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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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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
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $.01 par value................................ New York Stock Exchange
</TABLE>
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 27, 1998, 201,074,069 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
$5.0 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1998 definitive proxy statement are
incorporated by reference into Part III.
The financial statements required by Rule 3.09 of Regulation S-X of the
registrant's significant investee, Globalstar, L.P., are incorporated by
reference herein from the Annual Report on Form 10-K filed by Globalstar
Telecommunications Limited and Globalstar, L.P.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. and subsidiaries ("Loral" or the
"Company") is one of the world's leading satellite communications companies,
with substantial interests in the design, manufacture and operation of
geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Loral also
provides a broad array of satellite-based services. Since its formation in 1996,
Loral has assembled the building blocks essential to the creation of a seamless,
global networking capability for the information age.
Through a series of acquisitions commencing in August 1996 and concluding
in June 1997, Loral implemented its strategic decision to increase its ownership
in Space Systems/Loral, Inc. ("SS/L") to 100%. SS/L, one of the world's leading
satellite manufacturers, draws on a 40-year heritage, with more than 630 years
of cumulative on-orbit experience, and provides Loral with visibility into
emerging and new satellite-based technologies and applications.
In addition to SS/L's satellite manufacturing business, through a series of
strategic acquisitions, Loral has established itself as one of the world's
leading providers of satellite-based services. In March 1997, Loral acquired
Skynet Satellite Services ("Skynet"), a leading domestic satellite service
provider, from AT&T for $462.1 million in cash. Skynet owns and operates the
Telstar satellite network, which provides coverage over the continental United
States, Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. With the launch
of additional Telstar satellites, Skynet intends to become a worldwide satellite
communications service provider.
In December 1997, a joint venture in which Loral holds a 65% economic
interest, completed the acquisition from the Mexican government of a 75%
interest in Satelites Mexicanos, S.A. de C.V. ("SatMex"). SatMex, which owns and
operates three geosynchronous communications satellites, is the dominant
satellite communications company currently providing services in Mexico and
intends to expand its services to become a leading provider of satellite
services throughout Latin America.
Most recently, on March 20, 1998, Loral acquired Orion Network Systems,
Inc. ("Orion"). Orion, a rapidly growing provider of satellite-based
communications services, focuses primarily on three businesses -- private
communications network services, Internet services and video distribution and
other satellite transmission services. Orion currently owns and operates one GEO
satellite and is constructing two additional GEO satellites to be launched in
the fourth quarter of 1998 and the second quarter of 1999. The footprints of
these satellites will, in the aggregate, cover over 85% of the world's
population.
In addition, Loral is developing CyberStar, a proposed worldwide high-speed
broadband data communications system. CyberStar plans to offer business and home
users worldwide a variety of low-cost, interactive multimedia communications
services via high speed digital signals. Initially, CyberStar intends to offer
service in the United States using leased capacity on Skynet's Telstar 5
satellite, and plans in the future to migrate its service to a worldwide system
of three GEO satellites.
Loral manages and currently owns, directly and indirectly, approximately
40% (38% on a fully diluted basis) of Globalstar, L.P. ("Globalstar").
Globalstar will operate a worldwide, LEO satellite-based digital
telecommunications system (the "Globalstar System(TM)") that is scheduled to
commence service in early 1999. The Globalstar System 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. Loral,
together with partners, will act as the Globalstar service provider in Canada,
Mexico and Brazil.
In February 1998, Loral announced a strategic partnership with Alcatel
Alsthom of France to jointly build and operate Europe*Star, a multiple
geostationary satellite system that will provide broadcast and
telecommunications services to Europe, Southeast Asia, the Middle East, South
Africa and India. Europe*Star will become part of the Skynet global alliance
which intends to offer an integrated, worldwide portfolio of satellite capacity,
under the Skynet brand name.
Loral is pursuing additional satellite-based communications service
opportunities throughout the world. For instance, in August 1997, SS/L
established a joint venture with Mabuhay Philippines Satellite Corporation to
provide satellite-based services to the Philippines. Loral owns approximately
12% of CD Radio, Inc., a company that will provide digital audio radio service
to automobiles by satellite.
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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.
The following table presents a brief description of the orbital slots that
the Company and its affiliates are authorized to use. All satellite systems are
subject to international frequency coordination requirements and must obtain
appropriate authority ("landing rights") to provide service in a given
territory.
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ORBITAL FREQUENCY/
SATELLITE LOCATION TRANSPONDERS COVERAGE AREA
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<S> <C> <C> <C> <C>
Loral Skynet(1) Telstar 303(2) 120 degreesW.L. 18 C-band (36 North America
MHz)
Telstar 4 89 degreesW.L. 24 C-band (36 North America
MHz) 16 Ku-band
(54 MHz)
Telstar 5(3) 97 degreesW.L. 24 C-band (36 North America
MHz), 28 Ku-band
(24 x 27 MHz, 4 x
54 MHz)
Telstar 6 93 degreesW.L. C- and Ku-band North America
Telstar 7 129 degreesW.L. C- and Ku-band North America,
including Alaska
Telstar 8 77 degreesW.L. C- and Ku-band North America
Telstar 9 69 degreesW.L. C- and Ku-band North America
SatMex Morelos II 116.8 degreesW.L. C-band (12 x 36 Mexico Domestic
MHz, 6 x 72 MHz),
Ku-band (4 x 108
MHz)
SatMex 5(4) 116.8 degreesW.L. C-band (24 x 36 Americas
MHz), Ku-band (24
x 36 MHz)
Solidaridad 1 109.2 degreesW.L. C-band (12 x 36 Mexico & Portions of
MHz, 6 x 72 MHz), Latin America
Ku-band (16 x 54
MHz)
Solidaridad 2 113.0 degreesW.L. C-band (12 x 36 Mexico & Portions of
MHz,6 x 72 MHz), Latin America
Ku-band (16 x 54
MHz)
Loral Orion(5) Orion 1 37.5 degreesW.L. Ku-band (28 x 54 Europe, SE Canada,
MHz, 6x36 MHz) U.S., East of the
Rockies and parts of
Mexico.
