... $ 96,690 $ 87,513 $ 54,605 $ 45,292 2 to 5...... 19,873 18,592 62,435 49,933 6 to 10...... -- -- 17,776 14,295 ------$116,563 $106,105 $134,816 $109,520 ======
Debt
Long-term debt consists of:
DECEMBER 31, MARCH 31, 1996 1996 ------(IN THOUSANDS) Revolving credit agreement (weighted average annual interest rate of 8.25%)...... $ 59,000 $ 7,000 Note purchase facility (weighted average annual interest rate of 4.26%)...... 49,276 25,868 Export -- Import credit facility (weighted average annual interest rate of 5.63% and 5.8%, respectively)...... 19,310 32,184 ------$127,586 $65,052 ======
SS/L has a $250,000,000 revolving credit facility, as amended, ("the Revolving Credit Agreement") with a group of banks, which provides for borrowings and letters of credit through January 1, 1999 at which time the Revolving Credit Agreement expires. Borrowings are unsecured and bear interest, at SS/L's option, at various rates based on the lead bank's prime rate, or margins over the Federal Funds rate or the London Interbank Offer Rate ("LIBOR"). SS/L pays a commitment fee on the unused portion of the Revolving Credit Agreement. The Revolving Credit Agreement contains customary covenants requiring SS/L to maintain specified net worth and debt to equity ratios, an interest coverage ratio and a current asset to debt ratio. In addition, the Revolving Credit Agreement limits amounts that may be paid as dividends and advances to and from affiliates.
F-27 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED) In 1994 SS/L entered into a $140,000,000 note purchase facility (the "Note Purchase Facility") with an Italian bank. Borrowings are determined by formula and are made in accordance with a specified schedule through the earlier of June 30, 1998, or until the facility is fully disbursed. 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. All borrowings under this facility reduce the amount available under SS/L's Revolving Credit Agreement.
SS/L borrowed a total of $42,912,000 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. At December 31, 1996, no amounts remained available for borrowing under this facility. 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.
The aggregate maturities of long-term debt for the calendar years 1998 through 2001 are as follows: $2,146,000, $61,146,000, $51,422,000 and $2,146,000.
SS/L has other outstanding letters of credit of approximately $42,562,000 at December 31, 1996.
5. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------(IN THOUSANDS) Current: Federal...... $ 683 $ 1,836 $ -- State, local & foreign...... 287 3,107 ------970 4,943 -- Deferred, principally federal...... 26,673 10,237 11,946 ------Total...... $ 27,643 $15,180 $11,946 ======
The provision for income taxes excludes a deferred tax benefit of $834,000, $544,000 and $1,107,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively, related to SS/L's share of Globalstar, L.P. losses (see Note 6).
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:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------(IN THOUSANDS) Provision at statutory federal income tax rate...... $ 21,032 $ 9,942 $ 6,719 State income taxes, net of federal income tax benefit...... 4,042 2,219 1,767 Non-deductible goodwill amortization...... 1,770 2,360 2,360 Losses of ISTI...... 229 330 875 Non-deductible meals, entertainment and lobbying expense...... 370 208 275 Other...... 200 121 (50) ------Total provision for income taxes..... $ 27,643 $15,180 $11,946 ======
F-28 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES: (CONTINUED) Deferred income taxes have been calculated using an asset and liability method. The deferred tax liability on the accompanying balance sheet arises from the tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes, and is principally related to use of the long-term contract method of accounting for tax purposes, the liability for other postretirement benefits and differences in tax and book bases of assets and liabilities acquired.
At December 31, 1996, the reported deferred tax liability is net of future tax benefits of $7,288,000 arising from net operating loss carryforwards which expire beginning in 2008. Tax carryforward benefits will be used in the periods that net deferred tax liabilities mature.
The significant components of the deferred income tax assets and liabilities are:
DECEMBER 31, MARCH 31, 1996 1996 ------(IN THOUSANDS) Deferred tax assets: Postretirement benefits other than pensions...... $ 13,849 $13,719 Net operating loss carryforwards...... 7,288 6,864 Compensation and benefits...... 3,842 4,681 Other, net...... 3,464 4,376 ------28,443 29,640 Deferred tax liabilities: Income recognition on long-term contracts...... 86,761 60,315 Property, plant and equipment...... 25,059 26,869 Pension costs...... 8,770 8,764 ------120,590 95,948 ------Net deferred income tax liability...... $ 92,147 $66,308 ======
6. 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 and March 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 and operate a worldwide, low-earth-orbit satellite-based digital telecommunications system. SS/L's investment has been reduced by $2,383,000, $1,553,000 and $3,163,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively, 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 and the
F-29 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS: (CONTINUED) years ended March 31, 1996 and 1995 was $280,627,000, $336,977,000, and $97,258,000, respectively. Billed and unbilled receivables from Globalstar were $22,572,000 and $130,694,000 and $10,082,000 and $72,535,000 at December 31, 1996 and March 31, 1996, respectively.
Globalstar's space segment contract with SS/L calls for approximately $310 million of the contract billings to be deferred as vendor financing. Of the $310 million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per annum. The remaining $220 million of vendor financing is non-interest bearing. Globalstar will repay the non-interest bearing portions as follows: $49 million following the launch and acceptance of 24 or more satellites (the "Preliminary Constellation"), $61 million upon the launch and acceptance of 48 or more satellites (the "Full Constellation"), and the remainder in equal installments over the five-year period following acceptance of the Preliminary and Full Constellations. SS/L's subcontractors have assumed a portion of this vendor financing which totals approximately $121 million and will be paid on similar terms. Payment of the $90 million interest bearing vendor financing will be deferred until December 31, 1998 or the Full Constellation Date, whichever is earlier. Thereafter, interest and principal will be repaid in twenty equal quarterly installments over the next five years.
At December 31 and March 31, 1996, $130.7 million and $61.6 million, respectively, was due under this arrangement, of which $72.0 million and $33.8 million, respectively, of the vendor financing receivable was interest bearing.
SS/L has guaranteed approximately $11,700,000 of Globalstar's obligation under a $250,000,000 credit agreement. In return for providing such guarantee, SS/L received warrants to purchase 195,094 shares of Globalstar Telecommunications Limited ("GTL") common stock at $26.50 per share. On February 12, 1997, SS/L agreed to exercise these warrants in connection with arrangements reached by GTL with the other warrant holders.
In April 1994, SS/L purchased common stock representing a five percent interest in Orion Network Systems, Inc. for $5,000,000. In May 1996, SS/L purchased common stock representing a 4.8% interest in Asia Broadcasting and Communications Network Public Company Limited for $10 million. At December 31, 1996, the carrying value of these investments approximated market value. The investments are accounted for using the cost method.
7. 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, $5,608,000 and $3,169,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively.
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, $3,427,000 and $3,287,000 for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively.
For the nine months ended December 31, 1996, SS/L was billed $10,066,000 for certain operational, executive, administrative, financial, legal and other services provided by Loral. SS/L was billed for certain operational, executive, administrative, financial, legal and other services provided by Lockheed Martin and Old Loral, and SS/L charged Lockheed Martin and Old Loral certain overhead costs. Net costs billed by Lockheed Martin for the nine months ended December 31, 1996 were $5,154,000. Net costs billed by Old Loral were $7,066,000 and $8,518,000 for the years ended March 31, 1996 and 1995, respectively.
F-30 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED) In connection with contract performance, SS/L provided services to and acquired services from Lockheed Martin for the nine months ended December 31, 1996 and Old Loral for the years ended March 31, 1996 and 1995. A summary of such transactions and balances is as follows:
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------1996 1996 1995 ------(IN THOUSANDS) Revenue from services sold...... $ 3,174 $ 1,096 $ 1,103 Cost of purchased services...... 124,275 28,228 27,631 Balances at year end: Receivable...... $ 1,650 $ 430 $ 724 Payable...... 3,572 15,823 7,272 ------Net payable...... $ 1,922 $ 15,393 $ 6,548 ======
SS/L's sales to, purchases from, and balances with the Alliance partners are as follows:
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------1996 1996 1995 ------(IN THOUSANDS) Revenue from services sold...... $55,019 $ 32,561 $ 3,073 Cost of purchased services...... 150,608 249,092 85,489 Balances at year end: Receivable...... $ 8,526 $ 15,066 $ 840 Payable...... 41,335 38,257 19,521
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 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.
For the years ended March 31, 1996 and 1995, SS/L employees were eligible to participate in Old Loral's stock option plans. At March 31, 1996 and 1995, options to purchase 466,304 and 445,788 shares of Old Loral common stock were outstanding, respectively (adjusted for a two for one stock split in the fiscal year ended March 31, 1996.) All options were exercised in connection with the Distribution.
For the years ended March 31, 1996 and 1995, SS/L had agreed to pay Old Loral any difference between the market value of Old Loral stock at the time of exercise and the option price for up to 200,000 shares authorized by SS/L's stockholders, and to reimburse Old Loral for any tax benefit resulting from shares granted in excess of that amount. For the years ended March 31, 1996 and 1995, $4,510,000 and $726,000, respectively, of compensation expense was accrued for the excess of market value of Old Loral stock over exercise prices for options exercisable subject to the authorized limitation.
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
F-31 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED) 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 and the year ended March 31, 1996.
8. 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. Rent expense was $7,838,000, $6,440,000 and $4,805,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively.
Due to the long lead times required to produce purchased parts, 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.
9. 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.
10. 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
F-32 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED) Code and regulations thereon. No contributions were made for the nine months ended December 31, 1996. Contributions for the years ended March 31, 1996 and 1995 were $3,990,000 and $58,000, respectively. Plan assets are invested primarily in U.S. government and agency obligations and listed stocks and bonds.
Net pension costs include the following components:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ------DECEMBER 31, 1996 1996 1995 ------(IN THOUSANDS) Service cost -- benefits earned during the period...... $ 3,808 $ 3,676 $ 3,950 Interest cost on projected benefit obligation...... 8,205 10,070 9,025 Actual loss (return) on plan assets...... (9,934) (27,838) 372 Net amortization and deferral...... 574 18,110 (10,672) ------Net pension costs...... $ 2,653 $ 4,018 $ 2,675 ======
The following table sets forth the Plan's funded status:
DECEMBER 31, 1996 MARCH 31, 1996 ------(IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefits...... $ 130,363 $128,032 ======Accumulated benefits...... $ 134,507 $129,290 Effect of projected future salary increases..... 16,981 17,711 ------Projected benefits...... 151,488 147,001 Plan assets at fair value...... 167,635 140,934 ------Plan assets in excess of (less than) projected benefit obligation...... 16,147 (6,067) Unrecognized net prior service cost...... 60 63 Unrecognized net loss...... 5,183 27,347 ------Prepaid pension cost included in other assets in the accompanying balance sheet...... $ 21,390 $ 21,343 ======The principal actuarial assumptions are as follows: Discount rate...... 7.75% 7.50% Rate of increase in compensation levels...... 4.50% 4.50% Expected long-term rate of return on plan assets...... 9.50% 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.
F-33 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED) Postretirement health care and life insurance costs include the following components:
YEARS ENDED MARCH NINE MONTHS 31, ENDED ------DECEMBER 31, 1996 1996 1995 ------(IN THOUSANDS) Service cost -- benefits earned during the period...... $ 622 $ 405 $ 386 Interest cost on accumulated postretirement benefit obligation...... 1,599 1,549 1,445 Net amortization and deferrals...... (916) (1,316) (1,481) ------Total postretirement health care and life insurance costs...... $ 1,305 $ 638 $ 350 ======
The following table reconciles the amounts recognized in the balance sheet:
DECEMBER 31, 1996 MARCH 31, 1996 ------(IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees...... $15,260 $ 13,539 Fully eligible plan participants...... 3,517 3,229 Other active plan participants...... 10,541 6,031 ------Total accumulated postretirement benefit obligation...... 29,318 22,799 Fair value of assets...... (2,055) (1,868) ------Unfunded accumulated postretirement benefit obligation...... 27,263 20,931 Unrecognized prior service gain related to plan amendments...... 12,742 13,696 Unrecognized net (loss) gain...... (6,225) (1,164) ------Accrued postretirement health care and life insurance costs...... $33,780 $ 33,463 ======
The principal assumptions used in determining the pension benefit obligation are as follows:
Discount rate...... 7.75% 7.50% Rate of increase in compensation levels...... 4.50% 4.50% Present healthcare cost trend rate...... 10.59% 10.59% Ultimate trend rate by the year 2004...... 5.50% 5.50%
Changing the assumed health care cost trend rate by 1% in each year would change the accumulated postretirement benefit obligation by approximately $3,224,000 and 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, $2,852,000 and $2,976,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, respectively.
F-34 SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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-35 SCHEDULE III
6% SERIES C CONVERTIBLE REDEEMABLE PREFERRED SHARES
1. Number and Designation. The Company shall have a class of 6% Series C Convertible Redeemable Preferred Shares (the "Series C Preferred Shares"), par value U.S. $.01 per share, with such number of shares authorized as shall be set from time to time by Resolution adopted at a general meeting of the shareholders of the Company and as set forth in the Bye-Laws of the Company. Unless otherwise specified, references herein to any "Section" refer to the Section number specified in this Schedule III.
2. Issuance. (a) The Series C Preferred Shares shall be issued, upon mandatory exchange of the 6% Convertible Preferred Equivalent Obligations due 2006 of the Company (the "CPEOs"), in whole but not in part, in an aggregate liquidation preference equal to the aggregate principal amount of the CPEOs then outstanding, on such date as may be determined by the Board of Directors (or any committee thereof) of the Company. Upon any such exchange, holders of outstanding CPEOs will be entitled to receive one Series C Preferred Share, having a liquidation preference of $50.00, for each $50.00 principal amount of CPEOs, together with a payment in cash of accrued interest due and unpaid on the CPEOs to the Mandatory Exchange Date (as defined below).
(b) The Company may issue Series C Preferred Shares in addition to those issued pursuant to Section 2(a) and (b) above as may be determined from time to time by the Board of Directors (or any committee thereof) of the Company. 3. Liquidation Preference. (a) Certificate for Series C Preferred Shares shall be issuable only in registered form without coupons and only with a liquidation preference of $50.00 per share and any integral multiple thereof. The Company hereby appoints The Bank of New York as its initial Registrar for the Series C Preferred Shares.
4. Registration; Transfer. (a) The Series C Preferred Shares have not been registered under the United States Securities Act of 1933 (the "Securities Act") and may not be resold, pledged or otherwise transferred prior to the date when they no longer constitute "restricted" shares under Rule 144(k) under the Securities Act other than (1) to the Company, (2) to "qualified institutional buyers" pursuant to and in compliance with Rule 144A under the Securities, (3) pursuant to and in compliance with Regulation S under the Securities Act, (4) to "accredited investors" as defined in Rule 501(A) under the Securities Act, (5) pursuant to an exemption from registration under the Securities Act, or (6) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of Bermuda or any state of the United States.
(b) Series C Preferred Shares issued upon conversion of CPEOs held by Qualified Institutional Buyers ("QIBs") in reliance on Rule 144A ("Rule 144A") under the United States Securities Act of 1933, as amended (the "Securities Act"), as provided in the Purchase Agreement for such CPEOs, shall be issued in the form of one or more permanent global Series C Preferred Shares in definitive, fully registered form without interest coupons with the Global Series C Preferred Shares Legend and the Restricted Series C Preferred Shares Legend set forth on the form of such Series C Preferred Share (each, a "Global Series C Preferred Share"), which shall be deposited on behalf of the holders of the Series C Preferred Shares represented thereby with the Registrar, at its New York office, as custodian for The Depository Trust Company, New York, New York ("DTC") or its nominees and their respective successors (the "Depositary"), and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Registrar as hereinafter provided. The aggregate liquidation preference of the Global Series C Preferred Share may from time to time be increased or decreased by adjustments made on the records of the Registrar and the Depositary or its nominee as hereinafter provided.
- 2 - (c) This paragraph shall apply only to a Global Series C Preferred Share deposited with or on behalf of the Depositary. The Company shall execute and the Registrar shall, in accordance with this Section, authenticate and deliver initially one or more Global Series C Preferred Shares that (i) shall be registered in the name of Cede & Co. or other nominee of Cede & Co. and (ii) shall be delivered by the Registrar to Cede & Co. or pursuant to instructions received from Cede & Co. or held by the Registrar as custodian for the Depositary pursuant to a FAST Balance Certificate Agreement between the Depositary and the Registrar. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Schedule with respect to any Global Series C Preferred Share held on their behalf by the Depositary or by the Registrar as the custodian of the Depositary or under such Global Series C Preferred Share, and the Depositary may be treated by the Company, the Registrar and any agent of the Company or the Registrar as the absolute owner of such Global Series C Preferred Share for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Registrar or any agent of the Company or the Registrar from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Series C Preferred Share. Except as provided in Section 5 (b) hereof, owners of beneficial interests in Global Series C Preferred Shares will not be entitled to receive physical delivery of certificated Series C Preferred Shares.
(d) Purchasers of Series C Preferred Shares who are not QIBs will receive certificated Series C Preferred Shares bearing the Restricted Series C Preferred Shares Legend set forth on the form of such Series C Preferred Shares ("Restricted Series C Preferred Shares"). Restricted Series C Preferred Shares will bear a Restricted Series C Preferred Shares Legend unless removed in accordance with Section 5(b) and may not be exchanged for a Global Series C Preferred Share, or interest therein, at any time, except as set forth in paragraph (d) of this Section.
(e) Purchasers of Restricted Series C Preferred Shares in reliance of Regulation S under the Securities Act ("Regulation S") may exchange such Restricted Series C Preferred Shares for a beneficial interest in a Global Series C Preferred
- 3 - Share following the expiration of the "40-day restricted period" within the meaning of Regulation S by delivering (1) any such Restricted Series C Preferred Share, duly endorsed as provided herein; (2) instructions from such holder directing the Registrar to create a beneficial interest in such Global Series C Preferred Share and the authorized denomination or denominations of such beneficial interest to be created; and (3) such other certificates, legal opinions or other information as the Company may reasonably require.
(f) After a transfer of any Series C Preferred Shares during the period of the effectiveness of a Shelf Registration Statement with respect to such Series C Preferred Shares, all requirements pertaining to legends on such Series C Preferred Share will cease to apply, the requirements requiring any such Series C Preferred Share issued to certain holders be issued in global form will cease to apply, and a certificated Series C Preferred Share without legends will be available to the holder of such Series C Preferred Shares.
5. Paying Agent and Conversion Agent. (a) The Company shall maintain in the Borough of Manhattan, City of New York, State of New York and in a European city (i) an office or agency where Series C Preferred Shares may be presented for payment ("Paying Agent") and (ii) an office or agency where Series C Preferred Shares may be presented for conversion ("Conversion Agent"). The Company may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent and, with respect to payments hereunder by delivery of Common Shares, may include the Stock Transfer Agent, and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent or Conversion Agent without prior notice to any holder. The Company shall notify the Registrar of the name and address of any Agent appointed by the Company. If the Company fails to appoint or maintain another entity as Paying Agent or Conversion Agent, the Registrar shall act as such. The Company or any of its Affiliates may act as Paying Agent, Registrar, co-registrar or Conversion Agent.
Neither the Company nor the Registrar shall be required (i) to issue, authenticate or register the transfer of or exchange any Series C Preferred Share during a period beginning
- 4 - at the opening of business 15 days before the day of the mailing of a notice of redemption of Series C Preferred Shares selected for redemption under Section 10(b) hereof and ending at the close of business on the day of such mailing or (ii) to register the transfer of or exchange any Series C Preferred Share so selected for redemption in whole or in part, except the unredeemed portion of any Series C Preferred Share being redeemed in part.
(b) Notwithstanding any provision to the contrary herein, so long as a Global Series C Preferred Share remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Series C Preferred Share, in whole or in part, or of any beneficial interest therein, shall only be made in accordance with Section 4 hereof and this Section; provided, however, that beneficial interests in a Global Series C Preferred Share may be transferred to persons who take delivery thereof in the form of a beneficial interest in the same Global Series C Preferred Share in accordance with the transfer restrictions set forth in the Restricted Series C Preferred Shares Legend and under the heading "Notice to Investors" in the Offering Memorandum.
(i) Except for transfers or exchanges made in accordance with any of clauses (b)(ii) through (iv) of this Section, transfers of a Global Series C Preferred Share shall be limited to transfers of such Global Series C Preferred Share in whole, but not in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee.
(ii) If an owner of a beneficial interest in a Global Series C Preferred Share deposited with the Depositary or with the Registrar as custodian for the Depositary wishes at any time to transfer its interest in such Global Series C Preferred Share to a person who is required to take delivery thereof in the form of a Restricted Series C Preferred Share, such owner may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for one or more certificates evidencing such Restricted Series C Preferred Share. Upon receipt by the Registrar, at its office in The City of New York of (1) instructions from the Depositary directing the Registrar to authenticate and deliver one or more Restricted Series C Preferred Shares of the same aggregate liquidation preference as the beneficial interest in the Global Series C Preferred Share to be
- 5 - exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Restricted Series C Preferred Shares to be so issued and appropriate delivery instructions, (2) a certificate in the form of Exhibit A attached hereto given by the owner of such beneficial interest and stating that the person transferring such interest in such Global Series C Preferred Share reasonably believes that the person acquiring the Restricted Series C Preferred Shares for which such interest is being exchanged is an "accredited investor" (as defined in Rule 501(a) of Regulation D under the Securities Act) and is acquiring such Restricted Series C Preferred Shares having an aggregate liquidation preference of not less than $250,000 for its own account or for one or more accounts as to which the transferee exercises sole investment discretion, (3) a certificate in the form of Exhibit B attached hereto given by the person acquiring the Restricted Series C Preferred Shares for which such interest is being exchanged, to the effect set forth therein, and (4) such other certifications, legal opinions or other information as the Company may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar will instruct the Depositary to reduce or cause to be reduced such Global Series C Preferred Share by the aggregate liquidation preference of the beneficial interest therein to be exchanged and to debit or cause to be debited from the account of the person making such transfer the beneficial interest in the Global Series C Preferred Share that is being transferred, and concurrently with such reduction and debit, the Company shall execute, and the Registrar shall authenticate and deliver, one or more Restricted Series C Preferred Shares of the same aggregate liquidation preference in accordance with the instructions referred to above.
(iii) If a holder of a Restricted Series C Preferred Share wishes at any time to transfer such Restricted Series C Preferred Share to a person who is required to take delivery thereof in the form of a Restricted Series C Preferred Share, such holder may, subject to the restrictions on transfer set forth herein and in such Restricted Series C Preferred Share, cause the exchange of such Restricted Series C Preferred Share for one or more
- 6 - certificates evidencing such Restricted Series C Preferred Shares. Upon receipt by the Registrar, at its office in The City of New York of (1) such Restricted Series C Preferred Share, duly endorsed as provided herein, (2) instructions from such holder directing the Registrar to authenticate and deliver one or more certificates evidencing Restricted Series C Preferred Shares, such instructions to contain the name of the transferee and the authorized denomination or denominations of the Restricted Series C Preferred Shares to be so issued and appropriate delivery instructions, (3) a certificate from the holder of the Restricted Series C Preferred Share to be exchanged in the form of Exhibit A attached hereto, (4) a certificate in the form of Exhibit B attached hereto given by the person acquiring the Restricted Series C Preferred Shares for which such interest is being exchanged, to the effect set forth therein, and (5) such other certifications, legal opinions or other information as the Company may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar shall cancel or cause to be cancelled such Restricted Series C Preferred Share and concurrently therewith, the Company shall execute, and the Registrar shall authenticate and deliver, one or more Restricted Series C Preferred Shares of the same aggregate liquidation preference, in accordance with the instructions referred to above.
(iv) In the event that a Global Series C Preferred Share is exchanged for Series C Preferred Shares in definitive registered form pursuant to this Section, prior to the effectiveness of a Shelf Registration Statement with respect to such Series C Preferred Shares, such Series C Preferred Shares may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of clauses (ii) and (iii) above (including the certification requirements intended to ensure that such transfers comply with Rule 144A or Regulation S under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company.
(c) Except in connection with a Shelf Registration Statement contemplated by and in accordance with the terms of a Registration Rights Agreement dated November 6, 1996, relating to
- 7 - the CPEOs and the Series C Preferred Shares, between the Company and the initial purchasers of the CPEOs (the "Registration Rights Agreement"), if Series C Preferred Shares are issued upon the transfer, exchange or replacement of Series C Preferred Shares bearing the Restricted Series C Preferred Shares Legend set forth on the form of such Series C Preferred Shares, or if a request is made to remove such Restricted Series C Preferred Shares Legend on Series C Preferred Shares, the Series C Preferred Shares so issued shall bear the Restricted Series C Preferred Shares Legend, or the Restricted Series C Preferred Shares Legend shall not be removed, as the case may be, unless there is delivered to the Company such satisfactory evidence, which may include an opinion of counsel licensed to practice law in the State of New York, as may be reasonably required by the Company, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or, with respect to Restricted Series C Preferred Shares, that such Series C Preferred Shares are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence, the Registrar, at the direction of the Company, shall authenticate and deliver Series C Preferred Shares that do not bear the legend.
(d) The Registrar shall have no responsibility for any actions taken or not taken by the Depositary.
(e) Each holder of a Series C Preferred Share agrees to indemnify the Company and the Registrar against any liability that may result from the transfer, exchange or assignment of such holder's Series C Preferred Share in violation of any provision of this Schedule and/or applicable U.S. Federal or State securities law; provided, however, that such indemnity shall not apply to acts of willful misconduct or gross negligence on the part of the Company or the Registrar, as the case may be.
(f) Payments (whether in cash or, as permitted by Sections 10(a) hereof, in Common Shares) due on the Series C Preferred Shares shall be payable at the office or agency of the Company maintained for such purpose in The City of New York and at any other office or agency maintained by the Company for such purpose. If any such payment is in cash, it shall be payable by United States dollar check drawn on, or wire transfer (provided that appropriate wire instructions have been received by the Registrar at least 15 days prior to the applicable date of
- 8 - payment) to a United Stated dollar account maintained by the holder with, a bank located in New York City; provided, that at the option of the Company payment of dividends in cash may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Series C Preferred Share Register.
6. Dividend Rights. (a) The Company shall pay, and the holders of the Series C Preferred Shares shall be entitled to receive, dividends from the date of initial issuance of such Series C Preferred Shares at a rate of 6% per annum on the amount of the liquidation preference of the Series C Preferred Shares. Dividends will be computed on the basis of a 360-day year of twelve 30-day months and will be payable quarterly in cash in arrears on February 1, May 1, August 1 and November 1 of each year (each a "Dividend Payment Date"), commencing on the first Dividend Payment Date following the initial issuance date of the Series C Preferred Shares, until the liquidation preference thereof is paid or made available for payment. The Company may elect to defer dividend payments on any Dividend Payment Date.