Orion 2(6) 12 degreesW.L. Ku-band Eastern U.S., SE
Canada, Europe, CIS,
Middle East, North
Africa and Latin
America, S. Africa
Orion 3 139 degreesE.L. C- and Ku-band China, Japan, Korea,
India, Hawaii, SE
Asia, Australia, New
Zealand, Eastern
Russia, Oceana
47 degreesW.L. Ku-band Americas, Europe &
Africa
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<TABLE>
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ORBITAL FREQUENCY/
SATELLITE LOCATION TRANSPONDERS COVERAGE AREA
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<S> <C> <C> <C> <C>
135 degreesW.L.(6) Ku-band North America,
Hawaii, Puerto Rico,
U.S. Virgin Islands
144 degreesE.L. C- and Ku band China, Japan, Korea,
India, Hawaii, SE
Asia, Australia, New
Zealand, Eastern
Russia, Oceana
89 degreesW.L. Ka-band Americas
78 degreesE.L. Ka-band Russia, India,
China, Europe,
Africa, CIS,
Australia, Asia
81 degreesW.L. Ka-band Americas
126.5 degreesE.L. Ka-band Asia, Russia,
Australia, Oceana
CyberStar
115 degreesW.L. Ka-band (spot North America
beams)
93 degreesW.L. Ka-band (spot North and South
beams) America(7)
105.5 degreesE.L. Ka-band (spot Asia-Pacific
beams)
Globalstar(8)
56 satellites, LEO 1610-1621.35 MHz, Global
2483.5-2500 MHz,
feeder links in
C-band
R/L DBS
61.5 degreesW.L. 11-Odd numbered Eastern United
DBS channels 1-21 States
166 degreesW.L. 11-Odd numbered Western United
DBS channels 1-21 States
</TABLE>
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(1) In addition to the orbital slots listed in the table above, Loral has
applications pending at 77 degreesW.L. for use of the Extended C/Ku-band
frequencies, at 81 degreesW.L. for use of Ku/Extended Ku-band frequencies
and at 135 degreesW.L., 115 degreesW.L., 95 degreesW.L. and 58 degreesW.L.
for use of the V-band frequency. In addition, Loral has International
Telecommunication Union filings at 3.5 degreesE.L., 11 degreesE.L., 30
degreesE.L., 80 degreesE.L., 105.5 degreesE.L. and 135 degreesE.L. for use
of the V-band frequency.
(2) Currently operating in inclined orbit beyond its designed life. Subject to
FCC approval, can be expected to continue to generate modest revenues for
approximately one year.
(3) This satellite is licensed pursuant to a grant of special temporary
authority that expires May 18, 1998. Prior to that date, Loral anticipates
that the FCC will grant a permanent authorization or extend the temporary
authority.
(4) SatMex 5 is under construction and is scheduled for launch in the fourth
quarter of 1998 to replace Morelos II.
(5) In addition to the orbital slots listed in the table above, Loral Orion has
applications pending at 126 degreesE.L. for use of the Ku/Extended Ku/C and
Extended C-band frequencies and at 139 degreesE.L., 15 degreesW.L. and 67
degreesW.L. for use of the Ka-band frequency.
(6) These satellites are conditionally licensed by the FCC, subject to an
appropriate showing of Loral's financial capability to construct, launch and
operate the satellites.
(7) The FCC license does not describe a particular coverage area.
(8) In addition to the constellation in the table above, Globalstar has
applications pending for an 80 satellite LEO system using the V-band
frequency and for a second generation Globalstar system comprised of 64 LEO
satellites and four GEO satellites (at 80 degreesW.L., 10 degreesE.L., 100
degreesE.L. and 170 degreesE.L.) using the 2 GHz frequency.
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Loral was formed to effectuate the distribution (the "Distribution") of the
space and telecommunications businesses of Loral Corporation ("Old Loral") to
shareholders of Old Loral in connection with the merger (the "Merger") of Old
Loral into a subsidiary of Lockheed Martin Corporation ("Lockheed Martin"). The
Distribution was made on April 23, 1996.
SPACE SYSTEMS/LORAL
SS/L is a worldwide leader in the design, manufacture and integration of
telecommunications, weather and direct broadcast satellites with 40 years of
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.
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 CD Radio,
Chinasat, Globalstar, MCI, PanAmSat, Loral Skynet and TCI. SS/L has a broad
range of technical 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 630 years of service in
space.
SS/L has a history of technical innovation that includes the first
three-axis stabilized satellites, bipropellant propulsion systems for commercial
satellites that permit significant increases in the satellites' payload and
extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries
with a life span of 10 years or more, the use of advanced composites to
significantly enhance satellite performance at lighter weights and the first
communications satellite with more than ten kilowatts of power. SS/L also
created the first multi-mission geostationary satellite and was the first U.S.
company to exchange space technology with Russia's space industry, obtaining
exclusive rights outside the former Eastern bloc to an electric propulsion
subsystem that is five times as efficient as bipropellant propulsion systems.
Since 1990, SS/L has shortened delivery schedules significantly, increased
spacecraft reliability and increased spacecraft power.
In March and June 1997, Loral acquired the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities.
SS/L and three of 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 supply satellite payloads
in support of Aerospatiale's prime contract under the Eutelsat, Thaicom and
Sirius programs.
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 extensive, including
its efforts in 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
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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 was introduced in 1997.
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.
SKYNET
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.
Skynet's customers include, among others, the ABC and Fox television
networks. As a result, local affiliates of these networks have antennas pointed
at Skynet's satellites. This configuration creates a "neighborhood" attractive
to other users requiring similar distribution channels, giving Skynet a
competitive advantage in serving both television networks and television
programming syndicates. Other Skynet customers include third party resellers,
such as sports syndicators, who contract with major television programmers and
distance learning providers.
Skynet currently has two high-powered satellites in orbit. Telstar 4, which
was placed in service in November 1995, is equipped with 24 C-band and 24
Ku-band transponders and provides coverage over the continental United States,
Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. The 52-transponder
Telstar 5, built by SS/L, was successfully launched in May 1997 and placed into
service on July 1, 1997. Telstar 5 provides coverage over the continental United
States, Puerto Rico, the Caribbean and into Canada and Latin America. In
addition, Telstar 303, which has exceeded its 10-year design life, is now in
inclined orbit and generates modest revenues from customers that have tracking
antennas or do not require continuously-available service.
Skynet plans to construct, launch and operate four 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 6, which is being built by SS/L, will
have 24 C-band and 28 Ku-band transponders and is scheduled to be launched and
placed into service in the second half of 1998. Telstar 7, which is also under
construction by SS/L, will have 24 C-band and 32 Ku-band transponders and is
scheduled for launch in the first quarter of 1999. Telstar 8, which is expected
to have 24 C-band and 32 Ku-band transponders, and
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Telstar 9, which is expected to have 24 C-band and 28 Ku-band transponders, are
currently scheduled for delivery and launch in 2001 and 2000, respectively.
In addition to providing transponder capacity in the domestic U.S. market,
Skynet plans to offer satellite services worldwide. Skynet is coordinating the
formation of a global alliance among Skynet, SatMex, Orion and Europe*Star. This
alliance will offer an integrated, worldwide portfolio of satellite capacity
under the Skynet brand name and will employ, among other things, a complementary
marketing strategy to provide customers with "one stop shopping" for local,
regional and global satellite services.
SATMEX
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Telefonica Autrey equity contribution of $50.9 million and debt
issued by Holdings. As part of the acquisition, Holdings issued a $125.1 million
seven year obligation bearing interest at 6.03% to the Mexican Government (the
"Government Obligation") in consideration for the assumption by SatMex of the
debt incurred by Holdings in connection with the acquisition. The debt of SatMex
and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and
Telefonica Autrey have agreed to maintain assets in a collateral trust in an
amount equal to the value of the Government Obligation through December 30, 2000
and, thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. Loral has a 65% economic interest in Holdings and a
49% indirect economic interest in SatMex. SatMex is the dominant provider of
fixed satellite services in Mexico and provides broadcasting and
telecommunications capacity to approximately 180 customers.
SatMex provides satellite transmission capacity to broadcasting customers
for network and cable television programming, direct-to-home television service
and on-site transmission of live news reports, sporting events and other video
feeds. SatMex also provides satellite transmission capacity to
telecommunications service providers for public telephone networks in Mexico and
elsewhere and corporate customers for their private business networks with data,
voice and corporate video applications. SatMex has landing rights to provide
broadcasting and telecommunications transmission capacity in 15 nations in the
region, including the United States. SatMex's broadcasting customers include
Televisa, MVS Mutivision and Television Azteca, and its telecommunications
services customers include Telmex, Bancomer, Pemex, Cemex and the Mexican
subsidiaries of Ford and Chrysler.
SatMex believes that it has one of the largest aggregate satellite
capacities dedicated primarily to the Latin American region, with 132 36 MHz
transponder-equivalents currently in operation. SatMex's three satellites
(Solidaridad 1, Solidaridad 2 and Morelos II) are in geostationary orbit at
109.2 WL, 113.0 WL and 116.8 WL, respectively, with aggregate footprints
covering Mexico, the southern and eastern United States, Central America, the
Caribbean and most of South America. SatMex holds 20-year concession titles to
operate in these three orbital locations at certain C- and Ku-band frequencies
expiring October 22, 2017. The concession titles are renewable thereafter,
subject to certain conditions, for an additional 20-year term without additional
payment. In addition, SatMex operates two satellite control centers.
SatMex has contracts for the construction and launch of SatMex 5, the
replacement for Morelos II, which is scheduled to launch in the fourth quarter
of 1998. SatMex 5 has been designed to increase SatMex's total capacity to 144
36 MHz transponder-equivalents, with a substantial increase in power and an
extension of SatMex's footprint to include substantially all of the continental
United States and the Caribbean, as well as all of Latin America, other than
certain remote regions of Brazil.
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ORION
On March 20, 1998, Loral acquired Orion in exchange for Loral common stock.
Loral issued 17.9 million shares of its common stock and assumed existing Orion
options and warrants to purchase 1.9 million shares of Loral common stock
representing an aggregate purchase price of $467.0 million.
Orion is a rapidly growing provider of a satellite-based communications
services, focused primarily on private communications network services, Internet
services and video distribution and other satellite transmission services. Orion
provides multinational corporations with private communications networks
designed to carry high-speed data, fax, video teleconferencing, voice and other
specialized services. The Orion satellite's coverage reaches all locations
within its footprint, enabling the delivery of high-speed data to customers in
emerging markets and remote locations which lack the necessary infrastructure to
support these services. Orion also offers high speed Internet access and
transmission services to companies outside the United States seeking to avoid
"last mile" terrestrial connections and to bypass congested regional Internet
network routes. In addition, Orion provides satellite capacity for video
distribution, satellite news gathering and other satellite services primarily to
broadcasters, news organizations and telecommunications service providers. Orion
provides its services directly to customer premises using VSATs.
Orion believes that demand for satellite-based communications services will
continue to grow due to the expansion of businesses beyond the limits of wide
bandwidth terrestrial infrastructure, accelerating demand for high speed data
services, growing demand for Internet and intranet services, especially outside
the United States, increased size and scope of television programming
distribution, worldwide deregulation of telecommunications markets and
continuing technological advancement. Satellites are able to provide reliable,
high bandwidth services anywhere in their coverage areas, and Orion believes
that it is well positioned to satisfy market demand for these services.
Orion commenced operations of Orion 1, a high power Ku-band satellite with
34 Ku-band transponders, in January 1995. Orion 1 provides coverage of 34
European countries, much of the United States and parts of Canada, Mexico and
North Africa. Through arrangements with local ground operators, Orion currently
has the ability to deliver network services to and among points in 27 European
countries, portions of the United States and a limited number of Latin American
countries. As of December 31, 1997, Orion serviced 301 customers through 682
sites in service.
Orion 2, which will be a high power satellite with 30 Ku-band transponders,
will expand Orion's European coverage and extend coverage to portions of the
Commonwealth of Independent States, Latin America and the Middle East. Orion 2
will significantly increase Orion's pan-European capacity, currently the area of
strongest demand for Orion's services. Orion recently commenced selling services
in certain areas of Latin America. Orion 2 is scheduled to be launched in the
second quarter of 1999.