(b) If (i) on or prior to May 5, 1997, a shelf registration statement with respect to resales of the Series C Preferred Shares and the Common Shares issuable upon conversion thereof has not been filed with the Securities and Exchange Commission or (ii) on or prior to July 4, 1997, such shelf registration statement is not declared effective (each, a "Registration Default"), additional dividends will accrue on the Series C Preferred Shares, from and including the day following such Registration Default to but excluding the day on which such Registration Default has been cured. Additional dividends will be paid quarterly in arrears in cash, with the first quarterly payment due on the first Dividend Payment Date following the date on which such additional dividends begin to accrue, and will accrue at a rate per annum of 0.25% of the liquidation preference of this Series C Preferred Share, to and including the 90th day following such Registration Default and thereafter at a rate per annum of 0.50% until such Registration Default has been cured.
7. Payment of Dividend; Mechanics of Payment; Dividend Rights Preserved. (a) Dividends on any Series C Preferred Share which are payable, and are punctually paid or duly provided for, on any Dividend Payment Date (February 1, May 1, August 1, and November 1 of each year) shall be paid in cash in arrears to the Person in whose name that Series C Preferred
- 9 - Share (or one or more predecessor Series C Preferred Shares) is registered at the close of business on the Regular Record Date for such dividend, provided, however, that the Company may make a Deferral Election on any Dividend Payment Date. Arrearages of deferred but unpaid dividends accruals ("Dividend Arrearages") will not themselves bear interest, but so long as any Dividend Arrearage remains outstanding, the Company will be prohibited from paying (i) dividends on its Common Shares and (ii) dividends on any other Series of Preferred Shares (other than pro rata dividends on the Series A Preferred Shares and any other series of preferred shares ranking pari passu with the Preferred Shares). In the event that the Company fails to pay the dividends due for an aggregate of six quarterly payments, the holders will have the rights and remedies described below in Section 8.
(b) In the event the Board of Directors makes a Deferral Election in respect of any Dividend Payment Date, the Company shall deliver to holders the Dividend Payment Notice not later than 5 Business Days prior to the Dividend Payment Date.
(c) Any Dividend Arrearage on any Series C Preferred Share may be paid by the Company in any lawful manner not inconsistent with the requirements of any securities exchange on which the Series C Preferred Shares may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Registrar of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Registrar.
(d) Subject to the foregoing provisions of this Section, each Series C Preferred Share delivered under this Schedule upon registration of transfer of or in exchange for or in lieu of any other Series C Preferred Share shall carry the rights to dividends accrued and unpaid, and to accrue, which were carried by such other Series C Preferred Share.
(e) Series C Preferred Shares surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Dividend Payment Date to the opening of business on such Dividend Payment Date (except Series C Preferred Shares called for redemption on a Redemption Date within such period) must be accompanied by payment in cash of an amount equal to the accrued but unpaid dividends thereon which the registered holder is to receive on such Dividend
- 10 - Payment Date in respect of the Series C Preferred Shares so surrendered; provided, that no payment shall be owed or payable to any converting holder if the Board of Directors of the Company shall have elected to defer the dividends payment to be made on such Dividend Payment Date pursuant to paragraph (a) of this Section. No other adjustment for dividends, including for any Dividend Arrearages, is to be made upon conversion. Fractional Common Shares will not be issued upon conversion, but in lieu thereof the Company will pay a cash adjustment in the manner set forth in Section 11(c).
(f) The Company shall make all dividend payments (including Dividend Arrearages) in respect of the Series C Preferred Shares in cash.
8. Voting Rights. (a) Holders of Series C Preferred Shares will not be entitled to any voting rights unless the Company has not paid scheduled dividend payments for an aggregate of six quarterly payments (a "Deferral Trigger Event"). If a Deferral Trigger Event occurs while any Series C Preferred Shares are outstanding, the number of Directors constituting the Board of Directors of the Company will be adjusted to permit the holders of a majority of the then Outstanding Series C Preferred Shares, voting separately and as a class, to elect two Directors (the "Series C Preferred Shares Directors") to the Board of Directors. The voting rights set forth in the preceding sentence will continue until such time as all dividends in arrears on the Series C Preferred Shares are paid in full in cash, at which time the term of any Director elected pursuant to the provisions of the preceding sentence shall terminate. At any time after voting power to elect Directors shall have become vested and be continuing in the holders of the Series C Preferred Shares pursuant to the second preceding sentence, or if a vacancy shall exist in the offices of Directors elected by the holders of the Series C Preferred Shares, the Board of Directors may, and upon written request of the holders of record of at least 25% of the Outstanding Series C Preferred Shares addressed to the Chairman of the Board of the Company, shall, call a special meeting of the holders of the Series C Preferred Shares for the purpose of electing the Directors which such holders are entitled to elect. At any meeting held for the purpose of electing Directors at which the holers of Series C Preferred Shares shall have the right, voting together as a separate class, to elect Directors as aforesaid, the presence in person or by proxy of the holders of at least a majority of the Outstanding Series C Preferred Shares
- 11 - shall be required to constitute a quorum of such Series C Preferred Shares. Any vacancy occuring in the office of a Director elected by the holders of the Series C Preferred Shares may be filled by the remaining Director elected by the holders of the Series C Preferred Shares unless and until such vacancy shall be filled by the holders of the Series C Preferred Shares. The Directors to be elected by the holders of the Series C Preferred Shares shall agree, prior to their election to office, to resign upon any termination of the right of the holders of Series C Preferred Shares to vote as a class for Directors as herein provided, and upon such termination the Directors then in office elected by the holders of the Series C Preferred Shares shall forthwith resign.
(b) In addition to the voting rights set forth above, with the consent of the holders of not less than two-thirds of the Outstanding Series C Preferred Shares, by act of said holders delivered to the Company and the Registrar, the Company, when authorized by a resolution of the Board of Directors, may enter into amendment hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Schedule or of modifying in any manner the rights of the holders of Series C Preferred Shares under this Schedule; provided, however, that no such modification or amendment may, without the consent of the holders of each Outstanding Series C Preferred Share affected thereby, (i) change the Mandatory Redemption Date of any Series C Preferred Share, or the due date of any dividend on, any Series C Preferred Shares, or reduce the liquidation preference or Redemption Price thereof or the rate of dividends thereon, or change the place of payment where, or the coin or currency in which, any Series C Preferred Share or any payment thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Mandatory Redemption Date (or on or after other Redemption Dates), or adversely affect the rights to convert any Series C Preferred Share as provided in Section 11 hereof, or adversely affect the right to require the Company to redeem the Series C Preferred Shares as provided in Section 10 hereof, or modify the provisions of this Schedule with respect to the ranking of the Series C Preferred Shares in a manner adverse to the holders, or (ii) reduce the percentage of the Outstanding Series C Preferred Shares the consent of whose holders is required for any such modification, or the consent of whose holders is required for any waiver (of compliance with certain provisions of this Schedule) provided for in this Schedule, or (iii) modify any of the
- 12 - provisions of this Section except to increase any such percentage or to provide that certain other provisions of this Schedule cannot be modified or waived without the consent of the holder of each Outstanding Series C Preferred Share affected thereby. In addition, but subject to the foregoing, the Consent of the holders of at least a majority of the Series C Preferred Shares at the time Outstanding voting together as a single class, shall be necessary for any amendment to the Bye-laws of the Company, if such amendment would have the effect of amending any provision of this Schedule in a manner that is adverse to the interests of the holders of the Series C Preferred Shares.
(c) Neither (i) the creation, authorization or issuance of any Junior Shares or Parity Shares including additional Series C Preferred Shares, nor (ii) the increase or decrease in the amount of authorized capital stock of any class, including Series C Preferred Shares, shall (A) require the consent of holders of Series C Preferred Shares or (B) be deemed to affect adversely the rights, preferences, privileges or voting rights of Series C Preferred Shares.
9. Ranking. (a) The Series C Preferred Shares will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to all classes of Common Shares and to each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which do not expressly provide that it ranks on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with all classes of Common Shares of the Company, as "Junior Shares"); or (ii) on a parity with the Company's Series A Preferred Shares and each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which expressly provide that such class or series will rank on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Shares"). The Company may not authorize any new class of capital stock or series of preferred shares the terms of which expressly provide that such class or series will rank senior to the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company without the approval of each holder of the Outstanding Series C Preferred Shares.
(b) No cash payments of liquidation preference or
- 13 - dividends on the Series C Preferred Shares may be made and no Series C Preferred Shares may be redeemed, retired or purchased for cash (excepting payment for fractional shares) if the Company is then in default in the payment of any Debt Obligations or if at the time any other Event of Default under the terms of any Debt Obligations exists permitting acceleration thereof. Upon any payment or distribution of assets of the Company in the event of any insolvency, reorganization, liquidation or similar proceeding, all Debt Obligations must be repaid in full (including any dividend thereon accruing after the commencement of any proceeding) before the holders will be entitled to receive or retain any payment. Payments on the Series C Preferred Shares may not be declared due and payable prior to the Mandatory Redemption Date because of the failure to make dividend payments when due or to make payments with respect to any applicable redemption or under the terms of any Debt Obligations.
(c) No full dividends may be declared or paid or funds set apart for the payment of dividends on any Parity Shares for any period unless full cumulative dividends shall have been or contemporaneously are declared and paid (or are deemed declared and paid) in full or declared and a sum in cash sufficient for such payment is set apart for such payment of the Series C Preferred Shares. If full dividends are not so paid, the Series C Preferred Shares will share dividends pro rata with any Parity Shares. No dividends may be paid or set apart for such payment on other series of Junior Shares (except dividends on Junior Shares payable in additional Junior Shares) and no Junior Shares or Parity Shares may be repurchased, redeemed or otherwise retired nor may funds be set apart for payment with respect thereto, if full cumulative dividends have not been paid in full on the Series C Preferred Shares. Payments of Dividend Arrearages and dividends in connection with any optional redemption may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. So long as any Series C Preferred Shares are outstanding, the Company shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Parity Share or Junior Share or any warrants, rights, calls or options exercisable for or convertible into any Parity Share or Junior Share, and shall not permit any company or other entity directly or indirectly controlled by the Company to purchase or
- 14 - redeem any Parity Share or Junior Share or any such warrants, rights, calls or options unless full cumulative dividends determined in accordance herewith on the Series C Preferred Shares have been paid in full.
(d) In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series C Preferred Shares then Outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Common Shares or Junior Shares by reason of their ownership thereof, an amount equal to $50.00 per share for each outstanding Series C Preferred Share, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding up (including an amount equal to a pro rata dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up). If upon the occurrence of such event the assets thus distributed among the holders of Series C Preferred Shares shall be insufficient to permit the payment to such holders of the full preferential amount, the entire assets of the Company legally available for distribution shall be distributed ratably based upon their respective liquidation preference, among the holders of the Series C Preferred Shares pari passu with the holders of all Parity Shares. After payment of the full preferential amount (and, if applicable, an amount equal to a pro rata dividend to the holders of Outstanding Series C Preferred Shares), such holders shall not be entitled to any further participation in any distribution of assets of the Company.
10. Optional and Mandatory Redemption. (a) The Series C Preferred Shares (i) may be redeemed at any time commencing November 5, 1999, in cash, in whole or in part, at the election of the Company (the "Optional Redemption"), at a redemption price equal to the percentage of the liquidation preference set forth below plus accrued and unpaid dividends, if any, to the date of redemption (the "Optional Redemption Date") if redeemed in the 12-month period ending on November 1st of the following years:
Year Redemption Price ------
2000 102% 2001 101%
- 15 - and thereafter at a redemption price equal to 100% of the liquidation preference to be redeemed plus accrued and unpaid dividends, if any, to the Optional Redemption Date and (ii) (if not earlier redeemed or converted) shall be mandatorily redeemed by the Company on November 1, 2006 (the "Mandatory Redemption Date") at a redemption price of 100% of the liquidation preference per Share plus accrued and unpaid dividends, if any (including all Dividend Arrearages), to the Mandatory Redemption Date. The Company may make any payments in respect of the liquidation preference due on the Series C Preferred Shares on the Mandatory Redemption Date, (i) in cash, (ii) by delivery of Common Shares (in the manner described below); or (iii) through any combination of the foregoing. If the Company elects to deliver any Common Shares in payment of the liquidation preference on the Mandatory Redemption Date, the Company shall deliver, in the aggregate, the number of Common Shares equal to (I) the aggregate liquidation preference that is not paid in cash divided (II) by the Average Market Value of the Common Shares. No fractional Common Shares will be delivered to a holder, but the Company shall instead pay a cash adjustment determined as set forth in Section 11(c) hereof. Any portion of liquidation preference that is not paid through the delivery of Common Shares shall be paid in cash.
(b) In the event of a redemption of less than all of the Series C Preferred Shares, the Series C Preferred Shares will be chosen for redemption by the Registrar from the outstanding Series C Preferred Shares not previously called for redemption, pro rata or by lot or by such other method as the Registrar shall deem fair and appropriate. If fewer than all of the Series C Preferred Shares represented by any share certificate are so to be redeemed, (1) the Company shall issue a new certificate for the shares not redeemed and (2) if any Shares represented thereby are converted before termination of the conversion right with respect to such Shares, such converted Shares shall be deemed (so far as may be) to be the Shares selected for redemption. Series C Preferred Shares which have been converted during a selection of Series C Preferred Shares to be redeemed shall be treated by the Registrar as outstanding for the purpose of such selection but not for the purpose of the payment of the Redemption Price.
- 16 - (c) In the event the Company elects to effect an Optional Redemption, the Company shall deliver the Redemption Notice to the holders no later than 10 Business Days before the Redemption Date. Whenever a Redemption Notice is required to be delivered to the holders, such Notice shall provide the information set forth in the definition thereof and be given by first class mail, postage prepaid to each holder of Series C Preferred Shares to be redeemed, at his address appearing in the Series C Preferred Share Register. In addition, all Redemption Notices shall identify the Series C Preferred Shares to be redeemed (including CUSIP number) and shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) if less than all the outstanding Series C Preferred Shares are to be redeemed, the identification (and, in the case of partial redemption, the certificate number, the total number of shares represented thereby and the number of such shares being redeemed on the Redemption Date) of the particular Series C Preferred Shares to be redeemed;
(4) that on the Redemption Date the Redemption Price, together with (unless the Redemption Date shall be a Dividend Payment Date) dividends accrued and unpaid to the Redemption Date, will become due and payable upon each such Series C Preferred Share to be redeemed and that dividends thereon will cease to accrue on and after said date;
(5) the conversion price, the date on which the right to convert Series C Preferred Shares to be redeemed will terminate and the place or places where such Series C Preferred Shares may be surrendered for conversion; and
(6) the place or places where such Series C Preferred Shares are to be surrendered for payment of the Redemption Price.
The Redemption Notice shall be given by the Company or, at the Company's request, by the Registrar in the name and at the expense of the Company; provided, that if the Company so requests, it shall provide the Registrar adequate time, as
- 17 - reasonably determined by the Registrar, to deliver such notices in a timely fashion.
(d) Prior to any Redemption Date in connection with an Optional Redemption, the Company shall deposit with the Registrar or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust) an amount of consideration sufficient to pay the Redemption Price of and (except if the Redemption Date shall be a Dividend Payment Date) accrued but unpaid dividends on all the Series C Preferred Shares which are to be redeemed on that date other than any Series C Preferred Shares called for redemption on that date which have been converted in Common Shares prior to the date of such deposit. If any Series C Preferred Share called for redemption is converted, any cash deposited with the Registrar or with any Paying Agent or so segregated and held in trust for the redemption of such Series C Preferred Share shall (subject to any right of the holder of such Series C Preferred Share or any predecessor Series C Preferred Share to receive accrued but unpaid dividends thereon as provided in Section 7(e)) be paid or delivered to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust.
(e) Notice of redemption having been given as aforesaid, the Series C Preferred Shares so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued but unpaid dividends) dividends on such Series C Preferred Shares shall cease to accrue. Upon surrender of any such Series C Preferred Share for redemption in accordance with said notice, such Series C Preferred Share shall be paid, subject to Section 7(e), by the Company at the Redemption Price, together with accrued but unpaid dividends to the Redemption Date. If any Series C Preferred Share called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price thereof, exclusive of accrued but unpaid dividends, shall, until paid, bear interest from the Redemption Date at the rate borne by the Series C Preferred Shares.
(f) Any certificate that represents more than one Series C Preferred Share and is to be redeemed only in part shall be surrendered at any office or agency of the Company designated for that purpose (with, if the Company or the Registrar so requires, due endorsement by, or a written instrument of transfer
- 18 - in form satisfactory to the Company and the Registrar duly executed by, the holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Registrar shall authenticate and deliver to the holder of such Series C Preferred Share without service charge, a new Series C Preferred Share certificate or certificates, representing any number of Series C Preferred Shares as requested by such holder, in aggregate amount equal to and in exchange for the number of shares not redeemed and represented by the Series C Preferred Share certificate so surrendered.
(g) Unless the Company defaults in making a redemption payment, or the Paying Agent is prohibited from making such payment pursuant to this Schedule, dividends shall cease to accrue on the Series C Preferred Shares or portions of them called for redemption on or after the Redemption Date. If a Series C Preferred Share is redeemed subsequent to a Record Date with respect to any Dividend Payment Date specified above and on or prior to such Dividend Payment Date, then any accrued but unpaid dividends will be paid to the person in whose name such Series C Preferred Share is registered at the close of business on such Record Date.
11. Conversion. (a) Subject to and upon compliance with the provisions of this Schedule, at the option of the holder thereof, any Series C Preferred Share may be converted at the liquidation preference thereof into fully paid and nonassessable Common Shares (calculated as to each conversion to the nearest 1/100 of a share), at the Conversion Price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on the Business Day preceding the Mandatory Redemption Date. In case a Series C Preferred Share is called for redemption, such conversion right in respect of the Series C Preferred Share so called shall expire at the close of business on the Business Day preceding the Redemption Date, unless the Company defaults in making the payment due upon redemption.
The price at which Common Shares shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $20.00 per Common Share. The Conversion Price shall be adjusted in certain instances as provided in Section 11(d) and Section 11(e).
- 19 - (b) In order to exercise the conversion privilege, the holder of any Series C Preferred Share to be converted shall surrender the certificate for such Share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such Share or, if fewer than all of the Series C Preferred Shares represented by a single share certificate are to be converted, the number of shares represented thereby to be converted. Except as provided in Section 7(e), no payment or adjustment shall be made upon any conversion on account of any dividends accrued on the Series C Preferred Shares surrendered for conversion or on account of any dividends on the Common Shares issued upon conversion. In no event shall the Company be obligated to pay any converting holder any unpaid Dividend Arrearages upon conversion.
Series C Preferred Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such Shares as holders shall cease, and the person or persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 11(c) hereof.
In the case of any conversion of fewer than all the Series C Preferred Shares evidenced by a certificate, upon such conversion the Company shall execute and the Registrar shall authenticate and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Series C Preferred Shares.
(c) No fractional Common Shares shall be issued upon the conversion of a Series C Preferred Share. If more than one Series C Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate Series C Preferred Shares so surrendered. Instead of any fractional Common Share which would
- 20 - otherwise be issuable upon conversion of any Series C Preferred Share, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price (as defined in Section 11(d)(vii) per Common Share at the close of business on the Business Day prior to the day of conversion.
(d) the conversion price shall be adjusted from time to time by the Company as follows:
(i) If the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Shares in Common Shares, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the Record Date (as defined in Section 11(d)(vii)) fixed for such determination and the denominator shall be the sum of such number of Shares and the total number of Shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Record Date. If any dividend or distribution of the type described in this Section 11(d)(i) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared.
(ii) If the Company shall offer or issue rights or warrants to all holders of its outstanding Common Shares entitling them to subscribe for or purchase Common Shares at a price per share less than the Current Market Price (as defined in Section 11(d)(vii)) on the Record Date fixed for the determination of shareholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the Record Date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares subject to such
- 21 - rights or warrants would purchase at such Current Market Price and of which the denominator shall be the number of Common Shares outstanding at the close of business on the Record Date plus the total number of additional Common Shares subject to such rights or warrants for subscription or purchase. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of shareholders entitled to purchase receive such rights or warrants. To the extent that Common Shares are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of Common Shares actually delivered. If such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase Common Shares at less than such Current Market Price, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received for such rights or warrants, with the value of such consideration, if other than cash, to be determined by the Board of Directors.
(iii) If the outstanding Common Shares shall be subdivided into a greater number of Common Shares, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if the outstanding Common Shares shall be combined into a smaller number of Common Shares, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
- 22 - (iv) If the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 11(d)(i) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants of a type referred to in Section 11(d)(ii) and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation to which Section 11(e) applies) (the foregoing hereinafter in this Section 11(d)(iv) called the "Distributed Securities"), then, in each such case, the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date (as defined in Section 11(d)(vii)) with respect to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in Section 11(d)(vii)) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) on such date of the portion of the Distributed Securities so distributed applicable to one Common Share and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Common Share is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Series C Preferred Shares shall have the right to receive upon conversion of a Series C Preferred Share (or any portion thereof) the amount of Distributed Securities such holder would have received had such holder converted such Series C Preferred Share (or portion thereof) immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 11(d)(iv) by reference to the actual or when issued
- 23 - trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to Section 11(d)(vii) to the extent possible.
Rights or warrants distributed by the Company to all holders of Common Shares entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Dilution Trigger Event"): (i) are deemed to be transferred with such Common Shares; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Shares, shall be deemed not to have been distributed for purposes of this Section 11(d)(iv) (and no adjustment to the Conversion Price under this Section 11(d)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment to the Conversion Price under this Section 11(d)(iv) shall be made. If any such rights or warrants, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 11(d) was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Shares with respect to such rights or
- 24 - warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.
Notwithstanding any other provision of this Section 11(d)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any shareholder rights plan) shall be deemed not to have been distributed for purposes of this Section 11(d)(iv) if the Company makes proper provision so that each holder of Series C Preferred Shares who converts a Series C Preferred Share (or any portion thereof) after the date fixed for determination of shareholders entitled to receive such distribution shall be entitled to receive upon such conversion, in addition to the Common Shares issuable upon such conversion, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Series C Preferred Share into a Common Share.
For purposes of this Section 11(d)(iv) and Sections 11(d)(i) and (ii), any dividend or distribution to which this Section 11(d)(iv) is applicable that also includes Common Shares, or rights or warrants to subscribe for or purchase Common Shares to which Section 11(d)(ii) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which Section 11(d)(ii) applies (and any Conversion Price reduction required by this Section 11(d)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such Common Shares or such rights or warrants (and any further Conversion Price reduction required by Sections 11(d)(i) and 11(d)(ii) with respect to such dividend or distribution shall then be made), except that (1) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such
- 25 - dividend or other distribution", "Record Date fixed for such determination" and "Record Date" within the meaning of Section 11(d)(i) and as "the date fixed for the determination of shareholders entitled to receive such rights or warrants", "the Record Date fixed for the determination of the shareholders entitled to receive such rights or warrants" and "such Record Date" within the meaning of Section 11(d)(ii), and (2) any Common Shares included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 11(d)(i).
(v) If the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares cash (excluding any cash that is distributed upon a merger or consolidation to which Section 11(e) applies or as part of a distribution referred to in Section 11(d)(iv)) in an aggregate amount that, combined together with (1) the aggregate amount of any other such distributions to all holders of its Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 11(d)(v) has been made, and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) of consideration payable in respect of any tender offer by the Company for all or any portion of the Common Shares concluded within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to Section 11(d)(vi) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 11(d)(vii)) on the Record Date with respect to such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of Common Shares outstanding on the Record Date and
- 26 - (ii) the denominator of which shall be equal to the Current Market Price on such Record Date; provided, however, that, if the portion of the cash so distributed applicable to one Common Share is equal to or greater than the Current Market Price of the Common Shares on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Series C Preferred Shares shall have the right to receive upon conversion of a Series C Preferred Share (or any portion thereof) the amount of cash such holder would have received had such holder converted such Series C Preferred Share (or portion thereof) immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. Any cash distribution to all holders of Common Shares as to which the Company makes the election permitted by Section 11(d)(xii) and as to which the Company has complied with the requirements of such Section shall be treated as not having been made for all purposes of this Section 11(d)(v).
(vi) If a tender offer made by the Company or any of its subsidiaries for all or any portion of the Common Shares expires and such tender offer (as amended upon the expiration thereof) requires the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that, combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers, by the Company or any of its subsidiaries for all or any portion of the Common Shares expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 11(d)(vi) has been made and (2) the aggregate amount of any distributions to all holders of the Common Shares made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect
- 27 - of which no adjustment pursuant to Section 11(d)(v) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 11(d)(vii)) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of Common Shares outstanding (including any tendered shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of Common Shares outstanding (including any tendered shares) at the Expiration Time multiplied by the Current Market Price of the Common Shares on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of Common Shares outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price of the Common Shares on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender offer had not been made. If the application of this Section 11(d)(vi) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 11(d)(vi).
(vii) For purposes of this Section 11(d), the following terms shall have the meaning indicated:
- 28 - "closing price" with respect to any securities on any day means the closing price on such day or, if no such sale takes place on such day, the average of the reported high and low prices on such day, in each case on The Nasdaq National Market or the New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such national market or exchange, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the high and low prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated or a similar generally accepted reporting service, or, if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors.
"Current Market Price" means the average of the daily closing prices per Common Share for the 10 consecutive trading days immediately prior to the date in question; provided, however, that (A) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 11(d)(i), (ii), (iii), (iv), (v), or (vi) occurs during such 10 consecutive trading days, the closing price for each trading day prior to the "ex" date for such other event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (B) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 11(d)(i), (ii), (iii), (iv), (v) or (vi) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the closing price for each trading day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as
- 29 - a result of such other event and (C) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (A) or (B) of this proviso, the closing price for each trading day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 11(d)(iv) or (v), whose determination shall be conclusive and described in a resolution of the Board of Directors) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one Common Share as of the close of business on the day before such "ex" date. For purposes of any computation under Section 11(d)(vi), the Current Market Price on any date shall be deemed to be the average of the daily closing prices per Common Share for such day and the next two succeeding trading days; provided, however, that, if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 11(d)(i), (ii), (iii), (iv), (v), or (vi) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the closing price for each trading day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date (I) when used with respect to any issuance or distribution, means the first date on which the Common Shares trade regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (II) when used with respect to any subdivision or combination of Common Shares, means the first date on which the Common Shares trade regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective and (III) when used with respect to any tender or exchange offer means the first date on which the Common Shares trade regular way on such exchange or in such market after the Expiration Time of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 11(d), such adjustments shall be made to the
- 30 - Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 11(d) and to avoid unjust or inequitable results, as determined in good faith by the Board of Directors.
"fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's-length transaction.
"Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Shares have the right to receive any cash, securities or other property or in which the Common Shares (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).
(viii) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 11(d)(viii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made by the Company and shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. No adjustment need be made for a change in the par value or no par value of the Common Shares.
(ix) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Registrar an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each holder of Series C Preferred Shares at such holder's last address appearing on the register of holders maintained for that purpose within 20 days of the effective date of
- 31 - such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.
(x) In any case in which this Section 11(d) provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Series C Preferred Share converted after such Record Date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment.