Orion 3, which will be a high power satellite with 33 Ku-band transponders
and 10 C-Band transponders, will cover broad areas of the Asia Pacific region,
including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand,
Eastern Russia and Hawaii. Orion 3's footprint will provide Orion with the
ability to distribute programming from the United States via Hawaii to most of
the Asia Pacific region. Orion has already taken a number of steps to establish
an early market presence in Asia, and has entered into an $89 million lease for
eight of Orion 3's transponders. Orion 3 is scheduled to be launched in the
fourth quarter of 1998.
In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85% of the world's population.
CYBERSTAR
Loral is developing CyberStar, a proposed worldwide high-speed broadband
data communications system. CyberStar plans to offer business and home users
worldwide a variety of low-cost, interactive multimedia communications services
via high speed digital signals. Initially, CyberStar intends to offer service in
the United States using leased Ku-band transponder capacity on Skynet's Telstar
5 satellite. CyberStar's
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satellite-based services will include high speed Internet access, data
broadcasting, broadband interconnection, intranet muticasting, real-time
streaming and other data services. CyberStar service, expected to commence in
the second half of 1998, will be delivered to consumers, businesses and private
networks worldwide through a network of local and regional service providers.
In the future, CyberStar intends to offer services through a dedicated
worldwide constellation of three geostationary satellites utilizing the Ka-band.
CyberStar holds FCC licenses to orbital slots covering North and South America,
Asia, Europe and the Middle East.
GLOBALSTAR
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. 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 user terminals, including hand-held and vehicle-mounted units similar
to today's cellular telephones, fixed telephones similar either to phone booths
or ordinary wireline telephones, and data terminals and facsimile machines.
Dual-mode and tri-mode Globalstar user terminals will provide access to both the
Globalstar System and the subscriber's land-based cellular service. Each
Globalstar user terminal 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 27, 1998, each of the elements of the Globalstar
System -- space and ground segments, digital communications technology, user
terminal supply, service provider arrangements and licensing -- is on schedule
to commence commercial operations in early 1999 following the launch of 44
satellites in 1998. The remaining 12 satellites, including eight in-orbit
spares, will be launched in early 1999.
Space Segment. On February 14, 1998, Globalstar launched its first
four satellites. The next four Globalstar satellites, which will be
launched on a Boeing Delta II launch vehicle, are at the Cape Canaveral
launch site and are expected to be launched in late April 1998. In
addition, satellite and major subsystem assembly, integration and testing
necessary for the first launch on an Ukranian Zenit launch vehicle are
underway. Production is proceeding for the remaining satellites to meet
scheduled launch dates. Globalstar's 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. Globalstar purchased 38 gateways under contracts
totaling approximately $340 million. Globalstar has entered into contracts
and discussions to resell such gateways to its partners and service
providers. The first four Globalstar gateways, which are to be located in
Australia, France, South Korea and the United States, are completed. 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.
Construction of the remaining 34 gateways is proceeding on schedule for the
initiation of commercial service in 1999. In addition, Globalstar's
satellite operations control center facility has been completed.
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Digital Communications Technology. Qualcomm's CDMA technology has now
been successfully deployed in South Korea, Hong Kong and cities in the
United States supporting terrestrial personal communications services 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, gateways and handsets.
User Terminal Supply. Qualcomm/Sony and two other manufacturers,
Ericsson and TELITAL, are developing Globalstar's user terminals and
production orders were issued in the fourth quarter of 1997. In December
1997, an order for 40,000 fixed access terminals totaling $84 million was
placed with Ericsson. Globalstar expects to recover this cost through the
resale of these terminals to vendors.
Service Providers. Globalstar and its partners have been seeking
alliances with service providers throughout the world and have entered into
a number of agreements in specific territories. Globalstar believes that
these relationships with in-country service providers will facilitate the
granting of local regulatory approvals -- particularly where the service
provider and the licensing authority are one and the same -- as well as
provide local marketing and technical expertise.
Licensing. In January 1995, the FCC granted authority for the
construction, launch and operation of the Globalstar System and assigned
spectrum for its user links. Later that year, the 1995 World
Radiocommunications Conference ("WRC95") allocated feeder link spectrum on
an international basis for mobile satellite services ("MSS") systems such
as Globalstar, and in November 1996 the FCC authorized Globalstar's feeder
links.
Globalstar's current budgeted expenditures for the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on borrowings and operating expenses are approximately $2.7
billion. Globalstar has raised or received commitments for approximately $2.6
billion in equity, debt and vendor financing.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost of $175 million. Further, in order to accelerate the
deployment of gateways around the world, Globalstar has agreed to finance
approximately $80 million of the cost of up to 32 of the initial 38 gateways.
Globalstar expects to recover this financing upon resale of such gateways to its
partners and service providers.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than three billion people today live without
residential telephone service, many of them in rural areas where the cost of
installing wireline service is prohibitively high. Moreover, even where
telephone infrastructure is available in developing countries, outdated
equipment often leads to unreliable local service and limited international
access. The 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 1996 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:
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; 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 user terminals; lower average wholesale prices
than other proposed MSS systems and gateways installed in most major countries,
minimizing tail charges (i.e. amounts charged by
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<PAGE> 11
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.
CUSTOMERS
Sales to foreign customers, primarily Asia, represented 30% of revenues in
1997. Sales to the U.S. government represented 7% of revenues for 1997 and sales
to Globalstar represented 31% of revenues for 1997.
BACKLOG
At December 31, 1997, funded backlog was approximately $1.8 billion
including $188 million of intercompany backlog. Approximately 47% of funded
backlog, excluding intercompany backlog, at December 31, 1997 is expected to be
recognized as revenues in 1998.
RESEARCH AND DEVELOPMENT
For the year ended December 31, 1997, the Company expended approximately
$56.8 million for company sponsored research and development projects.
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 130 patents in the United States and
213 patents abroad and has applications for 59 patents pending in the United
States and 162 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 1998 and 2016.
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded nine patents issued and 30 patents pending in
the United States, as well as 13 patents issued and 152 patents pending
internationally for various aspects of communications satellite system design
and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 149 issued patents and 380 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
SS/L or Globalstar will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors of SS/L and Globalstar, do not have patents pending that could
result in issued patents which SS/L or Globalstar would infringe. In such an
event, SS/L or Globalstar could be required to redesign its system or satellite,
as the case may be, or pay royalties to obtain a license, which could increase
cost or delay implementation of the system or construction of the satellite, as
the case may be.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,300 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.
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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.
RISKS OF OPERATIONS IN THE SPACE ENVIRONMENT
Satellites operate in a distant, hostile environment. Despite costly high
reliability parts and significant on ground testing to assure reliability for
their designed lives, satellites remain vulnerable to complete or partial
failure or degradation from hazards which include space debris, solar and other
astronomical events, acts of war and component failure. Repair of satellites in
space is not practicable. In addition, a number of factors affect the useful
lives of Globalstar's, Skynet's, SatMex's and Orion'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").
The first-generation Globalstar 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 useful life. Globalstar anticipates using funds
from operations to develop a second generation of satellites. If sufficient
funds from operations are not available and Globalstar is unable to obtain
financing for the second-generation constellation, Globalstar will not be able
to deploy a second-generation constellation to replace first-generation
satellites at the end of their useful lives.
In November 1995, an Orion 1 component supporting nine transponders serving
the European portion of Orion 1's footprint experienced an anomaly that resulted
in a service interruption lasting approximately two hours. Full service was
restored using redundant equipment. These transponders generate a majority of
Orion's revenues. Orion believes, based on Orion's own investigations and the
manufacturer's, and based upon advice from Orion's engineering consultant that
because the redundant component is functioning in accordance with specifications
and the performance record of similar components is strong, the anomalous
behavior is unlikely to affect the expected performance of the satellite over
its useful life. There has been no further effect on Orion's ability to service
customers. However, if the currently operating component fails, Orion 1 would
experience a significant loss of usable capacity, resulting in lost service and
a corresponding adverse effect on Orion's results of operations.
In 1994 and 1997 (prior to the acquisition by Loral), Skynet experienced
the 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.
Certain of SS/L's contracts provide that a portion of the total contract
price is payable in the form of "incentive" payments earned during the life of
the satellite in orbit as its mission is performed. Although SS/L generally
receives the present value of such incentive payments in the event of launch
failure or one caused by customer error, it forfeits such revenues if the loss
is caused by system failure or an error on its part. While insurance against
loss of such payments 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.
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 that exposure. However,
SS/L cannot predict whether, and there can be no assurance that, insurance
against launch failure and loss of incentive payments will continue to be
available on reasonable terms.
LAUNCH RISK AND VEHICLE ACCESS
About 15% of commercial satellite launches have historically resulted in
loss before the payload reaches its planned orbit ("hot failures"). While Loral
ordinarily obtains insurance against loss due to hot failures, such events can
nevertheless disrupt and delay business schedules and cause substantial
uninsured losses above and beyond the insured cost of the lost satellite.
Loral's ability to place satellites in orbit, and SS/L's ability to perform its
on-orbit delivery contracts depend on the availability of launch vehicles and
the requisite insurance. Launch slots are limited, and the launch insurance
market has been subject to considerable fluctuation. Different launch facilities
and vehicles have different success records, but Loral, for business or
scheduling reasons does not always use, or have available to it, the most
successful facilities and vehicles for its
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launches. The cost and availability of launch insurance varies from time to time
so there is no assurance that such insurance will shield every future loss.
Moreover, the availability of launches 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. Changes in governmental policies or
political leadership in the United States, Russia, Kazakhstan or China could
affect Loral's ability to launch from these countries.
LEVERAGE
Many of the Loral businesses are capital intensive, requiring high initial
investments in the expectation of future revenues requiring relatively low
marginal costs. At December 31, 1997, Loral's outstanding debt was $435.4
million. In addition, Loral had outstanding at December 31, 1997 Series C
Convertible Redeemable Preferred Stock having a redemption value of $745.5
million, which may be payable at Loral's option in cash, common stock of Loral
or a combination thereof. On November 14, 1997, the Company, through its wholly
owned subsidiary Loral SpaceCom Corporation, entered into an $850 million credit
facility with a group of banks. SS/L will also require continuous investment to
maintain its technological position and the fixed satellite service businesses
are at the beginning of a planned expansion. At December 31, 1997, Loral had a
ratio of earnings to fixed charges of 1.9:1.
Orion has approximately $747.1 million of publicly-traded debt outstanding.
Such debt is non-recourse to Loral.
A significant portion of the SatMex purchase price was financed with debt,
including the Government Obligation. The debt of SatMex and Holdings is
non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica
Autrey have agreed to maintain assets in a collateral trust in an amount equal
to the value of the Government Obligation through December 30, 2000 and,
thereafter, in an amount equal to 1.2 times the Government Obligation until
maturity. Loral has a 65% economic interest in Holdings and a 49% indirect
economic interest in SatMex.
Globalstar is still in the development stage. At December 31, 1997,
Globalstar had outstanding long-term indebtedness of $1.1 billion. The
outstanding Globalstar debt is non-recourse to Loral.
Loral is subject to substantial financial risks in the face of possible
delays or reductions in revenue realization, unforeseen capital requirements or
unanticipated expenses attributable to the factors described in this document.
Such risks could result not only in adverse financial results due to ongoing
debt service charges, but also in the necessity for additional financing which
could result in increased debt and debt service costs, potential dilution of
equity interests resulting from issuances of debt or equity, rights to
distributions senior to those of the holders of Loral common stock, and
covenants restricting distributions to holders of Loral common stock.