(xi) For purposes of this Section 11(d), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company shall not pay any dividend or make any distribution on Common Shares held in the treasury of the Company.
(xii) In lieu of making any adjustment to the Conversion Price pursuant to Section 11(d)(v), the Company may elect to reserve an amount of cash for distribution to the holders of Series C Preferred Shares upon the conversion of the Series C Preferred Shares so that any such holder converting Series C Preferred Shares will receive upon such conversion, in addition to the Common Shares and other items to which such holder is entitled, the full amount of cash which such holder would have received if such holder had, immediately prior to the Record Date for such distribution of cash, converted its Series C Preferred Shares into Common Shares, together with any interest accrued with respect to such amount, in accordance with this Section 11(d)(xii) The Company may make such election by providing an Officers' Certificate to the Registrar to such effect on or prior to the payment date for any such distribution and depositing with the Registrar on or prior to such date an amount of cash equal to the aggregate amount that the holders of Series C Preferred Shares would have received if such holders had, immediately prior to the Record Date for such distribution, converted all the Series C Preferred Shares into Common Shares. Any such funds so deposited by the Company with the Registrar shall be invested by the
- 32 - Registrar in U.S. Government Obligations with a maturity not more than three months from the date of issuance. Upon conversion of Series C Preferred Shares by a holder thereof, such holder shall be entitled to receive, in addition to the Common Shares issuable upon conversion, an amount of cash equal to the amount such holder would have received if such holder had, immediately prior to the Record Date for such distribution, converted its Series C Preferred Shares into Common Shares, along with such holder's pro rata share of any accrued interest earned as a consequence of the investment of such funds. Promptly after making an election pursuant to this Section 11(d)(xii), the Company shall give or shall cause to be given notice to all holders of Series C Preferred Shares of such election, which notice shall state the amount of cash per $50 of liquidation preference of Series C Preferred Shares such holders shall be entitled to receive (excluding interest) upon conversion of the Series C Preferred Shares as a consequence of the Company having made such election.
(xiii) Whenever the conversion price is adjusted as provided in Section 11(d), the Company shall compute the adjusted conversion price in accordance with Section 11(d) and shall prepare a certificate signed by any Vice President or the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based and the effective date of such adjustment, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Series C Preferred Shares.
(e) In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any merger of another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Shares of the Company), or in case of any conveyance or transfer of the properties and assets of the Company substantially as an entirety, the holder of each Series C Preferred Share then outstanding shall have the right thereafter, during the period such Series C Preferred Share shall be convertible as specified in Section 11(a), to convert such Series C Preferred Share only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of
- 33 - shares of Common Shares of the Company into which such Series C Preferred Share might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Common Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of 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 Common Share of the Company 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 securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section. The above provisions of this Section shall similarly apply to successive consolidations, mergers, conveyances or transfers.
(f) In case:
(1) the Company shall declare a dividend (or any other distribution) on its Common Shares payable otherwise than in cash out of its earned surplus; or
(2) the Company shall authorize the granting to all holders of its Common Shares of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or
(3) of any reclassification of the Common Shares of the Company (other than a subdivision or combination of its outstanding Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or the sale or transfer of all or substantially all the assets of the Company; or
(4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed with the Registrar and at each office or agency maintained for the purpose of conversion
- 34 - of Series C Preferred Shares, and shall cause to be mailed to all holders at their last addresses as they shall appear in the Series C Preferred Shares Register, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give the notice requested by this Section or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or the vote upon any such action.
(h) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Shares, for the purpose of effecting the conversion of Series C Preferred Shares, the full number of Common Shares then issuable upon the conversion of all outstanding Series C Preferred Shares.
(i) The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Common Shares on conversion of Series C Preferred Shares pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Shares in a name other than that of the holder of the Series C Preferred Share or Series C Preferred Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid.
12. Consolidation, Merger, Conveyance or Transfer. (a) The Company shall not consolidate with or merge into any other company or convey or transfer its properties and assets
- 35 - substantially as an entirety to any person, unless (i) the Series C Preferred Shares shall have converted into or exchanged for and shall become shares of such resulting, surviving or transferee person, having in respect of such resulting, surviving or transferee person the same powers, preference and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series C Preferred Shares had immediately prior to such transaction and (ii) the Company shall have delivered to the Registrar an Officer's Certificate and an opinion of counsel, each stating that such consolidation, merger, conveyance or transfer complies with this Section 12 and that all conditions precedent herein provided for relating to such transaction have been complied with.
(b) Upon any consolidation or merger or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 12(b), the successor company formed by such consolidation or into which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Schedule with the same effect as if such successor company had been named as the Company herein, and thereafter the predecessor company shall be relieved of all obligations and covenants under this Schedule and the Series C Preferred Shares.
13. Registration Rights. Pursuant to a Registration Rights Agreement, dated November 6, 1996 (the "Closing Date"), between the Company and the Initial Purchasers (the "Registration Rights Agreement"), the Company has agreed for the benefit of the holders, that it will within 180 days after the Closing Date, file a shelf registration statement (the "Shelf Registration Statement") with the Securities and Exchange Commission (the "Commission") with respect to resales of the Series C Preferred Shares and Common Shares issuable upon conversion thereof; (ii) will use its best efforts to cause, within 240 days after the Closing Date, such Shelf Registration Statement to be declared effective by the Commission; and (iii) subject to certain exceptions, the Company will maintain such Shelf Registration Statement continuously effective under the Securities Act until such date as of which neither the Series C Preferred Shares nor the Common Shares issuable upon conversion thereof shall constitute restricted securities pursuant to Rule 144(k) under the Securities Act or all the Series C Preferred Shares and the
- 36 - Common Shares issuable upon conversion thereof have been sold pursuant to such Shelf Registration Statement.
14. SEC Reports; Reports by Company. Whether or not required by the rules and regulations of the SEC, so long as any Series C Preferred Shares are outstanding, the Company shall file with the Commission and, if requested, furnish to the holders of Series C Preferred Shares all quarterly and annual financial information required to be contained in a filing with the Commission on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to annual information only, a report thereon by the Company's certified independent accountants;
15. Definitions. For purposes of this Schedule, the following terms shall have the meaning set forth below:
Business Day: each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to be closed. Closing Date: November 6, 1996
Common Shares: Common shares of the Company, par value $.01 per share.
CPEOs: Convertible Preferred Equivalent Obligations due 2006 of the Company.
Commission: the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the adoption of this Schedule such Commission is not existing and performing the duties now assigned to it, then the body performing such duties at such time.
Company: Loral Space & Communications Ltd.
Company Order: a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, provided, however, that any person duly designated by the Chairman of the Board, the President, a Vice President or any other officer of
- 37 - the Company may sign or execute on behalf of any or all such persons listed above.
Debt Obligations: the principal of, premium, if any, interest and other amounts due on any indebtedness, whether now outstanding or hereafter created, incurred, assumed or guaranteed by the Company, for money borrowed from others (including obligations under capitalized leases, purchase money indebtedness or any trade credit), liabilities incurred in the ordinary course of business, commitment, standby and other fees due and payable to financial institutions with respect to credit facilities that may be maintained by the Company or in connection with the acquisition by the Company of any other business or entity, or in respect of letters of credit or bid, performance or surety bonds issued for the account or on the credit of the Company, and, in each case, all renewals, extensions and refundings thereof.
Deferral Trigger Event: the Company has deferred the payment of dividends due under the Series C Preferred Shares in an aggregate equal to six quarterly dividend payments
Dividend Arrearage: the amount of dividend payments that the Company has elected to defer pursuant to a Deferral Election that remains unpaid.
Dividend Payment Date: the dates specified in a Series C Preferred Share as the fixed dates on which a dividend is due and payable; provided, however, that if such date shall not be a Business Day, then such date shall be the next Business Day.
Junior Shares: all classes of Common Shares and each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which do not expressly provide that it ranks on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company;
Mandatory Redemption Date: November 1, 2006.
Outstanding: when used with respect to Series C Preferred Shares means, as of the date of termination, all Series C Preferred Shares theretofore authenticated and delivered under this Schedule, except (i) Series C Preferred Shares theretofore converted into Common Shares in accordance with Section 11 hereof and Series C Preferred Shares theretofore canceled by the Registrar or delivered to the Registrar for cancellation; (ii)
- 38 - Series C Preferred Shares for whose payment or redemption money in the necessary amount has been theretofore deposited with the Registrar or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the holders of such Series C Preferred Shares; provided, that, if such Series C Preferred Shares are to be redeemed, notice of such redemption has been duly given pursuant to this Schedule or provision therefor satisfactory to the Registrar has been made; and (iii) Series C Preferred Shares (x) that are mutilated, destroyed, lost or stolen which the Company has decided to pay or (y) in exchange for or in lieu of which other Series C Preferred Shares have been authenticated and delivered pursuant to this Schedule, provided, however, that, in determining whether the holders of the Series C Preferred Shares have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Series C Preferred Shares owned by the Company or any other obligor upon the Series C Preferred Shares or any affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Registrar shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Series C Preferred Shares which the Registrar has actual knowledge of being so owned shall be so disregarded. Series C Preferred Shares so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Registrar the pledgee's right so to act with respect to such Series C Preferred Shares and that the pledgee is not the Company or any other obligor upon the Series C Preferred Shares or any affiliate of the Company or of such other obligor.
Parity Shares: the Series A Preferred Shares and each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which expressly provide that such class or series will rank on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution.
Registrar: The Bank of New York.
Series C Preferred Shares Directors: the Directors who may be elected to the Company's Board of Directors by the holders of the Series C Preferred Shares in the case of a Deferral Trigger Event in respect of the Series C Preferred Shares.
- 39 - EXECUTION COPY
INDENTURE
Between
LORAL SPACE & COMMUNICATIONS LTD.
and
THE BANK OF NEW YORK,
as Trustee
Dated as of November 1, 1996
6% Convertible Preferred Equivalent Obligations due 2006 2
TABLE OF CONTENTS
Page
ARTICLE I
Definitions and Other Provisions of General Application
SECTION 1.01. Definitions...... 1 SECTION 1.02. Compliance Certificates and Opinions...... 10 SECTION 1.03. Form of Documents Delivered to Trustee...... 11 SECTION 1.04. Acts of Holders...... 11 SECTION 1.05. Notices, etc., to Trustee and Company...... 12 SECTION 1.06. Notice to Holders; Waiver...... 13 SECTION 1.07. Conflict with Trust Indenture Act...... 14 SECTION 1.08. Effect of Headings and Table of Contents...... 14 SECTION 1.09. Successors and Assigns...... 14 SECTION 1.10. Separability Clause...... 14 SECTION 1.11. Benefits of Indenture...... 14 SECTION 1.12. Governing Law...... 14 SECTION 1.13. Legal Holidays...... 14
ARTICLE II
Security Forms
SECTION 2.01. Forms Generally...... 15 SECTION 2.02. Global Securities; Book Entry Provisions; Certificated Securities...... 15
------Note: This table of contents shall not, for any purpose, be deemed to be part of the Indenture. 2
ARTICLE III
The Securities
SECTION 3.01. Title and Terms...... 17 SECTION 3.02. Denominations...... 19 SECTION 3.03. Execution, Authentication, Delivery and Dating...... 19 SECTION 3.04. Temporary Securities...... 20 SECTION 3.05. Registrar, Paying Agent and Conversion Agent...... 20 SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities...... 25 SECTION 3.07. Payment of Interest; Mechanics of Payment, Interest Rights Preserved...... 26 SECTION 3.08. Persons Deemed Owners...... 27 SECTION 3.09. Cancellation...... 28 SECTION 3.10. Computation of Interest...... 28 SECTION 3.11. CUSIP Number...... 28 SECTION 3.12. Treatment of the Securities for U.S. Federal Income Tax Purposes...... 28
ARTICLE IV
Satisfaction and Discharge
SECTION 4.01. Satisfaction and Discharge of Indenture...... 29 SECTION 4.02. Application of Trust Money...... 31
ARTICLE V
Remedies
SECTION 5.01. Collection of Obligations and Suits for Enforcement by Trustee...... 31 SECTION 5.02. Trustee May File Proofs of Claim ...... 32 SECTION 5.03. Trustee May Enforce Claims Without Possession of Securities...... 33 SECTION 5.04. Application of Money Collected...... 33 SECTION 5.05. Limitation on Suits...... 34 SECTION 5.06. Right of Holders To Receive Principal, Premium and Interest and To Convert...... 34 3
SECTION 5.07. Restoration of Rights and Remedies...... 35 SECTION 5.08. Rights and Remedies Cumulative...... 35 SECTION 5.09. Delay or Omission Not Waiver...... 35 SECTION 5.10. Control by Holders...... 35 SECTION 5.11. Waiver of Past Defaults...... 36 SECTION 5.12. Undertaking for Costs...... 36 SECTION 5.13. Waiver of Stay, Usury or Extension Laws...... 37 SECTION 5.14. Voting Rights Upon a Deferral Trigger Event...... 37
ARTICLE VI
The Trustee
SECTION 6.01. Certain Duties and Responsibilities...... 37 SECTION 6.02. Certain Rights of Trustee...... 39 SECTION 6.03. Not Responsible for Recitals or Issuance of Securities...... 40 SECTION 6.04. May Hold Securities...... 40 SECTION 6.05. Money Held in Trust...... 40 SECTION 6.06. Compensation and Reimbursement...... 41 SECTION 6.07. Corporate Trustee Required; Eligibility...... 42 SECTION 6.08. Resignation and Removal; Appointment of Successor...... 42 SECTION 6.09. Acceptance of Appointment by Successor...... 44 SECTION 6.10. Merger, Conversion, Consolidation or Succession to Business...... 44 SECTION 6.11. Preferential Collection of Claims Against Company...... 45 SECTION 6.12. Appointment of Authenticating Agent...... 45
ARTICLE VII
Holders' List and Reports by Trustee and Company
SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders...... 48 SECTION 7.02. Preservation of Information; Communications to Holders...... 48 SECTION 7.03. Reports by Trustee...... 50 SECTION 7.04. SEC Reports; Reports by Company...... 50 SECTION 7.05. Compliance Certificate...... 51 4
ARTICLE VIII
Consolidation, Merger, Conveyance or Transfer
SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms...... 51 SECTION 8.02. Successor Corporation Substituted...... 52
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Holders...... 52 SECTION 9.02. Supplemental Indentures with Consent of Holders...... 53 SECTION 9.03. Execution of Supplemental Indentures...... 54 SECTION 9.04. Effect of Supplemental Indentures...... 55 SECTION 9.05. Conformity with Trust Indenture Act...... 55 SECTION 9.06. Reference in Securities to Supplemental Indentures...... 55
ARTICLE X
Covenants
SECTION 10.01. Payment of Principal, Premium and Interest...... 55 SECTION 10.02. Maintenance of Office or Agency...... 56 SECTION 10.03. Security Payments To Be Held in Trust...... 56 SECTION 10.04. Corporate Existence...... 58 SECTION 10.05. Waiver of Certain Covenants...... 59
ARTICLE XI
Redemption of Securities
SECTION 11.01. Right of Redemption; Mechanics of Redemption...... 59 SECTION 11.02. Applicability of Article...... 59 SECTION 11.03. Election To Redeem...... 59 SECTION 11.04. Selection by Trustee of Securities To Be Redeemed...... 60 5
SECTION 11.05. Notice of Redemption...... 60 SECTION 11.06. Deposit of Redemption Price...... 61 SECTION 11.07. Securities Payable on Redemption Date...... 62 SECTION 11.08. Securities Redeemed in Part...... 62
ARTICLE XII
Conversion of Securities
SECTION 12.01. Conversion Privilege and Conversion Price...... 62 SECTION 12.02. Exercise of Conversion Privilege...... 63 SECTION 12.03. Fractions of Shares...... 64 SECTION 12.04. Adjustment of Conversion Price...... 64 SECTION 12.05. Notice of Adjustment of Conversion Price ...... 77 SECTION 12.06. Provisions in Case of Consolidation, Merger or Conveyance or Transfer of Properties and Assets ...... 77 SECTION 12.07. Notice of Certain Corporate Action ...... 78 SECTION 12.08. Company To Reserve Common Stock ...... 79 SECTION 12.09. Taxes on Conversions ...... 79 SECTION 12.10. Covenant as to Common Stock ...... 80 SECTION 12.11. Responsibility of Trustee ...... 80
ARTICLE XIII
Subordination of Securities
SECTION 13.01. Securities Subordinate to Debt Obligations...... 80 SECTION 13.02. No Payments When Debt Obligations in Default; Payment Over of Proceeds upon Dissolution, etc...... 81 SECTION 13.03. Trustee To Effectuate Subordination ...... 84 SECTION 13.04. Trustee Not Charged with Knowledge of Prohibition ...... 84 SECTION 13.05. Rights of Trustee as Holder of Debt Obligations ...... 84 SECTION 13.06. Article Applicable to Paying Agent...... 85 SECTION 13.07. Trustee Not Fiduciary for Holders of Debt Obligations...... 85
ARTICLE XIV 6
Mandatory Exchange of Securities
SECTION 14.01. Exchange for Series C Preferred Stock...... 85 SECTION 14.02. Procedures...... 86 SECTION 14.03. No Exchange in Certain Cases...... 87
LORAL SPACE & COMMUNICATIONS LTD.
Reconciliation and Tie Between the Trust Indenture Act of 1939 and Indenture dated as of November 1, 1996
Trust Indenture Act Section Indenture Section ------
ss. 310(a)(1)...... 6.07 (a)(2)...... 6.07 (a)(3)...... Not Applicable (a)(4)...... Not Applicable (a)(5)...... 6.07 (b)...... 6.07 6.08 ss. 311(a)...... 6.11 (b)...... 6.11 (b)(2)...... 7.03(a)(2) 7.03(b) ss. 312(a)...... 7.01 7.02(a) (b)...... 7.02(b) (c)...... 7.02(c) ss. 313(a)...... 7.03(a) (b)...... 7.03(b) (c)...... 7.03(a) (d)...... 7.03(c) ss. 314(a)...... 7.04 (b)...... Not Applicable (c)(1)...... 1.02 (c)(2)...... 1.02 (c)(3)...... Not Applicable (d)...... Not Applicable (e)...... 1.02 ss. 315(a)...... 6.01(a) (b)...... 6.02 7.03(a)(6) (c)...... 6.01(b) (d)...... 6.01(c) (d)(1)...... 6.01(a)(1) (d)(2)...... 6.01(c)(2) (d)(3)...... 6.01(c)(3) (e)...... 5.14 ss. 316(a)...... 1.01 (a)(1)(A)...... 5.02 5.12 7
(a)(1)(B)...... 5.13 (a)(2)...... Not Applicable (b)...... 5.08 ss. 317(a)(1)...... 5.03 (a)(2)...... 5.04 (b)...... 10.03 ss. 318(a)...... 1.07
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. INDENTURE dated as of November 1, 1996, between LORAL SPACE & COMMUNICATIONS LTD., a corporation duly organized and existing under the laws of Bermuda (herein called the "Company"), having its principaloffice at 600 Third Avenue, New York, N.Y., and THE BANK OF NEW YORK, a New York banking corporation, as Trustee (herein called the "Trustee").
The Company has duly authorized the creation of an issue of its 6% Convertible Preferred Equivalent Obligations due 2006 (herein called the "Securities") of substantially the tenor and amount hereinafter set forth and to provide therefor the Company has duly authorized the execution and delivery of this Indenture.
All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities by the Holders (as hereinafter defined) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows:
ARTICLE I
Definitions and Other Provisions of General Application
SECTION 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; 2
(b) all other terms used herein which are defined in the Trust Indenture Act (as hereinafter defined), either directly or by reference therein, have the meanings assigned to them therein; and
(c) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
"Act" when used with respect to any Holder has the meaning specified in Section 1.04.
"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 the purposes of this definition of Affiliate, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate Securities.
"Average Market Value" means the arithmetic average of the Current Market Value of the Common Stock for the ten Trading Days ending on the second Business Day prior to the applicable date of payment.
"Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to be closed. 3
"Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.
"Common Stock", as applied to the capital stock of any corporation other than the Company, shall mean the capital stock of any class which has no preference in respect of dividends or other distributions of assets or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of such corporation and which is not subject to redemption by such corporation; and as applied to the Company, shall mean the Common Stock of the Company, par value $.01; provided, however, that, subject to the provisions of Section 12.06, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of the Company at the date of the execution of this instrument or shares of any class or classes resulting from any reclassification or reclassification thereof which have no preference in respect of dividends or other distributions of assets or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided further, that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.
"Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation.
"Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee; provided, however, that any person duly designated by the Chairman of the Board, the President, a Vice President or any 4 other officer of the Company may sign or execute on behalf of any or all such persons listed above.
"Conversion Agent" has the meaning specified in Section 3.05(a).
"Conversion Price" has the meaning specified in Section 12.01.
"Corporate Trust Office" means the principal office of the Trustee in The City of New York at which at any particular time its corporate trust business shall be administered, which office at the time of the execution of this indenture is located at 101 Barclay Street, Floor 21 West, New York, New York 10286, Attention of Corporate Trust Trustee Administration.
"Corporation" includes corporations, associations, companies and business trusts.
"CPE Nominee" has the meaning specified in Section 5.14.
"Current Market Price" has the meaning specified in Section 12.04.
"Current Market Value" means the volume weighted average sale prices of the Common Stock as reported on the New York Stock Exchange or any national securities exchange upon which the Common Stock is then listed for the Trading Day in question.
"Debt Obligations" will mean the principal of, premium, if any, interest and other amounts due on any indebtedness, whether now outstanding or hereafter created, incurred, assumed or guaranteed by the Company, for money borrowed from others (including obligations under capitalized leases, purchase money indebtedness or any trade credit), liabilities incurred in the ordinary course of business, commitment, standby and other fees due and payable to financial institutions with respect to credit facilities that may be maintained by the Company or in connection with the acquisition by the Company of any other business or entity, or in respect of letters of credit or bid, performance or surety bonds issued for the account or on the credit of the Company, and, in each case, all renewals, extensions and refundings thereof, other than (i) any such indebtedness as to which, in the instrument creating or evidencing the same, 5 it is provided that such indebtedness is pari passu or junior in right of payment to the Securities and (ii) the Securities.
"Deferral Election" means the election of the Board of Directors to defer the payment of an installment of interest due on an Interest Payment Date, or any portion due thereof.
"Deferral Trigger Event" means the Company has deferred the payment of interest due under the Securities in an aggregate equal to six quarterly interest payments.
"Depositary" means The Depository Trust Company, its nominees and their respective successors.
"Dilution Trigger Event" has the meaning specified in Section 12.04.
"Exchange Act" means the Securities Exchange Act of 1934.
"Holder" means a Person in whose name a Security is registered in the Security Register.
"Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof.
"Initial Purchasers" has the meaning specified in the Purchase Agreement.
"Interest Arrearages" means the amount of interest payments that the Company has elected to defer pursuant to a Deferral Election that remains unpaid.
"Interest Payment Date" means the dates specified in a Security as the fixed dates on which any installment of interest is due and payable; provided, however, that if such date shall not be a Business Day, then such date shall be the next Business Day.
"Interest Payment Notice" means written notice delivered to the Holders, with a copy to the Trustee, notifying them that the Company has elected to defer the payment of an interest payment pursuant to a Deferral Election. 6
"Mandatory Exchange" has the meaning specified in Section 14.01(b).
"Mandatory Exchange Date" has the meaning specified in Section 14.02.
"Mandatory Exchange Notice" has the meaning specified in Section 14.02.
"Mandatory Redemption Date" means the date specified in the Security as the fixed date on which the principal of such Security is due and payable; provided, however, that, if such date shall not be a Business Day, then the Mandatory Redemption Date shall be the next Business Day.
"Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel acceptable to the Trustee, who may be counsel for, or employed by, the Company.
"Optional Redemption" has the meaning specified in Section 6 of the Security.
"Optional Redemption Date" means the Redemption Date for an Optional Redemption as specified in Section 6 of the Security.
"Outstanding" when used with respect to Securities means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore converted into Common Stock in accordance with Article XII and Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; 7 provided, that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made;
(iii) Securities paid pursuant to the third paragraph of Section 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture; and
(iv) that, from and after the Mandatory Exchange Date, if the conditions in Section 14.02 and 14.03 have been satisfied, no Securities shall be or remain Outstanding for any purposes of this Indenture; provided, however, that, in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which the Trustee has actual knowledge of being so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" has the meaning specified in Section 3.05(a).
"Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof.
"Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange 8 for or in lieu of all or a portion of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as such mutilated, destroyed, lost or stolen Security or portion thereof.
"Preferred Stock" means capital stock of the Company designated by the Board of Directors having a preference in respect of dividends or other distributions of assets or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company.
"Purchase Agreement" means the purchase agreement dated November 1, 1996, between the Company and the Initial Purchasers in connection with the Securities, as amended from time to time.
"Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture and includes the Optional Redemption Date and Mandatory Redemption Date, as the case may be.
"Redemption Notice" means written notice delivered to the Holders, with a copy to the Trustee, notifying the Holders of the Company's election to redeem the Securities pursuant to an Optional Redemption.
"Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.
"Registrar" has the meaning specified in Section 3.05(a).
"Registration Rights Agreement" means the Registration Rights Agreement relating to the Securities dated November 6, 1996, between the Company and the Initial Purchasers.
"Regular Record Date" for the interest payable on any Interest Payment Date means the January 15, April 15, July 15 or October 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date.
"Responsible Officer", when used with respect to the Trustee, means any officer within the corporate trust department (or any successor department) of the Trustee, 9 including, without limitation, any Vice President, any Assistant Vice President, any Assistant Treasurer, any Assistant Secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject.
"Securities" means the 6% Convertible Preferred Equivalent Obligations due 2006 issued pursuant to this Indenture.
"Security Register" has the meaning specified in Section 3.05(a).
"Series C Preferred Stock" means the Company's 6% Series C Convertible Redeemable Preferred Stock issued upon the occurrence of a Mandatory Exchange pursuant to Article XIV hereof.
"Series C Schedule" means Schedule III to the Bye- Laws of the Company, when and if adopted by the Company's shareholders, substantially in the form attached hereto as Exhibit D.
"Shelf Registration Statement" has the meaning specified in the Registration Rights Agreement.
"Stock Transfer Agent" means The Bank of New York or any other entity named as the stock transfer agent of the Company.
"Trading Day" means (a) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which such security actually trades on the New York Stock Exchange or another national securities exchange, (b) if the applicable security is quoted on The Nasdaq National Market, a day on which such security actually trades or (c) if the applicable security is not so listed, admitted for trading or quoted, any Business Day on which such security actually trades.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 and as in force at the date as of which this instrument was executed, except as provided in Section 9.05. 10
"Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee.
"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 are pledged and which are not callable or redeemable at the issuer's option.
"Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president".
SECTION 1.02. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;
(b) 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; 11
(c) a statement that, in the opinion of each 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
(d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.
SECTION 1.03. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.
SECTION 1.04. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more 12 instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.
(c) The ownership of Securities shall be proved by the Security Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.