OBSOLESCENCE DUE TO RAPID TECHNOLOGICAL CHANGE
In common with all high technology enterprises, Loral's businesses are
subject to obsolescence due to new technological developments. The rapid pace of
technological change exposes Loral to risk of loss due to the deployment of
superior technologies by competitors. Loral is also dependent upon technologies
developed by third parties to implement key aspects of its strategy to integrate
its satellite systems with terrestrial networks. SS/L, Skynet, SatMex, Orion and
Globalstar, in particular, are susceptible to such risks. As land-based
telecommunications services expand, demand for certain types of satellite-based
services may be reduced. New technology used by competitors could render Skynet,
Globalstar, SatMex or Orion less competitive by satisfying consumer demand in
alternative ways or through the use of incompatible telecommunications
standards. In addition, SS/L's success depends on its ability to introduce
innovative new products and services on a cost-effective and timely basis.
THE GLOBALSTAR SYSTEM
The Globalstar System will consist of 56 satellites (including eight
in-orbit spares) in low earth orbit together with ground facilities in numerous
remote and sometimes primitive regions. Its operating facilities
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<PAGE> 14
will be in more than 100 countries, many of which are based on emerging
economies, eventually connecting hundreds of thousands of mobile and fixed
telephone handsets. While Loral believes that each component of the Globalstar
System, and the Globalstar System as a whole, is capable of performing as
designed, no such complex, dispersed space/earth communications network has ever
been operated commercially. Until the Globalstar System has operated as a whole
in its actual space/earth environment, there can be no assurance that losses due
to delays, failures and unforeseen additional costs will not occur. Globalstar's
financial objectives are, in part, based on estimates as to the potential market
for Globalstar System services and the price that users will be willing and able
to pay, which cannot be practically validated until commercial operations have
begun. There can be no assurance that such economic assumptions are justified.
Globalstar is scheduled to begin commercial operations in early 1999.
Successful commencement of operations will require successful implementation of
each of the elements of the Globalstar System -- space and ground segments,
digital communications technology, user terminal supply, service provider
arrangements and licensing. Globalstar launched four satellites on February 14,
1998 and expects to launch an additional 40 satellites during 1998 and 12
satellites, including eight in-orbit spares, in early 1999. However, there can
be no assurance that schedule delays will not occur.
Loral's equity in net loss attributable to its interest in Globalstar for
the year ended December 31, 1997 was $42.5 million as compared to $18.1 million
for the nine months ended December 31, 1996. Globalstar is expending significant
funds for the construction, testing and deployment of the Globalstar System and
such losses are expected to continue through commencement of revenue generating
service operations.
COMPETITION
Each of Loral's businesses is subject to intense competition from entities,
including several of the world's largest corporations, as well as governments
and quasi-governmental organizations, which are larger and which may bring
greater financial and operating resources to bear in competing as to marketing,
regulation and technology. Loral competes for customers and for local regulatory
approval in jurisdictions in which both Loral and a competing party may wish to
operate. In addition, Loral competes for allocation of scarce frequency
assignments and geosynchronous orbital slots. Competition comes not only from
entities carrying on the same activities as Loral, but from others using
alternative technologies such as terrestrial telecommunications and cable
television, which themselves are constantly pursuing advanced technologies in
order to enhance their competitive positions. In addition, as Loral expands into
international markets, it will have to compete with international operators
including Intelsat and PanAmSat. To the extent that these entities offer
products and services which are more sophisticated, efficient or reliable than
those of Loral, there could be a material adverse effect on the financial
condition or results of operations of Loral.
COMPETITIVE BIDDING
SS/L generally obtains its contracts through 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 result in profitability
for SS/L. SS/L has in the past submitted bids which would result in minimal or
no profit due to a high level of non-recurring engineering costs. Such contracts
are generally bid with the expectation of more profitable follow-on contracts as
to which there is generally no advance assurance. To the extent that actual
costs exceed the projected costs on which bids or contract prices were based,
SS/L's profitability could be adversely affected.
REGULATION
Loral's activities, particularly the Globalstar System, Skynet, SatMex and
Orion, are subject to licensing and regulation by authorities in more than 100
jurisdictions, including the United States, the International Telecommunications
Union ("ITU") and the Commission of the European Union. Regulated activity
includes the occupation of orbital positions ("orbital slots"), the pricing and
quality of services, the use of frequency bands, competitive behavior, the
export of space-related products and services (which frequently require licenses
from the Department of State or the Department of Commerce), and other matters
essential
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to conduct of the business. The regulatory authorities, depending on the
location, often have broad discretion over such activities, including frequently
the power to modify, withdraw or impose charges or conditions upon, or delay the
grant of, the rights required for the conduct of the business. In particular, in
determining whether to grant Loral authorization, the FCC must evaluate whether
certain FCC standards and financial qualification requirements are met. Many of
the licenses Loral holds or has applied for have been contested by third
parties, including competitors, which increase the risk of regulatory decisions
adverse to Loral. In particular, two of Loral's Ka-band orbital slots for
CyberStar are in positions that are subject to prior claims of parties from
other countries. While regulation is an expected incident of international
telecommunications business, and Loral expects to obtain the rights and licenses
which it requires under satisfactory conditions, the broad reach of the
Globalstar System, the expansion of Skynet's operations beyond the domestic U.S.
market, the expansion of SatMex's Latin American presence, the proposed launch
and operation of Orion 2 and Orion 3 and the development of other satellite
services businesses, by becoming subject to such a large number of diverse
regulatory regimes and political systems, entail unusual risks of unforeseen
costs, delays and other burdens on planned performance. In addition, as part of
the regulatory process for orbital slot allocation of its satellites, Loral is
required to engage in frequency coordination with other satellite operators.
Although the Loral Group has in the past been able to coordinate its existing
satellites, there can be no assurance that satisfactory coordination will be
achieved in the future for any of Loral's satellites.
Orion has begun construction of Orion 2 and Orion 3 before completion of
the required consultation with Intelsat and Eutelsat, receipt of final authority
from the FCC (in the case of Orion 2) and completion of the ITU coordination
process. Failure to obtain one or more necessary approvals on time would have an
adverse effect on Orion's business or results of operations.
POTENTIAL CONFLICTS OF INTEREST; LACK OF FULL CONTROL
Loral has financed the development and acquisition of certain of its assets
which it does not own completely through complex financial and governance
arrangements.
Loral is the managing general partner of Globalstar, but its governance
rights are limited by rights of other partners and fiduciary duties that could
result in Globalstar actions that are not in Loral's own best interests. In
accordance with Mexican law, voting control of SatMex must be held by Mexican
nationals. While Loral's investment will be protected by contractual rights and
it is anticipated that SatMex will be managed in close coordination with the
activities of Skynet, there can be no assurance that SatMex will be managed as
it would be if it were a controlled subsidiary of Loral.
Conflicts of interest may arise as a result of such arrangements and
because some of Loral's businesses may compete with one another and are or may
become customers of SS/L.
Both Skynet and Orion own or are building satellites whose footprints
overlap with those of SatMex's present and proposed satellites and will
therefore compete directly with SatMex for customers in some of its markets.
Although Skynet and Orion will adopt a marketing policy which will provide for
cross-selling of capacity with SatMex and a process for allocating opportunities
between the companies, situations may arise where SatMex and Loral will have a
conflict. This conflict will become particularly acute if there is an oversupply
of capacity in their markets.
Partners and affiliates of Globalstar, including companies affiliated with
Loral, will be among Globalstar's service provider customers and may therefore
have conflicts with Globalstar and/or Loral as to service provider agreements.
RISKS OF CONDUCTING INTERNATIONAL BUSINESS
Operations in numerous countries outside the United States carry
substantial managerial, operational, legal and political uncertainties apart
from the technical risks of initiating a previously untried telecommunications
system. Such operations are subject to changes in government regulations and
telecommunications standards, tariffs or taxes and other trade barriers. In
addition, Loral's agreements relating to local operations may be enforceable
only in foreign jurisdictions so that it may be difficult for Loral to enforce
its rights. Also,
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limited availability of U.S. currency in local markets may prevent a service
provider from making payments in U.S. dollars and exchange rate fluctuations may
adversely affect Globalstar's, SatMex's and Orion's revenues. In connection with
delayed payment in 1997 by two Asian customers for three satellites, SS/L
stopped work, reduced backlog by $291 million, which will reduce future sales,
and recorded a charge of $23 million. If the current programs for these three
satellites are not restarted, the satellites will be sold to other customers.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
RELIANCE ON KEY PERSONNEL
The success of Loral is partially dependent upon the ability of Loral to
attract and retain highly qualified personnel. Except for Mr. Bernard L.
Schwartz, Loral's Chairman and Chief Executive Officer, none of the officers of
Loral has an employment contract with Loral nor does Loral expect to maintain
"key man" life insurance. The loss of any of these individuals and the
subsequent effect on business relationships could have an adverse effect on the
business or results of operations of Loral.
DEPENDENCE ON SS/L
Currently, SS/L generates a significant portion of Loral's revenue and
operating income. Loral intends to capitalize on SS/L's capabilities, market
position and advanced technologies to identify and develop additional
space-based communications services opportunities. There can be no assurance
that current or future satellite-based ventures entered into by Loral will
result in revenues or operating income that will materially reduce its
dependence on SS/L.
SS/L has historically derived a large portion of its total revenues from a
limited number of customers, and its revenues and operating results may be
adversely affected in the event completed or canceled contracts are not promptly
replaced.
The financial results of long-term fixed-price contracts are recognized
using the cost-to-cost percentage of completion method. Loral's statement of
operations reflects revisions in revenue and profit estimates in the period in
which the conditions that require the revision become known and can be
estimated. Adjustments for profits and 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, contract
revenues related to contract performance (including revenues from orbital
payments) and the potential for component obsolescence in connection with
long-term procurements.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
ITEM 2. PROPERTIES
The Company maintains office space, manufacturing and telemetry, tracking
and control facilities primarily in the United States. SS/L's research,
production and testing facilities are carried on in SS/L-owned facilities
covering approximately 562,000 square feet on 29.4 acres in Palo Alto,
California. In addition, SS/L leases 772,000 square feet of space from various
third parties. Skynet owns two telemetry, tracking and control stations located
in Hawley, Pennsylvania and Three Peaks, California and leases 26,000 square
feet of office space. Orion leases approximately 50,000 square feet for office
space and its satellite operations center. Management believes that the
facilities are sufficient to allow the Company to conduct its operations.
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ITEM 3. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Old Loral, filed suit (the "CCD Lawsuit") against a
number of companies including Sony Corporation ("Sony"), Matsushita Electronics
Corporation ("Matsushita") and NEC Corp. ("NEC") claiming that such companies
had infringed Loral Fairchild's patents for a "charged coupled device" ("CCD"),
commonly used as an optical sensor in video cameras and fax machines. Although
the CCD patents have expired, Loral Fairchild is seeking reasonable royalties
through the expiration date from a number of defendants. On February 22, 1996, a
jury in the United States District Court for the Eastern District of New York
found unanimously that Sony had infringed the CCD patents. The trial judge,
however, in an order dated July 12, 1996, reversed the jury verdict. Loral
Fairchild has appealed the court's decision. Loral Fairchild's claims against
other defendants remain pending, but if the court's decision is affirmed on
appeal, a substantial portion, but not all, of the damage claims against the
other defendants would be adversely affected. Matsushita has been granted a
declaratory judgment that it has a valid and enforceable license under the CCD
patents. In addition, a trial on Matsushita's claim against Loral Fairchild for
tortious interference was conducted during July 1996, and a verdict was rendered
in favor of Loral Fairchild.
Environmental Regulation. Operations at SS/L, Skynet, Orion, 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.
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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:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1997
Quarter ended March 31, 1997........................... $19 1/2 $14 1/8
Quarter ended June 30, 1997............................ 17 1/2 13
Quarter ended September 30, 1997....................... 21 14 1/16
Quarter ended December 31, 1997........................ 24 1/4 19
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
</TABLE>
The Company does not currently anticipate paying any dividends or
distributions on its common stock or the Series A Convertible Preferred Stock.
As required, Loral is currently paying dividends on its 6% Series C Convertible
Redeemable Preferred Stock. The credit facility maintained by the Company's
wholly owned subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom") restricts
the ability of Loral SpaceCom to transfer cash or pay dividends to its parent
(see Note 7 to Loral's consolidated financial statements).