SECTION 1.05. Notices, etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, 13
(a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing and mailed, first-class, postage prepaid, to the Trustee at its Corporate Trust Office, Attention of Corporate Trust Trustee Administration, or
(b) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company, or
(c) the Company by the Trustee or the Trustee by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if transmitted by facsimile transmission to the Company at (212) 661-8988 or to the Trustee at (212) 815-5915 (or to such other facsimile transmission number previously furnished in writing to the Company by the Trustee or to the Trustee by the Company) and in each case confirmed by a copy sent to the Company or to the Trustee, as the case may be, by guaranteed overnight courier.
SECTION 1.06. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. 14
In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.
SECTION 1.07. Conflict with Trust Indenture Act. If and to the extent that any provision hereof limits, qualifies or conflicts with the duties imposed by, or with another provision (an "incorporated provision") included in this Indenture by operation of, any of Sections 3.10 to 3.18, inclusive, of the Trust Indenture Act, such imposed duties or incorporated provision shall control.
SECTION 1.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
SECTION 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.
SECTION 1.10. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Debt Obligations and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 1.12. 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 law of another jurisdiction would be required thereby.
SECTION 1.13. Legal Holidays. In any case where any Interest Payment Date or any Redemption Date of any Security or the last date on which a Holder has the right to 15 convert his Securities shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal or Redemption Price of or payment of interest on or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date or such Redemption Date or on such last day for conversion; provided, that no interest shall accrue for the period from and after such Interest Payment Date or such Redemption Date, as the case may be.
ARTICLE II
Security Forms
SECTION 2.01. Forms Generally. The 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 Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). The Company shall furnish any such legend not contained in Exhibit A to the Trustee in writing. Each Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Exhibit A are part of the terms of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby.
SECTION 2.02. Global Securities; Book-Entry Provisions; Certificated Securities. (a) The Securities are being offered and sold by the Company pursuant to a Purchase Agreement.
Securities offered and sold to Qualified Institutional Buyers ("QIBs") in reliance on Rule 144A under the Securities Act ("Rule 144A"), as provided in the Purchase Agreement, shall be issued in the form of one or more permanent global Securities in definitive, fully registered form without interest coupons with the Global Securities Legend and Restricted Securities Legend set forth in Exhibit A hereto (each, a "Global Security"), which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Trustee, at its New York office, 16 as custodian for the Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Security may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided.
(b) This Section shall apply only to a Global Security deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with this Section, authenticate and deliver initially one or more Global Securities that (i) shall be registered in the name of Cede & Co. or other nominee of such Depositary and (ii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions or held by the Trustee as custodian for the Depositary pursuant to a FAST Balance Certificate Agreement between the Depositary and the Trustee.
Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary or by the Trustee as the custodian of the Depositary or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a Holder of a beneficial interest in any Global Security.
Except as provided in Section 3.05(b), owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Securities.
(c) Purchasers of Securities who are not QIBs will receive certificated Securities bearing the Restricted Securities Legend set forth in Exhibit A hereto ("Restricted Securities"). Restricted Securities will bear the Restricted Securities Legend set forth on Exhibit A unless removed in 17 accordance with Section 3.05(c) and may not be exchanged for a Global Security, or interest therein, at any time, except as set forth in paragraph (d) of this Section.
(d) Purchasers of Restricted Securities in reliance of Regulation S under the Securities Act ("Regulation S") may exchange such Restricted Securities for a beneficial interest in a Global Security following the expiration of the "40-day restricted period" within the meaning of Regulation S by delivering (1) any such Restricted Securities, duly endorsed as provided herein; (2) instructions from such Holder directing the Trustee to create a beneficial interest in such Global Security and the authorized denomination or denominations of such beneficial interest to be created; and (3) such other certificates, legal opinions or other information as the Company may reasonably require.
(e) After a transfer of any Securities during the period of the effectiveness of a Shelf Registration Statement with respect to the Securities, all requirements pertaining to legends on such Security will cease to apply, the requirements requiring any such Security issued to certain Holders be issued in global form will cease to apply, and a certificated Security without legends will be available to the Holder of such Securities.
ARTICLE III
The Securities
SECTION 3.01. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $600,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.08 or 12.02.
The Securities shall be known and designated as the "6% Convertible Preferred Equivalent Obligations due 2006" of the Company. Their Mandatory Redemption Date shall be November 1, 2006, and the Securities shall bear interest at the rate of 6% per annum, from November 6, 1996, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable quarterly in cash in arrears on February 1, May 1, August 1 18 and November 1 of each year, commencing February 1, 1997, until the principal thereof is paid or made available for payment; provided, however, that if (i) on or prior to May 5, 1997, a shelf registration statement with respect to resales of the Securities and the Shares of Common Stock issuable upon conversion thereof has not been filed with the Securities and Exchange Commission or (ii) on or prior to July 4, 1997, such shelf registration statement is not declared effective (each, a "Registration Default"), additional interest will accrue on the Securities, from and including the day following such Registration Default to but excluding the day on which such Registration Default has been cured. Additional interest will be paid quarterly in arrears, with the first quarterly payment due on the first Interest Payment Date following the date on which such additional interest begins to accrue, and will accrue at a rate per annum of 0.25% of the principal amount of the Securities, to and including the 90th day following such Registration Default and thereafter at a rate per annum of 0.50% until such Registration Default has been cured.
Payments (whether in cash or Common Stock) due on the Securities shall be payable at the office or agency of the Company maintained for such purpose in The City of New York and at any other office or agency maintained by the Company for such purpose. If any such payment is in cash, it shall be payable by United States dollar check drawn on, or wire transfer (provided that appropriate wire instructions have been received by the Trustee at least 15 days prior to the applicable date of payment) to a United States dollar account maintained by the Holder with, a bank located in New York City; provided, however, that at the option of the Company payment of interest in cash may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register.
The Securities shall be redeemable as provided in Article XI.
The Securities shall be convertible into Common Stock of the Company as provided in Article XII.
The Securities shall be subordinated in right of payment to Debt Obligations as provided in Article XIII.
The Securities shall be subject to mandatory exchange as provided in Article XIV. 19
Payments on the Securities shall be made in the form described in Section 10.01.
SECTION 3.02. Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of $50.00 and any integral multiple thereof.
SECTION 3.03. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries except no corporate seal shall be required for Temporary Securities issued pursuant to Section 3.04; provided, further, that any person duly designated by the Chairman of the Board, the President, a Vice-President or any other officer of the Company may execute the securities on behalf of any or all such persons listed above. The signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, 20 and the only evidence, that such Security has been duly authenticated and delivered hereunder.
SECTION 3.04. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.
If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities, at any office or agency of the Company designated pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities.
SECTION 3.05. Registrar, Paying Agent and Conversion Agent. (a) The Company shall maintain in the Borough of Manhattan, City of New York, State of New York and in a European city (only in connection with clauses (ii) and (iii) below) (i) an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), (ii) an office or agency where Securities may be presented for payment ("Paying Agent") and (iii) an office or agency where Securities may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange (the "Security Register"). The Company may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more co-registrars, one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent and, with respect to payments hereunder by delivery of Common Stock, may include 21 the Stock Transfer Agent, and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent, Registrar, co-registrar or Conversion Agent without prior notice to any Holder. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such. The Company or any of its Affiliates may act as Paying Agent, Registrar, co-registrar or Conversion Agent.
Upon surrender for registration of transfer of any Security at an office or agency of the Company, the Company shall execute, and the Trustee shall register on the Security Register and shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations, of a like aggregate principal amount.
At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations, of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same obligation and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company, the Trustee and the Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of 22
Securities, other than exchanges pursuant to Section 3.04, 9.06, 11.08, 12.01 or 12.02 not involving any transfer.
Neither the Company nor the Trustee or Registrar shall be required (a) to issue, authenticate or register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 11.04 and ending at the close of business on the day of such mailing or (b) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.
(b) Notwithstanding any provision to the contrary herein, so long as a Global Security remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Security, in whole or in part, or of any beneficial interest therein, shall only be made in accordance with Section 2.02 and this Section; provided, however, that beneficial interests in a Global Security may be transferred to persons who take delivery thereof in the form of a beneficial interest in the same Global Security in accordance with the transfer restrictions set forth in the Restricted Securities Legend and under the heading "Notice to Investors" in the Offering Memorandum.
(i) Except for transfers or exchanges made in accordance with any of clauses (b)(ii) through (iv) of this Section, transfers of a Global Security shall be limited to transfers of such Global Security in whole, but not in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee.
(ii) Global Security to Restricted Security. If an owner of a beneficial interest in a Global Security deposited with the Depositary or with the Trustee as custodian for the Depositary wishes at any time to transfer its interest in such Global Security to a person who is required to take delivery thereof in the form of a Restricted Security, such owner may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for one or more Restricted Securities of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (1) instructions from the Depositary directing the Trustee, as Registrar, 23 to authenticate and deliver one or more Restricted Securities of the same aggregate principal amount as the beneficial interest in the Global Security to be exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Restricted Securities to be so issued and appropriate delivery instructions, (2) a certificate in the form of Exhibit B attached hereto given by the owner of such beneficial interest and stating that the person transferring such interest in such Global Security reasonably believes that the person acquiring the Restricted Securities for which such interest is being exchanged is an "accredited investor" (as defined in Rule 501(a) of Regulation D under the Securities Act) and is acquiring such Restricted Securities having an aggregate principal amount of not less than $250,000 for its own account or for one or more accounts as to which the transferee exercises sole investment discretion, (3) a certificate in the form of Exhibit C attached hereto given by the person acquiring the Restricted Securities for which such interest is being exchanged, to the effect set forth therein, and (4) such other certifications, legal opinions or other information as the Company may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Trustee, as Registrar, as the case may be, will instruct the Depositary to reduce or cause to be reduced such Global Security by the aggregate principal amount of the beneficial interest therein to be exchanged and to debit or cause to be debited from the account of the person making such transfer the beneficial interest in the Global Security that is being transferred, and concurrently with such reduction and debit the Company shall execute, and the Trustee shall authenticate and deliver, one or more Restricted Securities of the same aggregate principal amount in accordance with the instructions referred to above.
(iii) Restricted Security to Restricted Security. If a Holder of a Restricted Security wishes at any time to transfer such Restricted Security to a person who is required to take delivery thereof in the form of a Restricted Security, such Holder may, subject to the restrictions on transfer set forth herein and in such Restricted Security, cause the exchange of such 24
Restricted Security for one or more Restricted Securities of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (1) such Restricted Security, duly endorsed as provided herein, (2) instructions from such Holder directing the Trustee, as Registrar, to authenticate and deliver one or more Restricted Securities of the same aggregate principal amount as the Restricted Security to be exchanged, such instructions to contain the name of the transferee and the authorized denomination or denominations of the Restricted Securities to be so issued and appropriate delivery instructions, (3) a certificate from the Holder of the Restricted Security to be exchanged in the form of Exhibit B attached hereto, (4) a certificate in the form of Exhibit C attached hereto given by the person acquiring the Restricted Securities for which such interest is being exchanged, to the effect set forth therein, and (5) such other certifications, legal opinions or other information as the Company may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Trustee, as Registrar, shall cancel or cause to be cancelled such Restricted Security and concurrently therewith, the Company shall execute, and the Trustee shall authenticate and deliver, one or more Restricted Securities of the same aggregate principal amount, in accordance with the instructions referred to above.
(iv) Other Exchanges. In the event that a Global Security is exchanged for Securities in definitive registered form pursuant to this Section, prior to the effectiveness of a Shelf Registration Statement with respect to such Securities, such Securities may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of clauses (ii) and (iii) above (including the certification requirements intended to ensure that such transfers comply with Rule 144A or Regulation S under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company.
(c) Except in connection with a Shelf Registration Statement contemplated by and in accordance with the terms of 25 the Registration Rights Agreement, if Securities are issued upon the transfer, exchange or replacement of Securities bearing the Restricted Securities Legend set forth in Exhibit A hereto, or if a request is made to remove such Restricted Securities Legend on Securities, the Securities so issued shall bear the Restricted Securities Legend, or the Restricted Securities Legend shall not be removed, as the case may be, unless there is delivered to the Company such satisfactory evidence, which may include an opinion of counsel licensed to practice law in the State of New York, as may be reasonably required by the Company, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or, with respect to Restricted Securities, that such Securities are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence, the Trustee, at the direction of the Company, shall authenticate and deliver Securities that do not bear the legend.
(d) The Trustee shall have no responsibility for any actions taken or not taken by the Depositary.
(e) Each Holder of a Security agrees to indemnify the Company and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Security in violation of any provision of this Indenture and/or applicable U.S. Federal or State securities law; provided, however, that such indemnity shall not apply to acts of wilful misconduct or gross negligence on the part of the Company or the Trustee, as the case may be.
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (a) evidence to their satisfaction of the destruction, loss or theft of any Security and (b) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall 26 authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07. Payment of Interest; Mechanics of Payment; Interest Rights Preserved. (a) Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest; provided, however, that the Company may make a Deferral Election on any Interest Payment Date. Interest Arrearages will not themselves bear interest, but so long as any Interest Arrearage remains outstanding, the Company will be prohibited from paying (i) dividends on its Common Stock, (ii) dividends on any Preferred Stock or (iii) interest on debt ranking pari passu with or junior to the Securities from time to time outstanding, except with respect to any such pari passu debt, on a pro rata basis based on the aggregate principal amount of such debt. 27
(b) In the event the Board of Directors makes a Deferral Election in respect of any Interest Payment Date, the Company shall deliver to Holders the Interest Payment Notice not later than 5 Business Days prior to such Interest Payment Date.
(c) Any Interest Arrearage on any Security may be paid by the Company in any lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.
(d) Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
(e) Securities surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (except Securities called for redemption on a Redemption Date within such period) must be accompanied by payment in cash of an amount equal to the interest thereon which the registered Holder is to receive; provided, that no payment shall be owed or payable to any converting Holder if the Board of Directors of the Company shall have elected to defer the interest payment to be made on such Interest Payment Date pursuant to paragraph (a) of this Section. No other adjustment for interest or dividends, including for any Interest Arrearages, is to be made upon conversion. Fractional shares of Common Stock will not be issued upon conversion, but in lieu thereof the Company will pay a cash adjustment in the manner set forth in Section 12.03.
SECTION 3.08. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of the principal or Redemption Price of and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security 28 is overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.
SECTION 3.09. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be delivered to the Company by the Trustee.
SECTION 3.10. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months.
SECTION 3.11. CUSIP Number. The Company in issuing Securities may use a "CUSIP" number, and if so, the Trustee may use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company will promptly notify the Trustee of any change in the CUSIP number.
SECTION 3.12. Treatment of the Securities for U.S. Federal Income Tax Purposes. (a) For purposes of Section 385(c) of the Internal Revenue Code of 1986, as amended, the Company hereby characterizes the Securities as stock and not as indebtedness for U.S. Federal income tax purposes.
(b) The Company and each holder of a Security, by its acceptance and holding of such Security, agree to treat the Securities as convertible preferred stock (treated as equity and not as indebtedness) for U.S. Federal income tax purposes. Neither the Company nor any such holder of the Securities shall take any position on any Federal, state or local income or franchise tax return, or take any other 29 action or reporting position for tax purposes, that is inconsistent with such treatment.
ARTICLE IV
Satisfaction and Discharge
SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when any of the following shall have occurred:
(a) (i) all Securities theretofore authenticated and delivered (other than (A) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 and (B) Securities for whose payment money and/or Common Stock has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid or redelivered to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation;
(ii) all such Securities not theretofore delivered to the Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their Mandatory Redemption Date within one year, or
(C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (A), (B) or (C) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for that purpose (I) money in an amount, or (II) U.S. Government Obligations that, through the scheduled 30 payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount or (III) a combination thereof in each case sufficient to pay and discharge the entire obligation on such Securities not theretofore delivered to the Trustee for cancellation to the date of such deposit (in the case of Securities which have become due and payable) or to the Redemption Date, as the case may be and, in the case of (B) or (C) above, has delivered to the Trustee an Opinion of Counsel stating that (1) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (2) since the date of the Indenture, there has been a change in the applicable United States 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 Securities will not recognize income, gain or loss for United States Federal income tax purposes as a result of such satisfaction and discharge 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 satisfaction and discharge had not occurred; or
(iii) the Securities have been exchanged or deemed exchanged for shares of Series C Preferred Stock in accordance with Article XIV hereof and the Company has not defaulted in the delivery of shares of Series C Preferred Stock or the payment of all accrued and unpaid interest to the Mandatory Redemption Date;
(b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee 31 under Section 6.06 and the obligations of the Company to any Authenticating Agent under Section 6.12 shall survive.
SECTION 4.02. Application of Trust Money. All money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, Redemption Price and interest for whose payment such money has been deposited with the Trustee. All moneys and U.S. Government Obligations deposited with the Trustee pursuant to Section 4.01 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon receipt by the Trustee of an Officers' Certificate.
ARTICLE V
Remedies
SECTION 5.01. Collection of Obligations and Suits for Enforcement by Trustee. The Company covenants that if:
(a) default is made with respect to any payment due on (including any Interest Arrearage) any Security at the Mandatory Redemption Date thereof; or
(b) there is a failure to redeem any Security required to be redeemed on an Optional Redemption Date pursuant to the provisions of this Indenture; the Company will, upon demand of the Trustee, pay to it (in cash and/or Common Stock, as elsewhere herein provided), for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for the principal or Redemption Price of and interest thereon, together with interest upon the overdue principal or Redemption Price, at the rate borne by the Securities; and, in addition thereto, such further amount (payable in cash) as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. 32
If the Company fails to pay such amounts and/or deliver such Common Stock forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of sums so due and unpaid (including the delivery of such Common Stock), may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated.
SECTION 5.02. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal or Redemption Price of the Securities shall then be due and payable as therein expressed and irrespective of whether the Trustee shall have made any demand on the Company for the payment thereof) shall be entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of principal or Redemption Price and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding; and
(b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same after deduction of its charges and expenses; and any receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the 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, disbursements and advances of the 33
Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.06.
Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan or reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 5.03. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.
SECTION 5.04. Application of Money Collected. Subject to Article XIII, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or Redemption Price or interest upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
(a) to the payment of all amounts due the Trustee under Section 6.06;
(b) to the payment of the amounts then due and unpaid for principal or Redemption Price of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal or Redemption Price and interest respectively; and
(c) to the payment of the remainder, if any, to the Company, its successors or assigns, or to whomsoever may 34 be lawfully entitled to the same, or as a court of competent jurisdiction may determine.
SECTION 5.05. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in its own name as Trustee hereunder;
(b) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;
(c) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and
(d) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders.
SECTION 5.06. Right of Holders To Receive Principal, Premium and Interest and To Convert. Notwithstanding any other provision in this Indenture, but subject to Article XIII, the Holder of any Security shall have the right to receive payment of the principal or Redemption Price of and (subject to Section 3.07(e)) interest on such Security on the Mandatory Redemption Date expressed in such Security (or on any other Redemption Date) and to convert such Security in accordance with Article XII and to institute suit for the enforcement of any such payment and 35 right to convert, and such rights shall not be impaired without the consent of such Holder.
SECTION 5.07. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.
SECTION 5.08. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
SECTION 5.09. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any default shall impair any such right or remedy or constitute a waiver of any such default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.
SECTION 5.10. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided that:
(a) such direction shall not be in conflict with any rule of law or with this Indenture;
(b) such direction is not unduly prejudicial to the other Holders or may involve the Trustee in personal 36 liability or if the Trustee determines that it does not have sufficient indemnity against any loss or expense connected to such action; and
(c) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.
SECTION 5.11. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default:
(a) in the payment of the principal or Redemption Price of or interest on any Security; or
(b) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and shall be deemed to have been cured, for every purpose of this Indenture but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.
SECTION 5.12. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities or to any suit instituted by any Holder for the enforcement of the payment of the principal or Redemption Price of or interest on any Security on or after 37 the Mandatory Redemption Date expressed in such Security (or on or after any other Redemption Date) or for the enforcement of the right to convert any Security in accordance with Article XII.
SECTION 5.13. Waiver of Stay, Usury or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, usury 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 Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
SECTION 5.14. Voting Rights Upon a Deferral Trigger Event. (a) Upon a Deferral Trigger Event, the Company shall use its reasonable best efforts to cause the Board of Directors to appoint two nominees designated by the Holders of a majority in principal amount of the Outstanding Securities (the "CPE Nominees") to the Board of Directors until the next annual meeting of the shareholders of the Company, at which time the Company shall submit such appointment to the shareholders for their approval; provided, however, that if such shareholder approval is not obtained, the above-described procedure shall continue to be in effect.
(b) The CPE Nominees, if appointed to the Board of Directors, will promptly resign upon receipt of notice from the Company that all Interest Arrearages with respect to the Securities have been paid.
ARTICLE VI
The Trustee
SECTION 6.01. Certain Duties and Responsibilities. (a) 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. 38
(b) In the absence of wilful misconduct 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 requirements of this Indenture, but, 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 they conform to the requirements of this Indenture.
(c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that:
(i) this subsection shall not be construed to limit the effect of subsection (a) of this Section;
(ii) the Trustee shall not be liable for any error of judgment made by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and
(iv) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any 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 for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, 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. 39
SECTION 6.02. Certain Rights of Trustee. Except as otherwise provided in Section 6.01:
(a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note 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) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as 40 it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and
(h) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture.
SECTION 6.03. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company or any Paying Agent other than the Trustee of Securities or the proceeds thereof.
SECTION 6.04. May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner of Securities and, subject to Section 6.11 and to Section 310(b) of the Trust Indenture Act, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Registrar or such other agent.
Subject to Section 310(b) of the Trust Indenture Act, the Trustee may become and act as trustee under other indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding in the same manner as if it were not Trustee.
SECTION 6.05. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The 41
Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company.
SECTION 6.06. Compensation and Reimbursement. The Company agrees:
(a) to pay to the Trustee from time to time such compensation as may be agreed upon by the Trustee and the Company from time to time for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);
(b) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents, counsel and other persons not regularly in its employ), except to the extent any such expense,, disbursement or advance may be attributable to its negligence or bad faith; and
(c) to indemnify the Trustee (in its individual capacity and as Trustee), its officers, directors, attorneys-in-fact and agents for, and to hold each such person harmless against, any and all loss, claim, damage, liability or expense, including taxes (other than taxes based on the income of such person) incurred without negligence or bad faith on such person's part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.
The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional obligations hereunder and shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 6.06, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee except money or property held in trust to pay the principal of or Redemption Price of or interest on 42 particular Securities and such lien shall survive the satisfaction and discharge of the Indenture and any other termination of the Indenture including any termination under any bankruptcy law. When the Trustee incurs expenses or renders services in connection herewith, the Holders by their acceptance of the Securities hereby agree that such expenses and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law. "Trustee" for the purposes of this Section 6.06 shall include any predecessor Trustee, but the negligence or willful misconduct of any Trustee shall not affect the indemnification of any other Trustee.
SECTION 6.07. Corporate Trustee Required; Eligibility. The Trustee shall at all times satisfy the requirements of Section 310 of the Trust Indenture Act and together with its immediate parent maintain a combined capital and surplus of at least $50,000,000, be subject to supervision or examination by Federal or State authority and have its Corporate Trust Office in The City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.
SECTION 6.08. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.09. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of notice of resignation or removal, the Trustee resigning or being removed may petition any court of competent jurisdiction for the appointment of a successor Trustee.
(b) The Trustee may resign at any time by giving written notice thereof to the Company. 43
(c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(i) the Trustee shall cease to be eligible under Section 6.07 and shall fail to resign after written request therefor by the Company or by any such Holder; or
(ii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Company by a Board Resolution may remove the Trustee, or (B) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, the Trustee or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. 44
(f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 6.09. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges pursuant to Section 6.06, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. Any retiring Trustee shall, nevertheless, retain a lien on all property or funds held or collected by such Trustee (except money or property held in trust to pay the principal or Redemption Price or interest on particular Securities) to secure any amounts then due pursuant to the provisions of Section 6.06.
Upon acceptance of appointment by a successor Trustee as provided in this Section, the Company shall cause such successor Trustee to mail notice of succession of such Trustee hereunder to all Holders of Securities as the names and addresses of such Holders appear on the Security Register.
No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be eligible under this Article and qualified under Section 310 of the Trust Indenture Act.
SECTION 6.10. Merger, Conversion, Consolidation or Succession to Business. Any trust company, banking 45 corporation or national banking association into which the Trustee may be merged or converted or with which it may be consolidated, or any trust company, banking corporation or national banking association resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any trust company, banking corporation or national banking association succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder; provided, that such trust company, banking corporation or national banking association shall be otherwise eligible under this Article and qualified under Section 310 of the Trust Indenture Act, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
SECTION 6.11. Preferential Collection of Claims Against Company. The Trustee is subject to Section 311(a) and (b) of the Trust Indenture Act. Any Trustee that has resigned or been removed shall be subject to Section 311(a) and (b) of the Trust Indenture Act to the extent indicated therein.
SECTION 6.12. Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and 46 surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.
Any trust company, banking corporation or national banking association into which an Authenticating Agent may be merged or converted or with which it may be consolidated or any trust company, banking corporation or national banking association resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any trust company, banking corporation or national banking association succeeding to all or substantially all the corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent; provided, that such trust company, banking corporation or national banking association shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of his Section. 47
The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section.
If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Securities referred to in the within-mentioned Indenture.
Dated:
THE BANK OF NEW YORK, as Trustee,
by______As Authenticating Agent
by______Authorized Signatory 48
ARTICLE VII
Holders' Lists and Reports by Trustee and Company
SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee:
(a) quarterly, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and
(b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Registrar.
SECTION 7.02. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders received by the Trustee in its capacity as Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished.
(b) If three or more Holders (herein referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders with respect to their rights under this Indenture or under the Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business 49
Days after the receipt of such application, at its election, either:
(i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 7.02(a), or
(ii) inform such applicants as to the approximate number of Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 7.02(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 7.02(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.
(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the 50 disclosure of any such information as to the names and addresses of the Holders in accordance with Section 7.02(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 7.02(b).
SECTION 7.03. Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant hereto. If required by Section 313(a) of the Trust Indenture Act, the Trustee shall, within 60 days after each May 15 following the date of this Indenture, deliver to Holders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a).
(b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee when, if ever, the Securities are listed on any stock exchange.
SECTION 7.04. SEC Reports; Reports by Company. (a) Whether or not required by the rules and regulations of the SEC, so long as any Securities are outstanding, the Company shall file with the Commission and, if requested, furnish to the Trustee and to the Holders all quarterly and annual financial information required to be contained in a filing with the Commission on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to annual information only, a report thereon by the Company's certified independent accountants;
(b) The Company shall also (1) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (2) transmit by mail to all Holders, as their names and addresses appear in the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company 51 pursuant to paragraphs (b)(1) of this Section as may be required by rules and regulations prescribed from time to time by the Commission.
(c) 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 Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates).
SECTION 7.05. Compliance Certificate. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under, and complied with the covenants and conditions contained in, this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge the Company has kept, observed, performed and fulfilled each and every covenant, and complied with the covenants and conditions contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof and that to the best of his knowledge no event has occurred and remains in existence by reason of which any payments on account of the Securities are prohibited.
One of the Officers signing such Officers' Certificate shall be either the Company's principal executive officer, principal financial officer or principal accounting officer.
ARTICLE VIII
Consolidation, Merger, Conveyance or Transfer
SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey or transfer its 52 properties and assets substantially as an entirety to any Person, unless:
(a) the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal or Redemption Price of and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 12.10; and
(b) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with.
SECTION 8.02. Successor Corporation Substituted. Upon any consolidation or merger or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Securities.
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, when authorized by a Board Resolution, the Company may and the Trustee, at any time and from time to time, shall enter into 53 one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or
(b) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or
(c) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Section 12.06; or
(d) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided, that such action shall not adversely affect the interests of the Holders in any material respect; or
(e) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect or maintain the qualification of this Indenture under the Trust Indenture Act, or under any similar Federal statute hereafter enacted.
SECTION 9.02. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than two-thirds in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, may and the Trustee shall enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,
(a) change the Mandatory Redemption Date of any Security, or the due date of any installment of interest on, any Security, or reduce the principal amount or 54
Redemption Price thereof or the rate of interest thereon, or change the place of payment where, or the coin or currency in which, any Security or any payment thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Mandatory Redemption Date (or on or after other Redemption Dates), or adversely affect the right to convert any Security as provided in Article XII, or adversely affect the right to require the Company to redeem the Securities as provided in Article XI or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or
(b) reduce the percentage in principal amount of the Outstanding Securities the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or
(c) modify any of the provisions of this Section or Section 5.11, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby.
It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 9.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 55
SECTION 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be, and shall be deemed to be, modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities.
ARTICLE X
Covenants
SECTION 10.01. Payment of Principal, Premium and Interest. The Company 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 principal or Redemption Price of and interest on the Securities in accordance with the terms of the Securities and this Indenture; provided, however, that the Company may defer paying interest on any Interest Payment Date to the extent provided in Section 3.07.
(b) Except as set forth in the immediately succeeding sentence, the Company shall make all payments in respect of the Securities (including principal, premium interest and Interest Arrearages) in cash. The Company may make any principal payments due on the Securities on the Mandatory Redemption Date (i) in cash, (ii) by delivery of Common Stock (in the manner described in paragraph (c) of 56 this Section); or (iii) through any combination of the foregoing.
(c) If the Company elects to deliver any Common Stock in payment of principal on the Mandatory Redemption Date, the Company shall deliver, in the aggregate, the number of shares of Common Stock equal to (i) the aggregate amount of principal that is not being paid in cash, divided by (ii) the Average Market Value of the Common Stock. No fractional shares of Common Stock will be delivered to a Holder, but the Company shall instead pay a cash adjustment determined as set forth in Section 12.03. Any portion of principal that is not paid through the delivery of shares of Common Stock shall be paid in cash.
SECTION 10.02. Maintenance of Office or Agency. The Company will maintain in The City of New York and in a European city an office or agency where Securities may be presented or surrendered for payment or repurchase where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such offices or agencies. If at any time the Company shall fail to maintain any such required offices or agencies or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices or agencies (in or outside The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
SECTION 10.03. Security Payments To Be Held in Trust. If the Company shall at any time act as its own Paying Agent it will, on or before each due date with respect 57 to any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto the applicable amount of cash or Common Stock, as the case may be, sufficient to pay, in the case of a cash payment, or deliver, in the case of delivery of Common Stock, the amount so becoming due and not deferred pursuant to a Deferral Election until such cash shall be paid or such Common Stock shall be delivered to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will prior to each due date with respect to any Securities, deposit with a Paying Agent the applicable amount of cash or Common Stock, as the case may be, sufficient to pay, in the case of a cash payment, or deliver, in the case of delivery of Common Stock, the amount so becoming due and not deferred pursuant to a Deferral Election, to be held in trust for the benefit of the Persons entitled to such payment or delivery, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will:
(a) hold all cash or Common Stock, as the case may be, held by it for payment or delivery with respect to Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid or delivered to such Persons or otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment or delivery that has not been deferred pursuant to a Deferral Election; and
(c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay, in the case of cash, or deliver, in the case of Common Stock, to the Trustee all such cash or Common Stock so held in trust by such Paying Agent. 58
The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, in the case of cash, or deliver, in the case of Common Stock, or by Company Order direct any Paying Agent to pay, in the case of cash, or deliver, in the case of Common Stock, to the Trustee all such cash or Common Stock held in trust by the Company or such Paying Agent, to be held by the Trustee upon the same trusts as those upon which such cash or Common Stock were held by the Company or such Paying Agent; and, upon such payment or delivery, as the case may be, by the Company or any Paying Agent to the Trustee, the Company or such Paying Agent shall be released from all further liability with respect to such cash or Common Stock.
The Company may use, with respect to Security payments by delivery of Common Stock, its then current transfer agent to act as a Paying Agent.
Any cash or Common Stock deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for payment or delivery with respect to any Security and remaining unclaimed for two years after the applicable due date shall be returned to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment or delivery thereof, and all liability of the Trustee or such Paying Agent with respect to such cash or Common Stock, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such return, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such cash or Common Stock remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such cash or Common Stock then remaining will be returned to the Company.
SECTION 10.04. Corporate Existence. Subject to Article VIII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or 59 franchise if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders.
SECTION 10.05. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Section 10.04, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect.
ARTICLE XI
Redemption of Securities
SECTION 11.01. Right of Redemption; Mechanics of Redemption. The Securities (i) may be redeemed, pursuant to an Optional Redemption (as described in Section 6 of the Security), at the election of the Company, as a whole or from time to time in part, at any time permitted under the terms of such Section of the Securities, and (ii) shall be redeemed at the Mandatory Redemption Date, any such Redemption at the Redemption Prices specified in the Security set forth for redemptions, together with accrued interest to the applicable Redemption Date. In the event the Company elects to effect an Optional Redemption, the Company shall deliver the Redemption Notice no later than 10 Business Days prior to each such Redemption Date.
SECTION 11.02. Applicability of Article. Redemption of Securities at the election of the Company or otherwise as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article.
SECTION 11.03. Election To Redeem. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution. 60
SECTION 11.04. Selection by Trustee of Securities To Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 20 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, pro rata or by lot or by such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $50.00 or any integral multiple thereof) of the principal amount of Securities of a denomination larger than $50.00.
If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection but not for the purpose of the payment of the Redemption Price.
The Trustee shall promptly notify the Company and the Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed.
SECTION 11.05. Notice of Redemption. Whenever a Redemption Notice is required to be delivered to the Holders, such Notice shall provide the information set forth in the definition thereof and be given by first class mail, postage prepaid to each Holder of Securities to be redeemed, at his address appearing in the Security Register.
In addition, all Redemption Notices shall identify the Securities to be redeemed (including CUSIP number) and shall state:
(1) the Redemption Date; 61
(2) the Redemption Price;
(3) if less than all the Outstanding Securities are to be redeemed, the identification and the principal amounts of the particular Securities to be redeemed;
(4) that on the Redemption Date the Redemption Price, together with (unless the Redemption Date shall be an Interest Payment Date) interest accrued and unpaid to the Redemption Date, will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date;
(5) the conversion price, the date on which the right to convert the principal of the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion; and
(6) the place or places where such Securities are to be surrendered for payment of the Redemption Price.
The Redemption Notice shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company; provided, however, that if the Company so requests, it shall provide the Trustee adequate time, as reasonably determined by the Trustee, to deliver such notices in a timely fashion.
SECTION 11.06. Deposit of Redemption Price. Prior to any Redemption Date in connection with an Optional Redemption, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust) an amount of consideration sufficient to pay the Redemption Price of and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on all the Securities which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit.
If any Security called for redemption is converted, any cash deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in Section 3.07(e)) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. 62
SECTION 11.07. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid, subject to Section 3.07(e), by the Company at the Redemption Price, together with accrued interest to the Redemption Date.
If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price thereof, exclusive of accrued interest, shall, until paid, bear interest from the Redemption Date at the rate borne by the Security.
SECTION 11.08. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at any office or agency of the Company designated for that purpose (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company, the Trustee and the Registrar duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.
ARTICLE XII
Conversion of Securities
SECTION 12.01. Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which is $50.00 or an integral multiple thereof may be converted at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company, at the conversion price, determined as hereinafter provided, in effect at the time of conversion. 63
Such conversion right shall expire at the close of business on the Business Day preceding the Mandatory Redemption Date. In case a Security or portion thereof is called for redemption, such conversion right in respect of the Security or portion so called shall expire at the close of business on the Business Day preceding the Redemption Date, unless the Company defaults in making the payment due upon redemption.
The price at which shares of Common Stock shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $20.00 per share of Common Stock. The Conversion Price shall be adjusted in certain instances as provided in Section 12.04 and Section 12.06.
SECTION 12.02. Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. In connection with the exercise of the conversion privilege by a Holder prior to a Redemption Date, a Holder's right to exercise his conversion privilege shall terminate at the close of business on the Business Day prior to the Redemption Date. Securities surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of Securities or portions thereof which have been called for redemption on a Redemption Date within such period) be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount in cash equal to the interest payable on such Interest Payment Date on the principal amount of Securities being surrendered for conversion. Except as provided in the preceding sentence and subject to Section 3.07(e), no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. In no event shall the Company be obligated to pay any converting Holder any unpaid Interest Arrearages upon conversion.
Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance 64 with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the person or persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 12.03.
In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security.
SECTION 12.03. Fractions of Shares. No fractional shares of Common Stock shall be issued upon the conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of Securities (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price (as defined in Section 12.04(g)(i)) per share of Common Stock at the close of business on the Business Day prior to the day of conversion.
SECTION 12.04. Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time by the Company as follows:
(a) If the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator 65 shall be the number of shares of Common Stock outstanding at the close of business on the Record Date (as defined in Section 12.04(g)) fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Record Date. If any dividend or distribution of the type described in this Section 12.04(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared.
(b) If the Company shall offer or issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined in Section 12.04(g)) on the Record Date fixed for the determination of stockholders entitled to purchase or receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock subject to such rights or warrants would purchase at such Current Market Price and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the total number of additional shares of Common Stock subject to such rights or warrants. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of stockholders entitled to purchase or receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of 66
Common Stock actually delivered. If such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, with the value of such consideration, if other than cash, to be determined by the Board of Directors.
(c) If the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.
(d) If the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 12.04(a) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants of a type referred to in Section 12.04(b) and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation to which Section 12.06 applies) (the foregoing hereinafter in this Section 12.04(d) called the "Distributed Securities"), then, in each such case, the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of 67 business on the Record Date (as defined in Section 12.04(g)) with respect to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in Section 12.04(g)) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) on such date of the portion of the Distributed Securities so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder of Securities shall have the right to receive upon conversion of a Security (or any portion thereof) the amount of Distributed Securities such Holder would have received had such Holder converted such Security (or portion thereof) immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 12.04(d) by reference to the actual or when issued trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to Section 12.04(g) to the extent possible.
Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Dilution Trigger Event"): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been 68 distributed for purposes of this Section 12.04(d) (and no adjustment to the Conversion Price under this Section 12.04(d) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment to the Conversion Price under this Section 12.04(d) shall be made. If any such rights or warrants, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 12.04 was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.
Notwithstanding any other provision of this Section 12.04(d) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any stockholder rights plan) shall be deemed not to have been distributed for purposes of this Section 12.04(d) if the Company makes 69 proper provision so that each Holder of Securities who converts a Security (or any portion thereof) after the date fixed for determination of stockholders entitled to receive such distribution shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion, the amount and kind of such distributions that such Holder would have been entitled to receive if such Holder had, immediately prior to such determination date, converted such Security into Common Stock.
For purposes of this Section 12.04(d) and Sections 12.04(a) and (b), any dividend or distribution to which this Section 12.04(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock to which Section 12.04 (b) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which Section 12.04(b) applies (and any Conversion Price reduction required by this Section 12.04(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 12.04(a) and (b) with respect to such dividend or distribution shall then be made), except that (a) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution", "Record Date fixed for such determination" and "Record Date" within the meaning of Section 12.04(a) and as "the date fixed for the determination of stockholders entitled to receive such rights or warrants", "the Record Date fixed for the determination of the stockholders entitled to receive such rights or warrants" and "such Record Date" within the meaning of Section 12.04(b), and (b) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 12.04(a).
(e) If the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed upon a 70 merger or consolidation to which Section 12.06 applies or as part of a distribution referred to in Section 12.04(d)) in an aggregate amount that, combined together with (1) the aggregate amount of any other such distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 12.04 (e) has been made, and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) of consideration payable in respect of any tender offer by the Company for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to Section 12.04(f) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 12.04(g)) on the Record Date with respect to such distribution times the number of shares of Common Stock outstanding on such date, then, and in each such case, immediately after the close of business on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of shares of Common Stock outstanding on the Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such Record Date; provided, however, that, if the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder of Securities shall have the right to receive upon conversion of a Security (or any portion thereof) the amount of cash such Holder would have received had such Holder converted such Security (or portion thereof) immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. Any cash distribution to all holders of Common Stock as to 71 which the Company makes the election permitted by Section 12.04(l) and as to which the Company has complied with the requirements of such Section shall be treated as not having been made for all purposes of this Section 12.04(e).
(f) If a tender offer made by the Company or any of its subsidiaries for all or any portion of the Common Stock expires and such tender offer (as amended upon the expiration thereof) requires the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that, combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers, by the Company or any of its subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 12.04(f) has been made and (2) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to Section 12.04(e) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 12.04(g)) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time multiplied by the Current Market Price of the Common Stock on the 72
Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender offer had not been made. If the application of this Section 12.04(f) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 12.04(f).
(g) For purposes of this Section 12.04, the following terms shall have the meaning indicated:
(i) "closing price" with respect to any securities on any day means the closing price on such day or, if no such sale takes place on such day, the average of the reported high and low prices on such day, in each case on The Nasdaq National Market or the New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such national market or exchange, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the high and low prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated or a similar generally accepted reporting service, or, if not so available, in such 73 manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors.
(ii) "Current Market Price" means the average of the daily closing prices per share of Common Stock for the 10 consecutive trading days immediately prior to the date in question; provided, however, that (A) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 12.04(a), (b), (c), (d), (e) or (f) occurs during such 10 consecutive trading days, the closing price for each trading day prior to the "ex" date for such other event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (B) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 12.04(a), (b), (c), (d), (e) or (f) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the closing price for each trading day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event and (C) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (A) or (B) of this proviso, the closing price for each trading day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 12.04(d) or (f), whose determination shall be conclusive and described in a resolution of the 74
Board of Directors) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 12.04(f), the Current Market Price on any date shall be deemed to be the average of the daily closing prices per share of Common Stock for such day and the next two succeeding trading days; provided, however, that, if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 12.04(a), (b), (c), (d), (e) or (f) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the closing price for each trading day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date (I) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (II) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective and (III) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 12.04, such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 12.04 and to avoid unjust or inequitable results, as determined in good faith by the Board of Directors. 75
(iii) "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's-length transaction.
(iv) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).
(h) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 12.04(h) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 12 shall be made by the Company and shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be.
No adjustment need be made for a change in the par value or no par value of the Common Stock.
(i) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each Holder of Securities at such Holder's last address appearing on the register of Holders maintained for that purpose within 20 days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. 76
(j) In any case in which this Section 12.04 provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event issuing to the Holder of any Security converted after such Record Date and before the occurrence of such event the additional shares of common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment.
(k) For purposes of this Section 12.04, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company.
(l) In lieu of making any adjustment to the Conversion Price pursuant to Section 12.04(e), the Company may elect to reserve an amount of cash for distribution to the Holders of Securities upon the conversion of the Securities so that any such Holder converting Securities will receive upon such conversion, in addition to the shares of Common Stock and other items to which such Holder is entitled, the full amount of cash which such Holder would have received if such Holder had, immediately prior to the Record Date for such distribution of cash, converted its Securities into Common Stock, together with any interest accrued with respect to such amount, in accordance with this Section 12.04(l). The Company may make such election by providing an Officers' Certificate to the Trustee to such effect on or prior to the payment date for any such distribution and depositing with the Trustee on or prior to such date an amount of cash equal to the aggregate amount that the Holders of Securities would have received if such Holders had, immediately prior to the Record Date for such distribution, converted all the Securities into Common Stock. Any such funds so deposited by the Company with the Trustee shall be invested by the Trustee in U.S. Government Obligations with a maturity not more than three months from the date of issuance. Upon conversion of Securities by a Holder thereof, such Holder shall be entitled to receive, in addition to the Common Stock issuable upon conversion, 77 an amount of cash equal to the amount such Holder would have received if such Holder had, immediately prior to the Record Date for such distribution, converted its Securities into Common Stock, along with such Holder's pro rata share of any accrued interest earned as a consequence of the investment of such funds. Promptly after making an election pursuant to this Section 12.04(l), the Company shall give or shall cause to be given notice to all Holders of Securities of such election, which notice shall state the amount of cash per $50 principal amount of Securities such Holders shall be entitled to receive (excluding interest) upon conversion of the Securities as a consequence of the Company having made such election.
SECTION 12.05. Notice of Adjustment of Conversion Price. Whenever the conversion price is adjusted as provided in Section 12.04, the Company shall compute the adjusted conversion price in accordance with Section 12.04 and shall prepare a certificate signed by any Vice President or the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based and the effective date of such adjustment, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Securities.
SECTION 12.06. Provisions in Case of Consolidation, Merger or Conveyance or Transfer of Properties and Assets. In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any merger of another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), or in case of any conveyance or transfer of the properties and assets of the Company substantially as an entirety, the corporation 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 the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have the right thereafter, during the period such Security shall be convertible as specified in Section 12.01, to convert such Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of shares of Common Stock of the Company into which such Security might 78 have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Common Stock of the Company failed to exercise his rights of election, if any, as to the kind or amount of 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 share of Common Stock of the Company 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 securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, 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 Company will not become a party to any consolidation or merger unless the terms of such consolidation or merger are consistent with this Section.
SECTION 12.07. Notice of Certain Corporate Action. In case:
(a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its earned surplus; or
(b) the Company shall authorize the granting to all holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or
(c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or the sale or transfer of all or substantially all the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; 79 then the Company shall cause to be filed with the Trustee and at each office or agency maintained for the purpose of conversion of Securities, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give the notice requested by this Section or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or the vote upon any such action.
SECTION 12.08. Company To Reserve Common Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Securities.
SECTION 12.09. Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. 80
SECTION 12.10. Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be duly and validly issued and fully paid and nonassessable and, except as provided in Section 12.09, the Company will pay all taxes, liens and charges with respect to the issue thereof.
SECTION 12.11. Responsibility of Trustee. The Trustee, subject to the provisions of Section 6.01, and any conversion agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture, provided to be employed, in making the same. The Trustee has no duty to determine whether a supplemental indenture under this Article need be entered into or whether any provisions of any supplemental indenture are correct. Neither the Trustee nor any conversion agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any other securities or property, which may at any time be issued or delivered upon the conversion of any Security; and it or they do not make any representation with respect thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion; and the Trustee, subject to the provisions of Section 6.01, and any conversion agent shall not be responsible for any failure of the Company to comply with any of the covenants of the Company contained in this Article.
ARTICLE XIII
Subordination of Securities
SECTION 13.01. Securities Subordinate to Debt Obligations. The Company, for itself, its successors and assigns, covenants and agrees, and each Holder of Securities, by his acceptance thereof likewise covenants and agrees, that all Securities issued hereunder 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 Debt Obligations. 81
SECTION 13.02. No Payments When Debt Obligations in Default; Payment Over of Proceeds upon Dissolution, etc. In the event the Company shall default in the payment of any Debt Obligation 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) shall be made or agreed to be made on account of the principal of or Redemption Price of or interest on the Securities (excepting cash payment for fractional shares).
Upon the happening of an event of default with respect to any Debt Obligation, 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) shall be made or agreed to be made on account of the principal of or Redemption of or interest on the Securities (excepting cash payment for fractional shares).
In the event of:
(a) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relating to the Company or its property;
(b) any proceeding for the liquidation, dissolution or other winding up of the Company or its property;
(c) any assignment by the Company for the benefit of creditors; or
(d) any other marshalling of the assets of the Company; all Debt Obligations (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, property or securities, by setoff or otherwise, shall be made to any Holder on account of any Securities, and to that end any payment or distribution, whether in cash, property or securities (other than 82 securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article with respect to the Securities, to the payment of all Debt Obligations at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) which would otherwise (but for the subordination provisions contained in this Article) be payable or deliverable in respect of the Securities shall be paid or delivered directly to the holders of Debt Obligations, as their respective interests may appear, until all Debt Obligations (including any interest thereon accruing after the commencement of any such proceedings) shall have been paid in full.
If any payment or distribution (other than securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article with respect to the Securities, to the payment of all Debt Obligations at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) shall be received by the Trustee or the Holders in contravention of any of the terms of this Article and before all the Debt Obligations have been paid in full, such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of such Debt Obligations at the time outstanding as their respective interests may appear for application to the payment of Debt Obligations until all Debt Obligations (including any interest thereon accruing after the commencement of any such proceeding referred to in paragraph (a), (b), (c) or (d) above) shall have been paid in full. If the Trustee or any such Holder fails to endorse or assign any such payment or distribution as required by this Article, the Trustee and the Holder of each Security by his acceptance thereof authorizes each holder of Debt Obligations, any representative or representatives of holders of Debt Obligations and the trustee or trustees under any indenture pursuant to which any instrument evidencing such Debt Obligations may have been issued so to endorse or assign the same.
No holder of Debt Obligations shall be prejudiced in the right to enforce subordination of the Securities by any act or failure to act on the part of the Company. 83
Subject to the payment in full of all Debt Obligations, the Holders shall be subrogated (equally and ratably with the holders of all obligations of the Company which rank on a parity with the Securities and are entitled to like rights of subrogation) to the rights of the holders of Debt Obligations to receive payments or distributions applicable to the Debt Obligations until the Securities shall be paid in full, and no such payments or distributions shall, as between the Company, its creditors other than the holders of Debt Obligations and the Holders of the Securities, be deemed to be a payment by the Company to or on account of the Securities. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of Debt Obligations, on the other hand, and nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Debt Obligations and the Holders of the Securities, the obligation of the Company to pay the Holders the principal of or Redemption Price of and interest on the Securities as and when the same shall become due and payable in accordance with the terms thereof, or prevent the Trustee or the Holders from exercising all rights, powers and remedies otherwise permitted by applicable law or under this Indenture, upon a default hereunder, all subject to the rights of the holders of Debt Obligations to receive cash, property or securities otherwise payable or deliverable to the Trustee or the Holders.
Upon any payment or distribution pursuant to this Section, the Trustee shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in this Section are pending, and the Trustee, subject as between the Trustee and the Holders to the provisions of Section 6.01, shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making such payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Debt Obligations and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Debt Obligations to participate in any payment or distribution pursuant to this Section, the 84
Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Debt Obligations held by such Person, as to the extent to which such Person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such Person under this Section, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.
SECTION 13.03. Trustee To Effectuate Subordination. The Holder of each Security by his acceptance thereof authorizes and directs the Trustee in his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination as provided in this Article and appoints the Trustee as attorney-in-fact for any and all such purposes.
SECTION 13.04. Trustee Not Charged with Knowledge of Prohibition. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, but subject as between the Trustee and the Holders to the provisions of Section 6.01, the Trustee shall not be charged with knowledge of the existence of any Debt Obligations, or of any default in the payment of any Debt Obligations, or of any facts which would prohibit the making of any payment of moneys to or by the Trustee, unless and until three Business Days after the Trustee shall have received written notice thereof from the Company or any holder of Debt Obligations or the representative or representatives of such holder, and the Trustee may conclusively rely on any writing purporting to be from a holder of Debt Obligations, or a representative of such holder, as being genuine; nor shall the Trustee be charged with knowledge of the curing of any such default or of the elimination of the act or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect. The provisions of this Section shall not limit any rights of holders of Debt Obligations under this Article to recover from the Holders of Securities any payment made to any such Holder.
SECTION 13.05. Rights of Trustee as Holder of Debt Obligations. The Trustee shall be entitled to all the rights set forth in this Article with respect to any Debt Obligations which may at any time be held by it, to the same 85 extent as any other holder of Debt Obligations; and nothing in Section 6.12, or elsewhere in this Indenture, shall deprive the Trustee of any of its rights as such holder. Nothing in this Article XIII shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 6.06.
SECTION 13.06. Article Applicable to Paying Agent. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Sections 13.04 and 13.05 shall not apply to the Company or any Affiliate of the Company if the Company or such Affiliate acts as Paying Agent.
SECTION 13.07. Trustee Not Fiduciary for Holders of Debt Obligations. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Debt Obligations and shall not be liable to any such holders if the Trustee shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other person cash or property to which any holders of Debt Obligations shall be entitled by virtue of this Article XIII or otherwise. The Trustee shall not be charged with knowledge of the existence of Debt Obligations or of any facts that would prohibit any payment hereunder unless a Trust Officer of the Trustee shall have received notice to that effect at the address of the Trustee set forth in Section 1.05. With respect to the holders of Debt Obligations, the Trustee undertakes to perform or to observe only such of its covenants or obligations as are specifically set forth in this Article XIII and no implied covenants or obligations with respect to holders of Debt Obligations shall be read into this Indenture against the Trustee.
ARTICLE XIV
Mandatory Exchange of Securities
SECTION 14.01. (a) Exchange for Series C Preferred Stock. (a) Subject to the provisions of Section 14.03, the Company shall recommend to the holders of its Common Stock and to holders of its Series A Preferred Stock, at the first annual meeting of such holders following the date of this Indenture, currently scheduled to be held in 86
April 1997, to approve the creation of and the issuance of the Series C Preferred Stock and the amendment of its By-laws by the adoption of the Series C Schedule. Upon receipt by the Company at any time of the approval from the Company's shareholders, in accordance with applicable law and the Company's Memorandum of Association and Bye-laws, for the creation and issuance by the Company of the Series C Preferred Stock in accordance with this Article XIV, the Company shall, as soon thereafter as practicable, exchange the Securities, in whole but not in part, for shares of Series C Preferred Stock.
(b) Upon any exchange (the "Mandatory Exchange") pursuant to Section 14.01(a), Holders of Outstanding Securities will be entitled to receive one share of Series C Preferred Stock, having a liquidation preference of $50.00 per share, for each $50.00 principal amount of Securities, together with payment in cash of accrued interest (including any Interest Arrearages due and unpaid on the Securities as of the Mandatory Redemption Date.
SECTION 14.02. Procedures. (a) The Company will send a written notice of mandatory exchange (the "Mandatory Exchange Notice") by mail to each holder of record of Securities not fewer than 30 days nor more than 60 days before the date fixed for such exchange (the "Mandatory Exchange Date"); provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the exchange of any Securities to be exchanged except as to the holder or holders to whom the Company has failed to give said notice or except as to the holder or holders whose notice was defective. The Mandatory Exchange Notice shall state:
(1) the Mandatory Exchange Date;
(2) that the holder is to surrender to the Company, in the manner and at the place or places designated, his certificate or certificates representing the Securities;
(3) that (a) interest on the Securities shall cease to accrue on such Mandatory Exchange Date and (b) after the Exchange Date, all Securities shall be deemed to have been paid in full and to be no longer outstanding for any purposes under this Indenture except to evidence the right of the Holder thereof to receive the shares of Series C Preferred Stock issuable in exchange therefor and the payment of all accrued and unpaid interest on the Securities to the Mandatory Exchange Date, in either case whether or not certificates for Securities are 87 surrendered for exchange on such Mandatory Exchange Date unless the Company shall default in the delivery of shares of Series C Preferred Stock or in the payment of all accrued interest; and
(4) that dividends on the shares of Series C Preferred Stock shall accrue from the Mandatory Exchange Date whether or not certificates for Securities are surrendered for exchange on such Mandatory Exchange Date.
(b) On and after the Mandatory Exchange Date, interest will cease to accrue on the Outstanding Securities, and all rights of the Holders of Securities (except the right to receive shares of Series C Preferred Stock and an amount in cash, to the extent applicable, equal to the accrued and unpaid interest to the Mandatory Exchange Date) will terminate. The person entitled to receive the Series C Preferred Stock issuable upon such exchange will be treated for all purposes as the registered holder of such shares of Series C Preferred Stock.
(c) Each holder of Securities shall surrender the certificate or certificates representing such Securities, in the manner and at the place designated in the Mandatory Exchange Notice; provided that no failure by any Holder to surrender properly any Security shall affect in any manner whatsoever the validity of the exchange (or deemed exchange) of such Security or any other Security pursuant to this Article XIV. The Company shall cause the shares of Series C Preferred Stock to be issued on the Mandatory Exchange Date and all accrued interest on the Securities through the Mandatory Exchange Date to be paid or otherwise set apart for the holders of Securities and, upon surrender in accordance with the Exchange Notice of the certificates for any Securities so exchanged, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), such Securities shall be exchanged by the Company into shares of Series C Preferred Stock. The Company shall pay dividends on the shares of Series C Preferred Stock at the rate and on the dates specified in the Series C Schedule from the Mandatory Exchange Date.
SECTION 14.03. No Exchange in Certain Cases. Notwithstanding the foregoing provisions of this Article XIV, the Company shall not effect the Mandatory Exchange (i) unless and until the Company shall have obtained a written opinion from competent counsel that (x) such shares of Series C Preferred Stock have been duly and validly authorized under applicable law and, when issued in exchange 88 for Securities in accordance with this Article XIV, will be validly issued, fully paid and nonassessable, and (y) the issuance of the Series C Preferred Stock does not violate or conflict with the Company's Memorandum of Association or Bye-laws, as then in effect or (ii) if such exchange, or any term or provision of the Series C Preferred Stock, or the performance of the Company's obligations in respect of the Series C Preferred Stock, shall materially violate or conflict with any applicable law then binding on the Company or (iii) if, at the time of such exchange, the Company is insolvent.
* * * 89
This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.
LORAL SPACE & COMMUNICATIONS LTD.,
by______Name: Title:
THE BANK OF NEW YORK, as Trustee,
by______Name:
Title: EXECUTION COPY
LORAL SPACE & COMMUNICATIONS LTD.
$600,000,000
6% Convertible Preferred Equivalent Obligations due 2006
REGISTRATION RIGHTS AGREEMENT
New York, New York November 6, 1996
Lehman Brothers Inc. Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette Securities Corporation Oppenheimer & Co., Inc. Unterberg Harris c/o Lehman Brothers Inc. 3 World Trade Center New York, New York 10285
Dear Sirs:
Loral Space & Communications Ltd., a Bermuda company (the "Company"), proposes to issue and sell to you (the "Purchasers"), upon the terms set forth in the Purchase Agreement dated November 1, 1996 (the "Purchase Agreement"), among the Company and the Purchasers, $600,000,000 aggregate principal amount (including $100,000,000 principal amount as a result of the exercise of the over-allotment option) of its 6% Convertible Preferred Equivalent Obligations due 2006 (the "CPEOs") (the "Initial Placement"). The CPEOs will be convertible into shares of Common Stock, $.01 par value per share, of the Company (the "Common Stock") at the conversion price set forth in the Final Memorandum (as defined below) and upon receipt of shareholder approval, will be mandatorily exchangeable for shares of the Company's 6% Series C Convertible Redeemable Preferred Stock, par value $.01 per share (the "Preferred Shares"), having an aggregate liquidation preference equal to the aggregate principal amount of the CPEOs outstanding at the time of such exchange. For purposes of this Agreement, the term "Securities" shall refer to the CPEOs until and unless shareholder approval shall have been secured for the 2 issuance of the Preferred Shares, in which case, upon the issuance of the Preferred Shares in exchange for the CPEOs, the term "Securities" shall refer to such Preferred Shares. In satisfaction of a condition to your obligations under the Purchase Agreement, the Company agrees with you (i) for your benefit and (ii) for the benefit of the holders of the Securities or the shares of Common Stock issuable upon conversion of the Securities (including you) from time to time until such time as such Securities shall no longer constitute restricted securities pursuant to Rule 144(k) of the Securities Act (as defined herein) or all such Securities and shares of Common Stock issued upon conversion of such Securities have been sold pursuant to the Shelf Registration Statement (as defined below) (each of the foregoing a "Holder" and together the "Holders"), as follows:
1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings:
"Act" means the Securities Act of 1933 and the rules and regulations of the Commission promulgated thereunder.
"Affiliate" of any specified person means any other person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Closing Date" has the meaning set forth in the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"CPEOs" has the meaning set forth in the preamble hereto. 3
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder.
"Final Memorandum" has the meaning set forth in the Purchase Agreement.
"First Closing Date" has the meaning set forth in the Purchase Agreement.
"Holder" has the meaning set forth in the preamble hereto.
"Incorporated Document" means filings made by the Company with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act.
"Indenture" means the indenture relating to the CPEOs, to be entered into by the Company and The Bank of New York, as trustee, as the same may be amended from time to time in accordance with the terms thereof.
"Initial Placement" has the meaning set forth in the preamble hereto.
"Majority Holders" means the Holders of a majority of the aggregate principal amount or liquidation preference, as the case may be, of Securities registered under a Shelf Registration Statement; provided, however, that Holders of Common Stock issued upon conversion of Securities shall be deemed to be Holders of the aggregate principal amount or liquidation preference, as the case may be, of Securities from which such Common Stock was converted.
"Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering of the securities covered by the Shelf Registration Statement.
"Preferred Shares" has the meaning set forth in the preamble hereto.
"Prospectus" means the prospectus included in any Shelf Registration Statement (including a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to 4 the terms of the offering of any portion of the Securities or Common Stock issuable upon conversion thereof covered by such Shelf Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments.
"Securities" has the meaning set forth in the preamble hereto.
"Shelf Registration" means a registration effected pursuant to Section 2 hereof.
"Shelf Registration Period" has the meaning set forth in Section 2(b) hereof.
"Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 2 hereof which covers some or all of the Securities and the Common Stock issuable upon conversion thereof, as applicable, on an appropriate form under Rule 415 under the Act or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.
"Trustee" means the trustee with respect to the Securities under the Indenture.
"underwriter" means any underwriter of Securities or Common Stock issuable upon conversion thereof in connection with an offering thereof under a Shelf Registration Statement.
2. Shelf Registration; Suspension of Use of Prospectus.
(a) The Company shall prepare and, not later than 180 days following the First Closing Date, shall file with the Commission and thereafter, but no later than 240 days following the First Closing Date, shall use its reasonable best efforts to cause to be declared effective under the Act a Shelf Registration Statement relating to the offer and sale of the Securities and the shares of Common Stock issuable upon conversion thereof by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration 5
Statement. In furtherance of the foregoing, it is hereby acknowledged and agreed that upon the issuance of the Preferred Shares upon mandatory exchange as provided in the Indenture, the Company shall take such steps as may be appropriate to ensure that any then current Shelf Registration Statement is amended, or a new Shelf Registration Statement is filed and promptly declared effective in accordance with the time limits in the first sentence of this Section 2(a), such that the Preferred Shares may be offered and sold by the Holders thereof from to time to the same extent as the CPEOs immediately prior to such mandatory exchange. The sole and exclusive remedy available to the Holders in the event that a Shelf Registration Statement is not filed or declared effective within the time periods specified in this Section 2(a) is the collection of additional interest or dividends, as the case may be, in accordance with the terms of the Securities.
(b) The Company shall use its reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders until such date as of which neither the Securities nor the shares of Common Stock issuable upon conversion thereof shall constitute restricted securities under Rule 144(k) of the Securities Act or until all the Securities and the shares of Common Stock issuable upon conversion thereof covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of securities covered thereby not to be able to offer and sell such securities during that period, unless such action is (i) required by applicable law or (ii) pursuant to Section 2(c) hereof, and, in either case, so long as the Company promptly thereafter complies with the requirements of Section 3(i) hereof, if applicable.
(c) The Company may suspend the use of the Prospectus for a period not to exceed 15 days (or such longer period as is reasonably necessary under the circumstances) in any three month period for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, public filings with the Commission, pending corporate developments and similar events. 6
3. Registration Procedures. In connection with any Shelf Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as you reasonably may propose; provided, however, that the Company shall be required only to furnish an Incorporated Document to you as promptly as practicable following its filing with the Commission.
(b) The Company shall ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Shelf 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 Shelf Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(c) (1) The Company shall advise you and the Holders and, if requested by you or any such Holder, confirm such advice in writing:
(i) when a Shelf Registration Statement and any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; and
(ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the Prospectus included therein or for additional information. 7
(2) The Company shall advise you and the Holders and, if requested by you or any such Holder, confirm such advice in writing:
(i) of the issuance by the Commission of any stop order suspending the effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose;
(ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included in any Shelf Registration Statement for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and
(iii) of the suspension of the use of the Prospectus pursuant to Section 2(c) hereof or of the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made); provided that such notice shall not be required to specify the nature of the event giving rise to the notice requirement hereunder.
(d) The Company shall use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of any Shelf Registration Statement at the earliest possible time.
(e) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference). 8
(f) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto.
(g) Prior to any offering of securities pursuant to any Shelf Registration Statement, the Company shall register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things reasonably necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Shelf Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject.
(h) The Company shall cooperate with the Holders of Securities or the shares of Common Stock issued upon conversion thereof to facilitate the timely preparation and delivery of certificates representing Securities or the Common Stock issued upon conversion thereof to be sold pursuant to any Shelf Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Shelf Registration Statement.
(i) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company shall, if required pursuant to the Act or paragraph (c)(2)(iii) above, as promptly as practicable prepare a post - 9 effective amendment to any Shelf Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an 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.
(j) Not later than the effective date of any Shelf Registration Statement hereunder, the Company shall provide a CUSIP number for the Securities registered under such Shelf Registration Statement, and provide the Trustee or transfer agent, as the case may be, with printed certificates for such Securities, in a form eligible for deposit with The Depository Trust Company.
(k) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act.
(1) The Company shall cause the Indenture to be qualified under the Trust Indenture Act in a timely manner.
(m) 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 such securities as the Company may from time to time reasonably require for inclusion in such Shelf Registration Statement. Any Holder who fails to provide such information shall not be entitled to use the Prospectus.
(n) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-- effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably agree should be included therein and shall make all required filings of such Prospectus supplement or post -effective amendment as 10 soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment.
(o) The Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Securities or the shares of Common Stock issuable upon conversion thereof, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 5 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any), with respect to all parties to be indemnified pursuant to Section 5 by Holders of Securities or the Common Stock issuable upon conversion thereof to the Company, it being understood that all underwriting discounts and commissions, and all other underwriting fees, associated with such agreement in connection with such offering of the Securities and shares of Common Stock issuable upon conversion thereof shall, except as otherwise expressly agreed herein (including those expenses covered by Section 4), be for the account of the Holders or the underwriters.
(p) The Company shall (i) make reasonably available for inspection any Managing Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and any attorney, accountant or other agent retained by the majority in principal amount or liquidation preference, as the case may be, of Holders of securities to be registered thereunder or by any such Managing Underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by any such Managing Underwriter, attorney, accountant or agent in connection with such Shelf Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by any such Managing Underwriter, attorney, accountant or agent, unless disclosure thereof is made in connection with a court proceeding or required by law, 11 or such information has become available (not in violation of this agreement) to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by Holders representing a majority by principal amount or number of shares, as the case may be, of the securities covered by such Shelf Registration Statement and by such Managing Underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, use its reasonable best efforts to retain any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Shelf Registration Statement), addressed to each selling Holder of securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 3(i) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 3(p) shall be performed at (A) the effectiveness of such Shelf Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. 12
4. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of the Company's obligations under Sections 2 and 3 hereof and shall reimburse the Holders for the reasonable and duly documented fees and disbursements of (i) counsel designated by the Majority Holders to act as counsel for the Holders in connection therewith or (ii) in the absence of such selection of counsel by the Majority Holders, one firm designated by the underwriters to act as counsel for the Holders in connection therewith. It is understood, however, that as except provided in this Section, the Holders shall pay all their own costs and expenses, including stock transfer taxes due upon resale by them of any of the securities covered by a Shelf Registration Statement and any advertising expenses incurred in connection with any offers and sales they make.
5. Indemnification and Contribution. (a) In connection with any Shelf Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including the Purchasers), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Shelf Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof 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 not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that (i) the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder 13 or underwriter or Managing Underwriter specifically for inclusion therein, (ii) the Company shall not be liable to any indemnified party under this indemnity agreement with respect to any Shelf Registration Statement or Prospectus to the extent that any such loss, claim, damage or liability of such indemnified party results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, the Shelf Registration Statement or Prospectus which untrue statement or omission was corrected in an amended or supplemented Shelf Registration Statement or Prospectus, if the person alleging such loss, claim, damage or liability was not sent or given, at or prior to the written confirmation of such sale, a copy of the amended or supplemented Shelf Registration Statement or Prospectus if the Company had previously furnished copies thereof to such indemnified party and if such delivery of a prospectus is finally judicially determined to be required by the Act and was not so made and (iii) the Company will not be liable to any indemnified party under this indemnity agreement with respect to any Shelf Registration Statement or Prospectus to the extent that any such loss, claim, damage or liability of such indemnified party results (a) from the use of a Shelf Registration Statement during a period when a stop order has been issued in respect thereof or any proceedings for that purpose have been initiated or (b) from the use of the Prospectus during a period when the use of the Prospectus has been suspended in accordance with Section 3 (c)(2)(iii) hereof, provided, in each case, that Holders received prior notice of such stop order, initiation of proceedings or suspension. This indemnity agreement will be in addition to any liability which the Company may otherwise have.
The Company also agrees to indemnify or contribute to Losses, as provided in Section 5(d), of any underwriters of Securities or the shares of Common Stock issued upon conversion thereof registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Purchasers and the selling Holders provided in this Section 5(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 3(o) hereof.
(b) Each Holder of securities covered by a Shelf Registration Statement (including the Purchasers) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who 14 signs such Shelf Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action, 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 in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) 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. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to 15 the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, which consent shall not be unreasonably withheld, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 5 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Shelf Registration Statement which resulted in such Losses; provided, however, that in no case shall the Purchasers of any Security or the shares of Common Stock issued upon conversion thereof be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Shelf Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified 16 party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the Initial Placement (before deducting expenses). Benefits received by the Purchasers shall be deemed to be equal to the total purchase discounts and commissions, and benefits received by any other Holders shall be deemed to be equal to the value such Holders realize by receiving Securities or the shares of Common Stock issuable upon conversion thereof registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Shelf Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Shelf Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d).
(e) The provisions of this Section 5 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 5 hereof, and will survive the sale by a Holder of securities covered by a Shelf Registration Statement. 17
6. Miscellaneous.
(a) 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.
(b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount or liquidation preference, as the case may be, of Securities or the shares of Common Stock issued upon conversion thereof; provided that, with respect to any matter that directly or indirectly affects the rights of the Purchasers hereunder, the Company shall obtain the written consent of the Purchasers against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Shelf Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Shelf Registration Statement.
(c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 6(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, 18 with a copy in like manner to Lehman Brothers Inc.;
(2) if to you, initially at the address set forth in the Purchase Agreement; and
(3) if to the Company, initially at its address set forth in the Purchase Agreement.
All such notices and communications shall be deemed to have been duly given when received.
The Purchasers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications.
(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, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities or the shares of Common Stock issuable upon conversion thereof. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto.
(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 internal laws of the State of New York applicable to agreements made and to be performed in said State.
(h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect
for 19 any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law.
(i) Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount or liquidation preference, as the case may be, of Securities or the shares of Common Stock issued upon conversion thereof is required hereunder, Securities or the shares of Common Stock issued upon conversion thereof held by the Company or its Affiliates (other than subsequent Holders of Securities or the shares of Common Stock issued upon conversion thereof if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or shares of Common Stock issued upon conversion thereof) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 20
Please confirm that the foregoing correctly sets forth the agreement between the Company and you.
Very truly yours,
LORAL SPACE & COMMUNICATIONS LTD.,
by______Name: Title:
Accepted in New York, New York
November 6, 1996
LEHMAN BROTHERS INC. BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION OPPENHEIMER & CO., INC. UNTERBERG HARRIS
by LEHMAN BROTHERS INC. by ______Name:
Title: [CONFORMED COPY]
EXCHANGE AGREEMENT
between
LORAL SPACE & COMMUNICATIONS LTD.
and
DAIMLER-BENZ AEROSPACE AG
Dated as of December 19, 1996 EXCHANGE AGREEMENT
EXCHANGE AGREEMENT dated as of December 19, 1996 (this "Agreement") between LORAL SPACE & COMMUNICATIONS LTD., a company organized under the laws of Bermuda ("Loral"), and DAIMLER-BENZ AEROSPACE AG (formerly Deutsche Aerospace AG), a corporation organized under the laws of Germany (the "Stockholder").
W I T N E S S E T H :
WHEREAS, the Stockholder currently owns 490 shares of Common Stock, par value $.10 per share (the "SS/L Shares"), of Space Systems/Loral, Inc., a Delaware corporation ("SS/L"), which shares constitute 12.25% of all of the issued and outstanding shares of capital stock of SS/L; and
WHEREAS, Loral and the Stockholder have agreed that the Stockholder will exchange its SS/L Shares for consideration from Loral having a value of $93.5 million, subject to adjustment in certain circumstances, as set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:
1. THE EXCHANGE
1.1. Exchange. At the Closing described in Section 1.2 below, the Stockholder agrees to transfer to Loral the SS/L Shares held by the Stockholder and, in exchange therefor, Loral agrees to transfer to the Stockholder the Consideration (as defined below). At Loral's election, the "Consideration" may consist of either (a) $93.5 million in cash (the "Cash Consideration") or (b) if all the conditions to closing set forth in Section 4.1.1 and 4.1.3 have been satisfied on or before the Closing Date (as defined below), a principal amount of the 6% Convertible Preferred Equivalent Obligations due 2006 of Loral (the "CPEOs"), such that upon sale of the CPEOs by or on behalf of the Stockholder immediately after the Closing, the Stockholder will realize net proceeds from such sale of $93.5 million (the "CPEO Consideration") on the Closing Date. If Loral elects to issue CPEOs as the Consideration, such CPEOs shall be issued under an indenture (the "Indenture") which shall be in form and substance substantially similar to the Indenture dated as of November 1, 1996 between Loral and The Bank of New York, as Trustee, relating to $600,000,000 principal amount of Loral's 6% Convertible Preferred Obligations due 2006, a copy of which indenture is attached hereto as Exhibit A. The amount of the Consideration shall be subject to adjustment as set forth in Section 1.3 below.
1.2. Closing. The closing ("Closing") of the transaction contemplated by Section 1.1 (the "Exchange") shall occur at the law offices of Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022 or such other place upon which the parties may agree on such date as Loral shall elect, but in no event later than March 31, 1997, or upon such other date after March 31, 1997 on which the parties may agree (the "Closing Date"). Loral shall notify the Stockholder in writing of the Closing Date at least five days prior thereto, provided, however, that Loral may, at any time after delivery of such notice and prior to the Closing, elect to deliver an additional notice to the Stockholder to defer the Closing Date to a later date, which date shall in no event be later than March 31, 1997. At the Closing, (a) Loral shall deliver to the Stockholder, (i) if Loral elects the Cash Consideration, the Cash Consideration by wire transfer of immediately available funds to the account of the Stockholder designated by the Stockholder's written instructions delivered at least two full business days prior to the Closing Date or (ii) if Loral elects the CPEO Consideration, CPEOs in certificated form, registered in the such name or names and denominations as the Stockholder shall have requested at least two full business days prior to the Closing Date, and (b) the Stockholder shall deliver to Loral stock certificates representing its SS/L Shares,
-3- duly endorsed in blank for transfer or accompanied by appropriate stock powers duly executed in blank, with all taxes, direct or indirect, attributable to the transfer of such shares paid or provided for.
1.3. Adjustment in Amount of Consideration. The amount of the Consideration shall be subject to adjustment as follows: if (a) the Closing Date occurs after January 31, 1997 and (b)(i) if Loral has elected the Cash Consideration and, in connection therewith, Loral has issued CPEOs or has received a bid from the Investment Banker (as defined below) to purchase CPEOs at a gross price equal to or greater than $60 per CPEO or (ii) if Loral has elected the CPEO Consideration and the gross price to be received by the Stockholder upon sale thereof as contemplated herein is equal to or greater than $60 per CPEO, then, the amount of the Consideration shall be increased to $95 million, payable either in cash or in CPEOs as set forth in Section 1.1.
2. CERTAIN AGREEMENTS
2.1 Sale of Securities by Stockholder. If Loral elects the CPEO Consideration, Loral agrees to use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable so that, immediately after the Closing, Lehman Brothers Inc. or another investment banking firm selected by Loral (the "Investment Banker") will purchase from the Stockholder, on the Closing Date, the CPEOs issued by Loral to the Stockholder, and the Stockholder shall receive as consideration therefor from the Investment Banker, on the Closing Date, a net purchase price equal to not less than $93.5 million (or $95 million, if Section 1.3 is applicable). Loral shall pay the fees and expenses of the Investment Banker.
2.2. Proxy; Resignation of Director. Effective as of the date of this Agreement, the Stockholder hereby irrevocably constitutes and appoints Loral or any designee of Loral the lawful agent, attorney and proxy of the Stockholder to vote all of the Stockholder's SS/L Shares at
-4- any meeting or in connection with any written consent of the stockholders of SS/L on any matters which may be presented to SS/L's stockholders at any meeting or in connection with any written consent of the stockholders of SS/L. This power of attorney is irrevocable, is granted in consideration of Loral entering into this Agreement and is coupled with an interest sufficient in law to support an irrevocable power. This appointment shall revoke all prior attorneys and proxies appointed by the Stockholder at any time with respect to its SS/L Shares, and no subsequent attorneys or proxies will be appointed by the Stockholder, or be effective, with respect thereto. The Stockholder shall, at Loral's request, cause its representative to the Board of Directors of SS/L to resign, and, after such resignation, the Stockholder shall no longer be entitled to appoint a representative to the Board of Directors of SS/L.
2.3. Price Protection.
2.3.1. Additional Consideration in Certain Events. In the event that, at any time hereafter and on or prior to March 31, 1997, Loral or any entity under its control (including SS/L) purchases any shares of SS/L Common Stock, or enters into a written agreement or any agreement in principle or letter of intent to do so or an oral agreement as to all material terms, at an Adjusted Price Per Share (as defined in Section 2.3.2 below) exceeding $156,070 (as such amount shall be equitably adjusted from time to time to reflect stock splits, stock dividends and the like), Loral will pay to the Stockholder an amount equal to the product of such excess and the number of SS/L Shares acquired from the Stockholder in the Exchange, such payment to be made in cash, or, at Loral's election, using the same form of consideration as is used in connection with transaction requiring the adjustment. The additional consideration contemplated by this Section 2.3.1 will not be payable in respect of any acquisition by Loral or any entity under its control (including SS/L) of SS/L Common Stock pursuant to Section 2.7 of the Stockholders Agreement (as defined below). In the event of successive purchases or agreements during the period from the date of this Agreement
-5- until March 31, 1997, the adjustment for all SS/L Shares shall be made based upon the highest price so paid.
2.3.2. Adjusted Price Per Share. The term "Adjusted Price Per Share" refers to the value attributable to a share of SS/L Common Stock, excluding therefrom any value attributable to the partnership interests in Globalstar, L.P. held by SS/L. The Adjusted Price Per Share shall be calculated by dividing (a) the difference obtained by subtracting (x) the value of the Globalstar partnership interests (including GTL warrants issued to SS/L) at the time held by SS/L (valued at the average of the daily high and low sales prices of the corresponding number of shares of GTL Common Stock on the Nasdaq National Market on the ten trading days preceding the date of the transaction in question) from (y) the valuation of 100% of the equity of SS/L, taken as a whole as determined by the value of the consideration paid in respect of the SS/L Common Stock in question (with consideration other than cash to be valued at the fair market value thereof) by (b) the number of shares of SS/L Common Stock outstanding immediately prior to such purchase.
2.3.3. Adjustment Closing. The closing of the transactions contemplated by Section 2.3.1 (the "Adjustment") shall occur on the third business day after the closing of the transaction requiring such adjustment (the "Adjustment Closing Date"). Any cash amounts payable in connection with the adjustment will be paid by wire transfer of immediately available funds to the account or accounts specified by the Stockholder.
3. REPRESENTATIONS AND WARRANTIES
3.1. Representations and Warranties of Loral. Loral represents and warrants to the Stockholder as follows:
3.1.1. Organization; Capitalization. Loral is a company duly organized and validly existing under the laws of the Islands of Bermuda and has all requisite corporate power and authority to own its properties and assets and to
-6- conduct its business as now conducted. The authorized capital stock of Loral consists of (a) 750,000,000 shares of Common Stock, par value $.01 per share, of which 191,092,308 shares are issued and outstanding and, without giving effect to the transactions contemplated hereby, 93,096,077 additional shares are reserved for issuance upon the exercise or conversion of outstanding options, warrants or convertible securities; (b) 150,000,000 shares of Series A Non-Voting Convertible Preferred Stock, par value $.01 per share, of which 45,896,977 shares are outstanding and none of which have been reserved for issuance; and (c) 750,000 shares of Series B Preferred Stock, par value $.01 per share, no shares of which are outstanding, and 250,000 shares of which have been reserved for issuance upon the exercise of outstanding rights.
3.1.2. Authorization and Validity of Agreement. Loral has the corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the performance of Loral's obligations hereunder have been, or will have been on the Closing Date, duly authorized by the Board of Directors of Loral, and no other corporate proceedings on the part of Loral are necessary to authorize such execution, delivery and performance. This Agreement has been duly executed by Loral and is the legal, valid and binding obligation of Loral.
3.1.3. No Conflict or Violation. The execution, delivery and performance by Loral of this Agreement do not and will not violate or conflict with any provision of the charter documents or bye-laws of Loral, and do not and will not violate any provision of any agreement or instrument to which Loral is a party or by which it is bound, or any order, judgment or decree of any court or other governmental or regulatory authority to which Loral is subject.
3.1.4. Validity of Securities. If Loral elects the CPEO Consideration, the CPEOs will have been duly and validly authorized and, when duly executed, authenticated, issued and delivered as contemplated by the Indenture
-7- against payment therefor as provided herein, will be duly and validly issued, fully paid and not subject to further calls, and will constitute the valid and binding obligation of Loral entitled to the benefits of the Indenture and enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law).
3.2. Representations and Warranties of the Stockholder. The Stockholder represents and warrants to Loral as follows:
3.2.1. Organization. The Stockholder is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all requisite corporate power and authority to own its properties and assets and to conduct its business as now conducted.
3.2.2. Authorization and Validity of Agreement. The Stockholder has the power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the performance of the Stockholder's obligations hereunder have been, or will have been on the Closing Date, duly authorized by the Board of Directors of the Stockholder, and no other corporate or other proceedings on the part of the Stockholder are necessary to authorize such execution, delivery and performance. This Agreement has been duly executed by the Stockholder and is the legal, valid and binding obligation of the Stockholder.
3.2.3. No Conflict or Violation. The execution, delivery and performance by the Stockholder of this Agreement do not and will not violate or conflict with any provision of the charter documents or by-laws of the Stockholder, and do not and will not violate any provision
-8- of any agreement or instrument to which the Stockholder is a party or by which it is bound, or any order, judgment or decree of any court or other governmental or regulatory authority to which the Stockholder is subject.
3.2.4. Title to SS/L Shares. The Stockholder holds good and valid title to the SS/L Shares, which shares are owned by the Stockholder free and clear of any lien or other right or claim, except to the extent set forth in the Stockholders Agreement (as defined below), and when such shares are acquired by Loral in accordance with the terms of this Agreement, Loral will acquire good and valid title to such shares free of any lien or other right or claim.
4. CONDITIONS TO CLOSING
4.1. Conditions to the Closing.
4.1.1. Conditions to Obligations of the Stockholder. The obligations of the Stockholder to consummate the Exchange are subject to the satisfaction or waiver, at or prior to the Closing Date, of the following conditions:
(a) the representations and warranties of Loral contained herein shall be true and correct in all material respects on and as of the Closing Date as if made on and as of such date;
(b) Loral shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date;
(c) the Stockholder shall have received a certificate signed by an executive officer of Loral to the effect that the conditions set forth in paragraphs (a) and (b) above have been satisfied;
(d) if Loral has elected the CPEO Consideration, the Stockholder shall have received an opinion, dated
-9- the Closing Date, from Appleby, Spurling & Kempe as to due formation of Loral and the legality of the CPEOs; and
(e) if Loral has elected the CPEO Consideration, the Stockholder shall have received written confirmation from the Investment Banker that the Investment Banker is committed to purchase, on the Closing Date, the CPEOs from the Stockholder as contemplated by Section 2.1.
4.1.2. Conditions to Obligations of Loral. The obligation of Loral to consummate the Exchange are subject to the satisfaction or waiver, at or prior to the Closing Date, of the following conditions:
(a) the representations and warranties of the Stockholder contained herein shall be true and correct in all material respects on and as of the Closing Date as if made on and as of such date;
(b) the Stockholder shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date; and
(c) Loral shall have received a certificate signed by and executive officer of the Stockholder to the effect that the conditions set forth in paragraphs (a) and (b) above have been satisfied.
4.1.3. Conditions to Obligations of Loral and the Stockholder. The obligations of Loral and the Stockholder to consummate the Exchange are subject to the satisfaction or waiver, at or prior to the Closing Date, of the following conditions:
(a) all consents, waivers, authorizations and approvals of any governmental or regulatory authority required in connection with the execution, delivery and performance of this Agreement shall have been duly
-10 - obtained and in full force and effect;
(b) the Exchange shall not be prohibited by any applicable law, court order or governmental regulation; and
(c) if Loral has elected the CPEO Consideration, Loral and the trustee under the Indenture shall have executed the Indenture and the Indenture shall be in full force and effect.
5. MISCELLANEOUS
5.1. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
5.2. No Waivers; Amendments.
5.2.1. No failure or delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
5.2.2. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by each party hereto.
5.3. Survival of Provisions. The representations and warranties, covenants and agreements contained in this Agreement shall survive and remain in full force and effect, regardless of any investigation made by or on behalf of the Stockholder, or by or on behalf of Loral, and shall survive delivery of the SS/L Shares and, if Loral has elected the CPEO Consideration, the CPEOs.
-11 - 5.4. Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties hereto and supersedes any and all prior agreements and understandings, written or oral, relating to the subject matter hereof.
5.5. Counterparts. This Agreement may be signed in counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument.
5.6. Section Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
5.7. Press Releases and Public Announcements. Press releases and public announcements or disclosures relating to the transactions contemplated hereby shall be made only if mutually agreed upon by the parties hereto, except to the extent required by law or by stock exchange regulation, provided that any such required disclosure will, to the extent practicable, be subject to consultation among the parties.
5.8. Termination of Certain Agreements. Effective upon the Closing, each of (i) that certain Stockholders Agreement dated as of April 22, 1991 among Aerospatiale SNI, Alcatel Espace, Finmeccanica S.p.A. (as successor in interest to Alenia Aeritalia & Selenia S.p.A.), SS/L, Loral Corporation and Loral Aerospace Holdings, Inc., as amended by that certain Amendment No. 1 to Stockholders Agreement dated as of November 10, 1992 among the parties to the aforementioned Stockholders Agreement and DASA and Loral Aerospace Corporation (such Stockholders Agreement, as amended by such Amendment No. 1, the "Stockholders Agreement"), (ii) that certain Operational Agreement dated April 22, 1991 among Aerospatiale SNI, Alcatel Espace, Finmeccanica S.p.A. (as successor in interest to Alenia Aeritalia & Selenia S.p.A.), SS/L, Loral Corporation and Loral Aerospace Holdings, Inc., as amended by that certain
-12 - Amendment No. 1 to Operational Agreement dated November 10, 1992 among the parties to the aforementioned Operational Agreement and DASA (such Operational Agreement, as amended by such Amendment No. 1, the "Operational Agreement"), (iii) that certain Space Systems/Loral, Inc. Memorandum of Agreement on Security Matters dated November 10, 1992 among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., SS/L, Aerospatiale SNI, Alcatel Espace, Finmeccanica S.p.A. (as successor in interest to Alenia Aeritalia & Selenia S.p.A.), the Stockholder and the United States Department of Defense and (iv) that certain Visitation Procedures Agreement for Space Systems/Loral, Inc. dated November 10, 1992 among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., SS/L, Aerospatiale SNI, Alcatel Espace, Finmeccanica S.p.A. (as successor in interest to Alenia Aeritalia & Selenia S.p.A.), the Stockholder and the United States Department of Defense shall terminate with respect to the Stockholder and be of no further force and effect with respect to the Stockholder, and the Stockholder shall have no further rights or obligations under any of such agreements. Each of the Stockholder and Loral hereby waives and releases any and all claims that it may have against the other arising from or relating to either the Stockholders Agreement or the Operational Agreement, provided, however, that any commercial subcontracts between the Stockholder and SS/L or between the Stockholder and Loral or any of its affiliates that may have been entered into pursuant to or as a result of the Operational Agreement shall remain in full force and effect.
5.9. Expenses. Except as otherwise set forth in this Agreement, each party to this Agreement shall bear all the fees, costs and expenses that are incurred by it in connection with the transactions contemplated hereby, including, without limitation, attorneys' fees and fees of financial advisors and investment bankers engaged by such party. Without limiting the generality of the foregoing, the Stockholders shall indemnify Loral and hold Loral harmless from and against any and all losses, claims, demands, costs, damages or liabilities, arising out of or
-13 - related to the Stockholder's arrangements with Morgan Stanley & Co. in connection with the transactions contemplated hereby.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above.
LORAL SPACE & COMMUNICATIONS LTD.
By: /s/ Michael B. Targoff ------Name: Michael B. Targoff Title: President and Chief Operating Officer
DAIMLER-BENZ AEROSPACE AG
By: /s/ Dr. Andreas Sperl ------Name: Dr. Andreas Sperl Title: Executive Vice President
-14 - AMENDMENT NO. 1
TO
EXCHANGE AGREEMENT
AMENDMENT NO. 1 TO EXCHANGE AGREEMENT dated as of February 6, 1997 (this "Amendment") between LORAL SPACE & COMMUNICATIONS LTD., a company organized under the laws of Bermuda ("Loral"), and DAIMLER-BENZ AEROSPACE AG (formerly Deutsche Aerospace AG), a corporation organized under the laws of Germany (the "Stockholder").
W I T N E S S E T H :
WHEREAS, Loral and the Stockholder are parties to that certain Exchange Agreement dated as December 19, 1996 (the "Exchange Agreement"); and
WHEREAS, Loral and the Stockholder desire to amend the Exchange Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and in the Exchange Agreement, the parties hereto agree as follows:
1. Amendment of Section 2.3. Section 2.3 of the Exchange Agreement is hereby amended and restated in its entirety as follows:
2.3. Price Protection.
2.3.1. Additional Consideration in Certain Events. In the event that, at any time hereafter and on or prior to the Price Protection Termination Date (as defined below), Loral or any entity under its control (including SS/L) purchases any shares of SS/L Common Stock, or enters into a written agreement or any agreement in principle or letter of intent to do so or an oral agreement as to all material terms, at a price per SS/L Share exceeding $190,816 (as such amount shall be equitably adjusted from time to time to reflect stock splits, stock dividends and the like), Loral will pay to the Stockholder an amount equal to the product of such excess and the number of SS/L Shares acquired from the Stockholder in the Exchange, such payment to be made in cash, or, at Loral's election, using the same form of consideration as is used in connection with transaction requiring the adjustment. The additional consideration contemplated by this Section 2.3.1 will not be payable in respect of any acquisition by Loral or any entity under its control (including SS/L) of SS/L Common Stock pursuant to Section 2.7 of the Stockholders Agreement (as defined below). In the event of successive purchases or agreements during the period from the date of this Agreement until the Price Protection Termination Date, the adjustment for all SS/L Shares shall be made based upon the highest price so paid. The "Price Protection Termination Date" shall mean (i) March 31, 1997 or (ii) such later date, if any, to which Loral or any entity under its control (including SS/L) shall have agreed to extend price protection similar to the provisions of this Section 2.3.1 for the benefit of an SS/L stockholder other than the Stockholder.
2.3.2. Adjustment Closing. The closing of the transactions contemplated by Section 2.3.1 (the "Adjustment") shall occur on the third business day after the closing of the transaction requiring such adjustment (the "Adjustment Closing Date"). Any cash amounts payable in connection with the adjustment will be paid by wire transfer of immediately available funds to the account or accounts specified by the Stockholder.
2. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.
3. Effectiveness of Agreement. Except as expressly amended by this Amendment, all terms of the Agreement shall remain in full force and effect.
-2- 4. Counterparts. This Amendment may be signed in counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date set forth above.
LORAL SPACE & COMMUNICATIONS LTD.
By: /s/ Michael P. DeBlasio ------Name: Michael P. DeBlasio Title: Senior Vice President and Chief Financial Officer
DAIMLER-BENZ AEROSPACE AG
By: /s/ Dr. Andreas Sperl ------Name: Dr. Andreas Sperl Title: Executive Vice President
-3- Exhibit 21
Loral Space & Communications Ltd.
As of February 28, 1997, active subsidiaries, all 100% owned directly or indirectly (except as noted below) consist of the following:
State or Country of Incorporation ------
Loral Space & Communications Corporation Delaware Loral General Partner, Inc. Delaware Loral SpaceCom Corporation Delaware Space Systems/Loral, Inc.(1) Delaware International Space Technology, Inc.(2) Delaware Cosmotech(2) Russian Federation SS/L Export Corporation(1) U.S. Virgin Islands Loral Travel Services, Inc. Delaware K&F Industries, Inc.(3) Delaware Globalstar, L.P.(4) Delaware Globalstar Capital Corporation(4) Delaware GlobalTel(5) Russian Federation GlobalTrak Pty(4) Australia Globalstar Telecommunications Limited(6) Bermuda LGP (Bermuda) Ltd. Bermuda Loral Canada Holdings Ltd. Bermuda Loral/DASA Globalstar, L.P.(7) Delaware Loral/Qualcomm Partnership, L.P.(1) Delaware LQ Licensee, Inc.(1) Delaware Loral/Qualcomm Satellite Services, L.P.(8) Delaware Loral Skynet Ltd. Bermuda Loral SpaceCom DBS Holdings, Inc. Delaware R/L DBS Company L.L.C.(9) Delaware Loral SpaceCom DBS, Inc. Delaware Continental Satellite Corporation(10) California
(1) Only 51% owned directly or indirectly (2) Only 22.9% owned directly or indirectly (3) Only 22.5% owned directly or indirectly (4) Only 33.8% owned directly or indirectly (5) Only 16.6% owned directly or indirectly (6) Only 14.1% owned directly or indirectly (7) Only 66.7% owned directly or indirectly (8) Only 52.9% owned directly or indirectly (9) Only 50% owned directly or indirectly
(10) Only 86% owned directly or indirectly
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-14863 of Loral Space & Communications Ltd. (a Bermuda company) on Form S-8 of our reports with respect to the consolidated financial statements of Loral Space & Communications Ltd., Space Systems/Loral, Inc., and Globalstar, L.P. appearing in and incorporated by reference in this Annual Report on Form 10-K of Loral Space & Communications Ltd. for the transition period ended December 31, 1996.
DELOITTE & TOUCHE LLP New York, New York
March 28, 1997 ARTICLE 5 This schedule contains summary financial information extracted from the financial statements of Loral Space & Communications Ltd. for the nine months ended December 31, 1996, and is qualified in its entirety by reference to such financial statements MULTIPLIER: 1,000
PERIOD TYPE 9 MOS FISCAL YEAR END DEC 31 1996 PERIOD START APR 01 1996 PERIOD END DEC 31 1996 CASH 1,180,752 SECURITIES 0 RECEIVABLES 0 ALLOWANCES 0 INVENTORY 0 CURRENT ASSETS 1,210,307 PP&E 20,254 DEPRECIATION 2,315 TOTAL ASSETS 1,699,326 CURRENT LIABILITIES 19,131 BONDS 583,292 PREFERRED MANDATORY 0 PREFERRED 459 COMMON 1,911 OTHER SE 1,067,699 TOTAL LIABILITY AND EQUITY 1,699,326 SALES 0 TOTAL REVENUES 39,787 CGS 0 TOTAL COSTS 17,284 OTHER EXPENSES 0 LOSS PROVISION 0 INTEREST EXPENSE 6,000 INCOME PRETAX 16,498 INCOME TAX 2,912 INCOME CONTINUING 8,877 DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET INCOME 8,877 EPS PRIMARY .04 EPS DILUTED .04 Exhibit 99
INDEPENDENT AUDITORS' REPORT
To the Partners of Globalstar, L.P.:
We have audited the accompanying consolidated balance sheets of Globalstar, L.P. (a development stage limited partnership) and its subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations, partners' capital and subscriptions receivable and cash flows for the period from March 23, 1994 (commencement of operations) to December 31, 1994, the years ended December 31, 1995 and 1996 and cumulative. We have also audited the accompanying consolidated statement of operations for the period from January 1, 1994 to March 22, 1994 (the pre-capital subscription period). These consolidated financial statements are the responsibility of the Partnership'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 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 financial position of Globalstar, L.P. and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for the periods stated above in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP San Jose, California February 24, 1997
2 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS (In thousands, except partnership interests)
DECEMBER 31, ------1996 1995 ------ASSETS Current assets: Cash and cash equivalents...... $ 21,180 $ 71,602 Other current assets...... 606 506 ------Total current assets...... 21,786 72,108 Property and equipment, net...... 1,720 1,509 Globalstar System Under Construction: Space segment...... 730,513 348,434 Ground segment...... 160,520 51,823 ------891,033 400,257 Deferred FCC license costs...... 8,690 7,056 Deferred financing costs...... 19,577 24,461 Other assets...... 107 ------Total assets...... $942,913 $505,391 ======
LIABILITIES and PARTNERS' CAPITAL Current liabilities: Accounts payable...... $ 4,401 $ 2,070 Payable to affiliates...... 63,937 47,569 Accrued expenses...... 6,929 4,782 ------Total current liabilities...... 75,267 54,421 Deferred revenues...... 23,652 21,913 Vendor financing liability...... 130,694 42,219 Borrowings under long-term revolving credit facility...... 96,077 --
Commitments and contingencies (Notes 4,6,7,9,10,11 and 12) Redeemable preferred partnership interests (4,769,230 outstanding at December 31, 1996, $310,000 redemption value)...... 302,037 -- Ordinary partners' capital: Ordinary partnership interests (47,000,000 outstanding)...... 292,585 364,237 Warrants...... 22,601 22,601 ------Total ordinary partners' capital...... 315,186 386,838 ------Total liabilities and partners' capital...... $942,913 $505,391 ======
See notes to consolidated financial statements.
3 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
YEAR ENDED DECEMBER 31, 1994 ------PRE-CAPITAL CUMULATIVE SUBSCRIPTION PERIOD MARCH 23 YEARS ENDED MARCH 23, 1994 ------(COMMENCEMENT OF DECEMBER 31, (COMMENCEMENT OF JANUARY 1 TO OPERATIONS) TO ------OPERATIONS) TO MARCH 22, 1994 DECEMBER 31, 1994 1995 1996 DECEMBER 31, 1996 ------Operating expenses: Development costs...... $4,057 $21,279 $62,854 $42,152 $ 126,285 Marketing, general and administrative...... 2,815 6,748 17,372 18,873 42,993 ------Total operating expenses...... 6,872 28,027 80,226 61,025 169,278 Interest income...... -- 1,783 11,989 6,379 20,151 ------Net loss...... 6,872 26,244 68,237 54,646 149,127 Preferred distributions and related increase in redeemable preferred partnership interests...... ------17,323 17,323 ------Net loss applicable to ordinary partnership interests...... $6,872 $26,244 $68,237 $71,969 $ 166,450 ======
See notes to consolidated financial statements.
4 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
MARCH 23, 1994 CUMULATIVE (COMMENCEMENT OF YEARS ENDED MARCH 23, 1994 OPERATIONS) TO DECEMBER 31, (COMMENCEMENT OF DECEMBER 31, ------OPERATIONS) TO 1994 1995 1996 DECEMBER 31, 1996 ------Cash flows from operating activities: Net loss...... $(26,244) $ (68,237) $ (54,646) $(149,127) Deferred revenues...... -- 21,913 1,739 23,652 Stock compensation transactions...... -- -- 317 317 Depreciation and amortization...... 115 398 5,858 6,371 Changes in operating assets and liabilities: Other current assets...... -- (506) (100) (606) Other assets...... -- -- (107) (107) Accounts payable...... 638 857 1,723 3,218 Payable to affiliates...... (1) 4,865 (3,553) 1,311 Accrued expenses...... 2,440 2,342 2,147 6,929 ------Net cash used in operating activities...... (23,052) (38,368) (46,622) (108,042) ------Investing activities: Globalstar System under construction...... (71,996) (328,261) (490,776) (891,033) Payable to affiliates for Globalstar System under construction...... 25,042 8,863 19,921 53,826 Capitalized interest payable on long-term revolving credit facility...... -- -- 77 77 Accounts payable...... -- 67 608 675 Vendor financing liability...... -- 42,219 88,475 130,694 ------Cash used for Globalstar System...... (46,954) (277,112) (381,695) (705,761) Purchases of property and equipment...... (1,119) (888) (935) (2,942) Deferred FCC license costs...... (2,286) (2,535) (1,634) (6,455) Purchases of investments...... -- (126,923) -- (126,923) Maturity of investments...... -- 126,923 -- 126,923 Other current assets...... (190) 190 ------Net cash used in investing activities...... (50,549) (280,345) (384,264) (715,158) ------Financing activities: Deferred line of credit fees...... -- (1,875) (250) (2,125) Proceeds from capital subscriptions receivable...... 148,661 133,780 -- 282,441 Payment of accrued capital raising costs...... (1,500) (900) -- (2,400) Sale of partnership interests to GTL...... -- 185,750 -- 185,750 Sale of redeemable preferred partnership interests to GTL...... -- -- 299,500 299,500 Distributions on redeemable preferred partnership interests...... -- -- (14,833) (14,833) Prepaid interest on redeemable preferred partnership interests...... -- -- 47 47 Borrowings under long-term revolving credit facility.... -- -- 106,000 106,000 Repayment of borrowings under long-term revolving credit facility...... -- -- (10,000) (10,000) ------Net cash provided by financing activities...... 147,161 316,755 380,464 844,380 ------Net increase (decrease) in cash and cash equivalents..... 73,560 (1,958) (50,422) 21,180 Cash and cash equivalents, beginning of period...... -- 73,560 71,602 ------Cash and cash equivalents, end of period...... $ 73,560 $ 71,602 $ 21,180 $ 21,180 ======Noncash transactions: Payable to affiliates...... $ 9,308 $ 9,308 ======Accrual of capital raising costs...... $ 2,400 $ 2,400 ======Deferred FCC license costs...... $ 2,235 $ 2,235 ======Warrants issued in exchange for debt guarantee...... $ 22,601 $ 22,601 ======Increase in redemption value of preferred partnership interests...... $ 2,537 $ 2,537 ======
See notes to consolidated financial statements.
5 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF ORDINARY PARTNERS' CAPITAL AND SUBSCRIPTIONS RECEIVABLE (In thousands)
ORDINARY PARTNERS' CAPITAL
ORDINARY PARTNERSHIP INTERESTS WARRANTS TOTAL ------Capital subscription, March 23, 1994 General partner (18,000 interests)...... $ 50,000 $ 50,000 Limited partners (18,000 interests)...... 225,000 225,000 Cost of raising capital...... (2,400) (2,400) Net losses -- pre-capital subscription period: Year ended December 31, 1993...... (11,510) (11,510) January 1, 1994 to March 22, 1994...... (6,872) (6,872) Net loss applicable to ordinary partnership interests -- March 23, 1994 (commencement of operations) to December 31, 1994...... (26,244) (26,244) Capital subscription, December 31, 1994 (1,000 limited partnership interests)...... 18,750 18,750 ------Capital balances, December 31, 1994...... 246,724 246,724 Sale of 10,000 general partnership interests to GTL, February 22, 1995...... 185,750 185,750 Warrant agreement in connection with debt guarantee...... -- $22,601 22,601 Net loss applicable to ordinary partnership interests -- Year ended December 31, 1995...... (68,237) (68,237) ------Capital balances -- December 31, 1995...... 364,237 22,601 386,838 Stock compensation transactions by managing general partner for the benefit of Globalstar...... 317 317 Net loss applicable to ordinary partnership interests -- Year ended December 31, 1996...... (71,969) (71,969) ------Capital balances -- December 31, 1996...... $ 292,585 $22,601 $315,186 ======
SUBSCRIPTIONS RECEIVABLE
Capital subscriptions: March 23, 1994...... $ 275,000 $275,000 December 31, 1994...... 18,750 18,750 ------Total subscriptions...... 293,750 293,750 ------Cash received...... (148,661) (148,661) Credit for pre-capital subscription costs...... (11,309) (11,309) ------(159,970) (159,970) ------Subscriptions receivable, December 31, 1994...... 133,780 133,780 Cash received...... (133,780) (133,780) ------Subscriptions receivable, December 31, 1995 and 1996..... $ -- $ -- ======
See notes to consolidated financial statements.
6 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globalstar, L.P. ("Globalstar"), a Delaware limited partnership with a December 31 fiscal year end, was formed in November 1993. It had no activities until March 23, 1994, when it received capital subscriptions for $275 million and commenced operations. The accompanying financial statements reflect the operations of the Partnership from that date. In addition, the statements of operations for the period January 1, 1994 to March 22, 1994 (the "Pre-Capital Subscription Period") reflect certain costs incurred by Loral Corporation ("Old Loral") and QUALCOMM Incorporated ("Qualcomm") and reimbursed by Globalstar through a capital subscription credit or agreement for reimbursement, as described in Note 9.
Effective April 23, 1996, a merger between Old Loral and Lockheed Martin Corporation ("Lockheed Martin") was completed. In conjunction with the merger, Old Loral's space and communications businesses, including its direct and indirect interests in Globalstar, Globalstar Telecommunications Limited ("GTL"), Space Systems/Loral, Inc. ("SS/L") and other affiliated businesses, as well as certain other assets and liabilities, have been transferred to Loral Space & Communications Ltd. ("Loral"), a Bermuda company.
The managing general partner of Globalstar is Loral/QUALCOMM Satellite Services, L.P. ("LQSS"). The general partner of LQSS is Loral/QUALCOMM Partnership, L.P. ("LQP"), a Delaware limited partnership comprised of subsidiaries of Loral and Qualcomm. The managing general partner of LQP is Loral General Partner, Inc. ("LGP"), a subsidiary of Loral.
Globalstar was founded to design, construct and operate a worldwide, low-earth orbit ("LEO") satellite-based digital telecommunications system (the "Globalstar System"). 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 communications 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. On January 31, 1995, the U.S. Federal Communications Commission ("FCC") granted the necessary license to a wholly-owned subsidiary of LQP to construct, launch and operate the Globalstar System. LQP has agreed to use such license for the exclusive benefit of Globalstar.
On November 23, 1994, GTL was incorporated as an exempted company under the Companies Act 1981 of Bermuda. GTL's sole business is acting as a general partner of Globalstar. On February 14, 1995, GTL completed an initial public offering of 10,000,000 shares of common stock resulting in net proceeds of $185,750,000. Effective February 22, 1995, GTL purchased 10,000,000 partnership interests from Globalstar with the net proceeds of the initial public offering. The partners in Globalstar have the right to convert their partnership interests into shares of GTL common stock on a one-for-one basis following the Full Coverage Date, as defined, of the Globalstar System and after at least two consecutive reported fiscal quarters of positive net income, subject to certain annual limitations.
At December 31, 1996, Loral had an effective 33.8% interest in the ordinary partnership interests of Globalstar, including 1,407,144 shares of GTL's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
Globalstar is devoting substantially all of its present efforts to the design, licensing, construction, testing, and financing of the Globalstar System, and establishing its business. Its planned principal operations have not commenced. Accordingly, Globalstar is a development stage company as defined
7 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) in Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage Enterprises."
Globalstar may encounter problems, delays and expenses, many of which may be beyond Globalstar's control. These may include, but are not limited to, problems related to technical development of the system, testing, regulatory compliance, manufacturing and assembly, the competitive and regulatory environment in which Globalstar will operate, marketing problems and costs and expenses that may exceed current estimates. There can be no assurance that substantial delays in any of the foregoing matters would not delay Globalstar's achievement of profitable operations.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of Globalstar and its wholly-owned subsidiary, Globalstar Capital Corporation. All intercompany accounts and transactions are eliminated.
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally three to eight years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the improvements.
Globalstar System Under Construction
Globalstar System Under Construction expenditures include and will include progress payments and costs for the design, manufacture, test, launch and launch insurance for 48 low-earth orbit satellites, plus additional spare satellites (the "Space Segment"), and ground and satellite operations control centers, gateways and subscriber terminals (handsets) (the "Ground Segment").
Globalstar intends to depreciate the Space Segment over 7 1/2 years and to depreciate the Ground Segment over eight years as assets are placed in service. Service is currently anticipated to commence in 1998.
Costs incurred related to the development of certain technologies, pursuant to a cost sharing arrangement included in Globalstar's contract with Qualcomm, and for the engineering and development of subscriber terminals, are being charged to operations as incurred.
8 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financing Costs and Interest
Deferred financing costs represent costs incurred in obtaining a long-term credit facility and the estimated fair value of a warrant agreement in connection with a guarantee of this facility (see Note 6-Credit Facility). Such costs are being amortized over the term of the credit facility as interest. Total amortization of deferred financing costs for the years ended December 31, 1996 and 1995 was approximately $5,134,000 and $15,000, respectively.
Interest costs incurred during the construction of the Globalstar System are capitalized. Total interest costs capitalized for the years ended December 31, 1996 and 1995 was approximately $9,900,000 and $300,000, respectively. No interest was capitalized for the period ending December 31, 1994.
FCC License Costs
Expenditures, including license fees, legal fees and direct engineering and other technical support, for obtaining the required FCC licenses are capitalized and will be amortized over 7 1/2 years, the expected life of the first generation satellites.
Deferred Revenues
Advance payments from Globalstar strategic partners to secure exclusive rights to Globalstar service territories are deferred. These advance payments are recoverable by the service providers through credits against a portion of the service fees payable to Globalstar after the commencement of services.
Vendor Financing
Globalstar's contract with SS/L calls for a portion of the contract price to be deferred as vendor financing and to be repaid, over as long as a five-year period, commencing upon the initial service and full coverage dates of the Globalstar System. Amounts deferred as vendor financing are capitalized as costs of the Globalstar System Under Construction as incurred.
Preferred Partnership Distributions
Distributions accrue on the redeemable preferred partnership interests at 6 1/2% per annum. Globalstar is increasing the carrying value of the redeemable preferred partnership interests to their ultimate redemption value. The distributions are recorded as reductions against the ordinary partnership capital accounts.
Stock-Based Compensation
As permitted by Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation," Globalstar 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".
9 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net (Loss) Income Allocation
Net losses are allocated among the partners in proportion to their percentage interests until the adjusted capital account of a partner is reduced to zero, then in proportion to, and to the extent of, positive adjusted capital account balances and then to the general partners.
Net income is allocated among the partners in proportion to, and to the extent of, the distributions made to the partners from distributable cash flow for the period, as defined, then in proportion to and to the extent of negative adjusted capital account balances and then in accordance with percentage interests.
Under the terms of the Partnership Agreement, adjusted partners' capital accounts are calculated in accordance with the principles of U.S. Treasury Regulations governing the allocation of taxable income and loss including adjustments to reflect the fair market value (including intangibles) of partnership assets upon certain capital transactions including a sale of partnership interests. Such adjustments are not permitted under generally accepted accounting principles and, accordingly, are not reflected in the accompanying consolidated financial statements.
Income Taxes
Globalstar was organized as a Delaware limited partnership. As such, no income tax provision (benefit) is included in the accompanying financial statements since U.S. income taxes are the responsibility of its partners. Generally, taxable income (loss), deductions and credits of Globalstar will be passed proportionately through to its partners.
Reclassifications
Certain reclassifications have been made to conform prior-year amounts to the current-year presentation.
3. PROPERTY AND EQUIPMENT
DECEMBER 31, ------1996 1995 ------(IN THOUSANDS) Property and equipment consists of: Leasehold improvements...... $ 473 $ 401 Furniture and office equipment...... 2,469 1,606 ------2,942 2,007 Accumulated depreciation and amortization...... (1,222) (498) ------$ 1,720 $1,509 ======
Depreciation and amortization expense for the years ended December 31, 1996 and 1995, and for the period March 23 to December 31, 1994, was $724,000, $383,000 and $115,000, respectively.
10 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
Total System Cost
As of February 1997, Globalstar estimates the cost for the design, construction and deployment of the Globalstar System including working capital, cash interest on anticipated borrowings and operating expenses to be approximately $2.5 billion, as compared with approximately $2.2 billion estimated at December 31, 1995. Actual amounts may vary from this estimate and additional funds would be required in the event of unforeseen delays, cost overruns, launch failures, technological risks, adverse regulatory developments, or to meet unanticipated expenses and for system enhancements and measures to assure system performance and readiness for the space and ground segments.
In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites that will increase Globalstar's ability to have at least 40 satellites in service during 1999, even in the event of launch failures. If the launch program is successful, the additional satellites will serve as ground spares, readily available for launch to replenish the constellation as needed to respond to satellite attrition during the first generation, or to increase system capacity as required. If Globalstar were to experience a launch failure, the costs associated with the construction and launch of replacements would be substantially covered by insurance, and in that event the cost of the additional satellites used as replacements, currently estimated at $175 million, would be reimbursed to Globalstar.
As of February 13, 1997, Globalstar had raised or received commitments for approximately $2.0 billion, including the vendor financing arrangements. Globalstar intends to raise the remaining funds required for the Globalstar System from a combination of sources, including debt issuance (which may include an equity component), financial support from the Globalstar partners, projected service provider payments, projected net service revenues from initial operations, anticipated payments from the sale of gateways and Globalstar phones and placement of partnership interests with new and existing strategic investors. 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.
The Space Segment
Globalstar has entered into a contract with SS/L, an affiliate of Loral and a limited partner of LQSS, to design, manufacture, test and launch its 56 satellite constellation. The price of the contract consists of three parts, the first for non-recurring work at a price not to exceed $117.1 million, the second for recurring work at a fixed price of $15.6 million per satellite (including certain performance incentives of up to approximately $1.9 million per satellite) and the third for launch services and insurance. SS/L has agreed to obtain launch vehicles and arrange for the launch of Globalstar's satellites on Globalstar's behalf for all 56 satellites, and obtain insurance to cover the replacement cost of satellites or launch vehicles lost in the event of a launch failure. In certain circumstances these amounts are subject to equitable adjustment in light of future market conditions, which may, in turn, be influenced by international political developments. Any change in such assumptions may result in an increase in the costs paid by Globalstar, which may be substantial. Termination by Globalstar of this contract would result in termination fees, which may be substantial.
During 1996, Globalstar authorized SS/L to alter its original launch plans and procure three launches of the Starsem Soyuz launch vehicle, which will launch four Globalstar satellites each. The selection of these launch vehicles is part of a strategy to place on-orbit a constellation of at least 40 satellites by the first quarter of 1999 even in the event of launch failures. As a result of this decision, total costs for launch vehicles and insurance are expected to be approximately $455 million.
11 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION (CONTINUED) SS/L has entered into fixed-price subcontracts aggregating approximately $650 million, with certain of Globalstar's direct or indirect limited partners. Some of these contracts are subject to adjustment.
Globalstar's space segment contract with SS/L calls for a portion of the contract price to be deferred as vendor financing (see Note 5.).
The Ground Segment
Globalstar has entered into a contract with Qualcomm providing for the design, development, manufacture, installation, testing and maintenance of four gateways, two ground operations control centers and 100 pre-production subscriber terminals. The contract provides for reimbursement to Qualcomm, subject to a cap for certain joint development efforts, for contract costs incurred, plus a 12% fee thereon. Termination by Globalstar of its contract with Qualcomm would result in delays and termination fees, which may be substantial. A portion of the ground operations control center software is being developed by Globalstar.
Qualcomm is currently preparing a revised estimate of costs under its contract with Globalstar and has given Globalstar indication that, due to additional integration testing procedures to support system readiness on schedule, scope changes to add features, capabilities and functions, cost growth and other factors, the total cost may increase to $545 million. The Qualcomm estimate is subject to further review by Globalstar. In addition, Globalstar has authorized the expenditure of $25 million for the development of additional service features and $30 million to fund development efforts of additional handset suppliers.
Globalstar and its strategic service providers intend to jointly finance the procurement of 33 gateways for resale to service providers, thereby accelerating the deployment of gateways around the world prior to the In-Service Date. Globalstar has agreed to finance approximately $80 million of the cost of these gateways and expects to recover its cost from the resale of these gateways to service providers.
Globalstar will receive from Qualcomm or its licensee(s) a payment of approximately $400,000 for each installed gateway sold to a Globalstar service provider. In addition, Globalstar will receive a payment of up to $10 on each Globalstar subscriber terminal sold, until Globalstar funding of that design has been recovered.
Globalstar has entered into an agreement with Lockheed Martin for the development and delivery of two satellite operations control centers and 33 telemetry and command units for the Globalstar System. The maximum contract price is $25.1 million and provides for reimbursement to Lockheed Martin for contract costs incurred such as labor, materials, travel, license fees, royalties and general and administrative expenses. Lockheed Martin will receive a 12% fee under the contract, 6% of which is payable at the time the costs are incurred, with the remainder payable upon achievement of certain milestones. Globalstar will own any intellectual property produced under the contract.
5. VENDOR FINANCING LIABILITY
Globalstar's space segment contract with SS/L calls for approximately $310 million of the contract price to be deferred as vendor financing. Of the $310 million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per annum. The remaining $220 million of vendor financing is non-interest bearing. Globalstar will repay the non-interest bearing portions as follows: $49 million following the launch and acceptance of 24 or more satellites (the "Preliminary Constellation"), $61 million upon the
12 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. VENDOR FINANCING LIABILITY (CONTINUED) launch and acceptance of 48 or more satellites (the "Full Constellation"), and the remainder in equal installments over the five-year period following acceptance of the Preliminary and Full Constellations. Payment of the $90 million interest bearing vendor financing will be deferred until December 31, 1998 or the Full Constellation Date, whichever is earlier. Thereafter, interest and principal will be repaid in twenty equal quarterly installments over the next five years. At December 31, 1996 and 1995, approximately $72.0 million and $21.5 million, respectively, of the vendor financing liability was interest bearing.
6. CREDIT FACILITY
On December 15, 1995, Globalstar entered into a $250 million credit agreement (the "Credit Agreement") with a group of banks. Lockheed Martin, Qualcomm, SS/L and another Globalstar partner have guaranteed $206.3 million, $21.9 million, $11.7 million and $10.1 million of the Credit Agreement, respectively. In addition, Loral agreed to indemnify Lockheed Martin for any liability in excess of $150 million. The Credit Agreement provides that Globalstar may select loans at varying interest rates, including the Eurodollar rate plus 5/8%. Globalstar pays a commitment fee on the unused portion. The Credit Agreement contains covenants requiring Globalstar to meet certain financial ratios including minimum net worth of $200 million and limits additional indebtedness and the payment of cash distributions. The Credit Agreement expires on December 15, 2000.
In exchange for the guarantee and indemnity, GTL issued warrants to purchase 4,185,318 shares of GTL common stock at $26.50 as follows: Loral 942,428 warrants, Lockheed Martin 2,511,190 warrants, Qualcomm 367,131 warrants, SS/L 195,094 warrants and another Globalstar partner 169,475 warrants. Proceeds from the exercise of the warrants will be used to purchase Globalstar ordinary partnership interests under a one-for-one exchange arrangement. As part of this transaction, Globalstar issued GTL warrants to purchase an additional 1,131,168 ordinary partnership interests of Globalstar. The estimated fair value of the warrant agreement has been recorded as a deferred financing cost in the accompanying financial statements. Globalstar has also agreed to pay the guarantors, other than Lockheed Martin, a fee equal to 1.5% per annum of the average guaranteed amount outstanding under the Credit Agreement. Such fee will be deferred and will be paid with interest commencing 90 days after the expiration of the Credit Agreement.
On February 12, 1997, GTL and the holders of the warrants entered into an arrangement under which GTL agreed to accelerate the vesting and exercisability of the warrants to purchase 4,185,318 shares of GTL common stock at $26.50 per share and the holders agreed to exercise such warrants. GTL also agreed to register for resale the GTL shares issuable upon exercise of the warrants. In addition, GTL announced its intention to distribute to the holders of its common stock rights to subscribe for and purchase 1,131,168 GTL shares for a price of $26.50 per share of which Loral will receive 159,172 rights. Loral agreed to purchase all GTL shares not purchased upon exercise of the rights. Upon the exercise of the warrants and the rights, GTL will receive proceeds of approximately $140.9 million, which it will use to exercise warrants to purchase 5,316,486 Globalstar ordinary partnership interests at $26.50 per interest. Globalstar will use such proceeds for the construction of the Globalstar System.
13 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
The following table presents the future minimum lease payments required under operating leases that have an initial lease term in excess of one year (in thousands):
1997...... $1,045 1998...... 1,067 1999...... 1,090 2000...... 789 2001...... 156 Thereafter...... 767 ------Total minimum payments required...... $4,914 ======
Rent expense for the years ended December 31, 1996 and 1995, and the period March 23 to December 31, 1994, was approximately $1,067,000, $934,000, and $373,000, respectively.
8. SALE OF REDEEMABLE PREFERRED PARTNERSHIP INTERESTS
On March 6, 1996 and April 3, 1996, GTL purchased 4,615,385 and 153,845 redeemable preferred partnership interests ("RPPIs"), respectively, in Globalstar using the net proceeds of $299,500,000 from GTL's sale of its Convertible Preferred Equivalent Obligations (the "CPEOs"). The RPPIs will convert to ordinary general partnership interests on a one-for-one basis upon any conversion of the CPEOs, will pay a quarterly preferred distribution to GTL of 6 1/2% per annum, will be allocated losses of the partnership only after all adjusted capital accounts of the ordinary partnership interests have been reduced to zero, and are redeemable on terms comparable to the CPEOs. If still outstanding, the RPPIs must be redeemed by Globalstar on March 1, 2006 for the aggregate amount of $310,000,000 plus all unpaid distributions. Globalstar may elect to make the quarterly preferred distribution and redemption payments to GTL in cash or general partnership interests. If such distribution is made in cash, GTL must make its interest payment on the CPEOs in cash. Globalstar may elect to defer payment of the preferred distribution; in such case, GTL may also elect to defer interest payment on the CPEOs, however, holders of the CPEOs are entitled to certain representation rights on the General Partners' Committee of Globalstar in the event six consecutive interest payments are deferred. Through December 31, 1996, all payments have been made in cash on a timely basis.
9. ORDINARY PARTNERS' CAPITAL
Initial Capital Subscriptions
Prior to the commencement of Globalstar's operations on March 23, 1994, Loral and Qualcomm undertook independent efforts at their own risk to explore the feasibility of a Globalstar-type system. Efforts to develop the Globalstar System were formalized with the initial funding of Globalstar on March 23, 1994 through capital subscriptions of $50,000,000 for 18,000,000 general partner interests and $225,000,000 for an aggregate of 18,000,000 limited partner interests. In connection with the initial capital subscriptions, the partners of Globalstar agreed to reimburse Loral and Qualcomm for certain expenditures totaling $18,382,000, incurred related to such efforts from January 1, 1993 through March 22, 1994. These expenditures included development costs and marketing, general and administrative expenses related to the Globalstar System. The statements of operations include the costs for these periods under the heading Pre-Capital Subscription Period.
14 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ORDINARY PARTNER'S CAPITAL (CONTINUED) In addition, costs of $2,235,000 were incurred in connection with the FCC license application. The aggregate expenditures by Loral and Qualcomm of $20,617,000 were reimbursed through a credit of $11,309,000 issued to the general partner as a reduction of its required capital subscription payment and a payment to Qualcomm of $9,308,000. The reimbursed expenses of $18,382,000 have been charged to partners' capital as of the date of the capital subscription agreement and allocated to the partners' capital accounts in accordance with the partnership agreement. The $2,235,000 of costs relating to the FCC license application are included in the balance sheet.
Other Arrangements
In connection with service provider arrangements in China, under which China Telecommunications Broadcast Satellite Corporation ("China Sat") will act as the sole distributor of Globalstar services in China, China Sat has the right, under certain circumstances, to acquire up to 1,875,000 ordinary partnership interests at $20 per partnership interest. China Sat may purchase one-half of this amount currently and one-half upon reaching certain target revenue levels.
Stock Option Arrangements
Officers and employees of Globalstar are eligible to participate in GTL's 1994 Stock Option Plan (the "Plan"), which provides for nonqualified and incentive stock options. The plan is administered by a stock option committee (the "Committee"), appointed by the GTL Board of Directors. The Committee determines the option price, the option's exercise date and the expiration date of each option (provided no option shall be exercisable after the expiration of ten years from the date of grant). Proceeds received by GTL for options exercised will in turn be used to purchase Globalstar ordinary partnership interests under a one-for-one exchange arrangement.
In 1995, options to purchase 110,400 shares of GTL common stock and in 1996, options to purchase 122,000 shares of GTL common stock were granted under the Plan. The options generally expire ten years from the date of grant and become exercisable over the period stated in each option, generally ratably over a five-year period. All options granted in 1995 and 1996 were non-qualified stock options with a price equal to fair market value at the date of grant. As of December 31, 1996, 18,800 shares of common stock were available for future grant under the Plan, no options were exercised or are exercisable and 1,200 have been cancelled.
On September 14, 1995, Loral, in its capacity as managing general partner, granted certain of its officers options to purchase 140,000 shares of the GTL common stock owned by Loral at an exercise price of $20.00 per share. On December 12, 1995 Loral, in its capacity as managing general partner, granted non-employee directors of Loral options to purchase 200,000 shares of the GTL common stock owned by Loral at an exercise price of $33.375 per share. Such exercise prices were greater than or equal to the market price at grant date. These options are immediately exercisable, and expire 12 years from date of grant; no options were exercised or cancelled during the year.
On October 9, 1996, Loral, in its capacity as managing general partner, granted certain of its officers options to purchase 152,000 shares of the GTL common stock owned by Loral at a price $25.375 below market price on the grant date. Such options vest over a three year period and expire 10 years from date of grant; no options were exercised or cancelled during the year.
In April and December 1996, Loral granted certain officers and employees of Globalstar options to purchase 99,000 shares of Loral common stock at $10.50 per share and 5,000 shares of Loral common stock at $18.9375 per share, respectively. Such exercise prices were equal to the market price at grant
15 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ORDINARY PARTNER'S CAPITAL (CONTINUED) date. These options expire ten years from the date of grant and become exercisable ratably over a five year period.
As described in Note 2, Globalstar accounts for its stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Except for $317,000 of compensation expense in 1996 related to the below market option grant, no compensation expense has been recognized in Globalstar's financial statements for stock-based compensation.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") requires the disclosure of pro forma net income and earnings per share had Globalstar adopted the fair value method as of the beginning of 1995. 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 Globalstar'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. Globalstar's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, six months following vesting; stock volatility, 30%; risk free interest rates, 6.25% in 1996 and 6% in 1995; and no dividends during the expected term. Globalstar's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1996 and 1995 awards (including the stock-based awards made by Loral to its officers and directors on Globalstar's behalf) had been amortized to expense over the vesting period of the awards, the pro forma net loss applicable to ordinary partnership interests would have increased by $1,755,000 to $73,724,000 in 1996 and would have increased by $156,000 to $68,393,000 in 1995.
A summary of the status of the GTL stock option plan at December 31, 1996 and changes during the year then ended is presented below:
WEIGHTED AVERAGE EXERCISE SHARES PRICE ------Granted in 1995 (weighted average fair value $5.33 per share)... 110,400 $ 16.625 Outstanding at December 31, 1995...... 110,400 16.625 Granted (weighted average fair value $18.04 per share)...... 122,000 54.90 Forfeited...... (1,200) 16.625 ------Outstanding at December 31, 1996...... 231,200 36.824 ======
The following table summarizes information about the stock options outstanding at December 31, 1996:
WEIGHTED AVERAGE NUMBER REMAINING EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE-YEARS ------$16.625 ...... 109,200 8.7 50.375 ...... 80,000 9.4 63.5313...... 42,000 9.9
16 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS
Prior to April 23, 1996, Globalstar employees were eligible to participate in the employee benefit plans of Old Loral. Globalstar was charged for the actual costs of these benefits which for the period March 23 through December 31, 1994, amounted to $321,000, including $55,000 relating to pensions and retiree health care and life insurance benefits. The costs incurred for the year ended December 31, 1995 amounted to $710,000, including $121,000 relating to pensions and retiree health care and life insurance benefits. In April 1996, separate pension, postretirement health care and life insurance and employee savings plans were established by Globalstar.
Pensions: Globalstar maintains a noncontributory pension plan and a supplemental pension plan covering certain employees. Eligibility for participation in these plans vary and benefits are generally based on members' compensation and years of service. Plan assets are generally invested in U.S. government and agency obligations and listed stocks and bonds.
Pension cost for the year ended December 31, 1996 includes the following components (in thousands):
Service cost-benefits earned during the period...... $ 213 Interest cost on projected benefit obligation...... 195 Actual return on plan assets...... (134) Net amortization and deferral...... (151) ------Total pension cost...... $ 123 ======
The following presents the plan's funded status and amounts recognized in the balance sheet at December 31, 1996 (in thousands):
Actuarial present value of benefit obligations: Vested benefits...... $ 2,944 ======Accumulated benefits...... $ 3,129 Effect of projected future salary increases...... 764 ------Projected benefits...... 3,893 Plan assets at fair value...... 4,156 ------Plan assets in excess of projected benefit obligation...... 263 Unrecognized net gain...... 386 ------Pension liability...... $ 123 ======
The principal actuarial assumptions were:
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 Benefits: In addition to providing pension benefits, Globalstar 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 Globalstar'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.
17 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS (CONTINUED) Postretirement health care and life insurance costs for the year ended December 31, 1996 include the following components (in thousands):
Service cost -- benefits earned during the period...... $ 29 Interest cost on accumulated postretirement benefit obligation...... 32 Net amortization and deferral...... 26 Return on assets...... (2) ------Total postretirement health care and life insurance costs...... $ 85 ======
At December 31, 1996, the total accumulated postretirement benefit obligation was $641,000. Actuarial assumptions used in determining the accumulated postretirement benefit obligation include a discount rate of 7.75% at December 31, 1996, and an assumed health care cost trend rate of 10.6% decreasing gradually to an ultimate rate of 5.5% by the year 2004. Changing the assumed health care cost trend by 1% in each year would change the accumulated postretirement benefit obligation at December 31, 1996 by $110,000 and the aggregate service and interest cost components by $12,000 for the year ended December 31, 1996.
11. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 4, 5, 6, 8 and 9, Globalstar has a number of other transactions with its affiliates. Globalstar believes that the arrangements are as favorable to Globalstar as could be obtained from unaffiliated parties. The following describes these related-party transactions.
Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive license to use certain intellectual property expressly developed in connection with the SS/L agreement provided that SS/L will not use, or permit others to use, such license for the purpose of engaging in any business activity that would be in material competition with Globalstar. Globalstar has similarly agreed that it will not license such intellectual property if it will be used for the purpose of designing or building satellites that would be in competition with SS/L.
Globalstar has granted to Qualcomm an irrevocable, non-exclusive, worldwide perpetual license to intellectual property owned by Globalstar in the Ground Segment and developed pursuant to the Qualcomm agreement. Qualcomm may, pursuant to such grant, use the intellectual property for applications other than the Globalstar System provided that Qualcomm may not for a period of three years after its withdrawal as a strategic partner or prior to the third anniversary of the Full Constellation Date, whichever is earlier, engage in any business activity that would be in competition with the Globalstar System. The grant of intellectual property to Qualcomm described above is generally royalty free. Under certain specified circumstances, however, Qualcomm will be required to pay a 3% royalty fee on such intellectual property.
A support agreement was entered into among Qualcomm, Loral and Globalstar pursuant to which Qualcomm agreed to (i) assist Globalstar and SS/L with Globalstar's system design, (ii) support Globalstar and Loral with respect to various regulatory matters, including the FCC application and (iii) assist Globalstar and Loral in their marketing efforts with respect to Globalstar. For the years ended December 31, 1996 and 1995, and for the period March 23 through December 31, 1994, Qualcomm has received approximately $1,823,000, $2,712,000 and $2,431,000, respectively, for costs incurred in rendering such support and assistance.
18 GLOBALSTAR, L.P. (A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED) Certain of Globalstar's limited partners have signed agreements granting them the right to provide Globalstar System services to users in specific countries on an exclusive basis, as long as specified minimum levels of subscribers are met. These service providers will receive certain discounts from Globalstar's expected pricing schedule generally over a five- year period.
Globalstar has entered into consulting agreements with certain limited partners. Costs incurred under these arrangements for the years ended December 31, 1996 and 1995, and for the period March 23 through December 31, 1994, were $496,000, $1,411,000 and $471,000, respectively. Globalstar anticipates that similar agreements may be entered into with other strategic partners in the future.
Current payable to affiliates consists of:
DECEMBER 31, ------1996 1995 ------(IN THOUSANDS) SS/L...... $22,572 $26,126 Qualcomm...... 40,903 21,443 Loral...... 462 ------Total...... $63,937 $47,569 ======
Commencing after the initiation of Globalstar services, LQP, the general partner of LQSS, will be paid an annual management fee equal to 2.5% of Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500 million. Should Globalstar incur a net loss in any year following commencement of services, the management fee for that year will be reduced by 50% and LQP will reimburse Globalstar for management fee payments, if any, received in any prior quarter of such year, sufficient to reduce its management fee for the year to 50%. No management fees have been paid to date.
12. REGULATORY MATTERS
Globalstar and its operations are, and will be, subject to substantial U.S. and international regulation, including required regulatory approvals in each country in which Globalstar intends to provide service. Globalstar's business may be significantly affected by regulatory activities.
13. SUBSEQUENT EVENT
On February 13, 1997, Globalstar and GTL sold units consisting of $500 million principal amount of Globalstar's 11 3/8% Senior Notes due 2004 and warrants to purchase 1,032,250 shares of GTL common stock in a private offering. The notes are senior in right of payment to the redeemable preferred partnership interests, may not be redeemed prior to February 2002 and are subject to a prepayment premium prior to 2004. Interest on the notes is payable semi-annually.
The indenture for the notes contains certain covenants that among other things limit the ability of Globalstar to incur additional debt, issue preferred stock, or pay dividends and certain distributions. In certain limited circumstances involving a change of control of Globalstar, as defined, each note is redeemable at the option of the holder for 101% of the principal amount plus accrued interest.
The warrants are exercisable on February 19, 1998 at a price of $69.575 per share. The warrants represent approximately 1.7% of Globalstar's total partnership interests on a fully diluted basis.
Globalstar will use the net proceeds of approximately $484 million from the offering for the construction and deployment of the Globalstar System.
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