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 27, 1998, there were approximately 6,800 holders of record of
the Company's common stock.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and should be
read in conjunction with, the related financial statements. Historical financial
information as of and for the three years in the period ended March 31, 1996,
represents the space and communications operations of Old Loral.
LORAL SPACE & COMMUNICATIONS LTD.
(In thousands except per share data)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,(1)
YEAR ENDED NINE MONTHS ENDED -----------------------------
DECEMBER 31, 1997(1) DECEMBER 31, 1996(1) 1996 1995 1994
-------------------- -------------------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $1,312,591
Management fee from
affiliate.................. $ 5,088 $ 5,608 $ 3,169 $ 2,981
Operating income (loss)...... 13,552 (12,201) 2,587 (33) 398
Equity in net income (loss)
of affiliates(1)(2)........ (47,273) (4,709) (8,628) (8,988) 1,174
Net income (loss)............ 40,004 8,877 (13,785) (7,873) (3,694)
Preferred dividends and
accretion(3)............... (26,315)
Net income (loss) applicable
to common shareholders..... 13,689 8,877 (13,785) (7,873) (3,694)
Earnings (loss) per share --
basic and diluted.......... .06 .04 (.08) N/A N/A
CASH FLOW DATA:
Used in operating
activities................. $ 230,248 $ 3,003 $ 1,319 $ 8,439 $ 587
Used in investing
activities................. 1,022,772 1,962 115,031 92,055 25,288
Provided by (used in) equity
transactions............... (18,097) 602,413 116,362 100,494 25,875
Provided by financing
transactions............... 316,912 583,292
Dividends paid per common
share...................... N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ------------------------------
1997 1996 1996 1995 1994
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 226,547 $1,180,752 $ 12 $ -- $ --
Total assets............................. 3,004,936 1,699,326 354,396 251,819 163,479
Convertible preferreds(3)................ 583,292
Debt..................................... 435,398
Non-current liabilities.................. 179,482 26,834
Shareholders' equity(4)/Invested
equity................................. 1,973,245 1,070,069 354,396 251,819 159,198
</TABLE>
- ---------------
(1) In 1997, Loral increased its ownership in SS/L to 100% and, accordingly, the
1997 financial information includes the results of SS/L. In prior years SS/L
was accounted for under the equity method of accounting. On March 14, 1997
Loral acquired Skynet from AT&T; Loral's financial information includes the
results of Skynet from that date. Financial information as of and for the
three years in the period ended March 31, 1996, represents the space and
communications operations of Old Loral. The results of operations for the
three years in the period ended March 31, 1996 include allocations and
estimates of certain expenses of Loral based upon estimates of actual
services performed by Old Loral on behalf of Loral. Interest expense was
allocated to Loral based on Old Loral's historical weighted average interest
rate applied to the average investment in affiliates.
(2) The Company's affiliates are Globalstar and SatMex since November 17, 1997.
Loral sold its interest in K&F Industries, Inc. in 1997.
(3) Convertible preferreds were exchanged for 6% Series C Preferred Stock and
were reclassified to shareholders' equity in 1997 upon approval by the
Company's shareholders.
(4) As of December 31, 1997, 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 $4.98 and $4.97,
respectively. Book value per share represents the quotient obtained by
dividing shareholders' equity, reduced by the Series C Preferred Stock
redemption value, by the number of outstanding shares of common stock,
giving effect to the conversion of the Series A Preferred Stock, plus, in
the case of such preferred stock, the $.01 liquidation preference thereof.
18
<PAGE> 20
SPACE SYSTEMS/LORAL, INC.
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
NINE MONTHS ENDED --------------------------------
DECEMBER 31, 1996 1996 1995 1994
------------------ ---------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $1,017,653 $1,121,619 $633,717 $596,267
Gross profit.................................. 64,157 34,406 27,785 24,964
Net income.................................... 31,025 12,367 5,554 3,591
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
DECEMBER 31, 1996 1996 1995 1994
----------------- ---------- -------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 19,181 $126,863 $ 52,222 $ 26,578
Total assets.................................. 1,059,064 908,677 766,475 743,016
Long-term debt................................ 127,586 65,052 34,040 92,249
Shareholders' equity.......................... 478,893 447,868 435,501 429,947
</TABLE>
GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------
CUMULATIVE PRE-CAPITAL
MARCH 23, 1994 MARCH 23 SUBSCRIPTION PERIOD(1)
(COMMENCEMENT YEARS ENDED (COMMENCEMENT ---------------------------
OF OPERATIONS) TO DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, ------------------------------- DECEMBER 31, MARCH 22, DECEMBER 31,
1997 1997 1996 1995 1994 1994 1993
----------------- ------- --------- --------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating loss.......... 257,349 88,071 61,025 80,226 28,027 6,872 11,510
Net loss applicable to
ordinary partnership
interests............. 255,238 88,788 71,969 68,237 26,244 6,872 11,510
Net loss per weighted
average ordinary
partnership interest
outstanding........... 1.74 1.53 1.50 0.73
Cash distributions per
ordinary partnership
interest-basic and
diluted...............
OTHER DATA:
Deficiency of earnings
to cover fixed
charges(2)............ 184,683 81,869 N/A N/A
CASH FLOW DATA:
Used in operating
activities............ 210,304 97,128 51,756 38,368 23,052
Used in investing
activities............ 1,301,049 591,025 591,025 280,345 50,549
Provided by partners'
capital
transactions.......... 883,495 132,990 284,714 318,630 147,161
Provided by (used in)
other financing
activities............ 1,092,012 998,137 95,750 (1,875)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 464,154 $ 21,180 $ 71,602 $ 73,560
Total assets........................................ 2,149,053 942,913 505,391 151,271
Vendor financing liability.......................... 197,723 130,694 42,219
Debt................................................ 1,099,531 96,000
Redeemable preferred partnership interests.......... 303,089 302,037
Ordinary partners' capital.......................... 380,828 315,186 386,838 112,944
</TABLE>
- ---------------
(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.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, Globalstar, SatMex and Orion,
and elsewhere in this Annual Report, 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 companies, with substantial
activities in both satellite manufacturing and satellite-based communications
services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and
manufacturer of space systems. Loral Skynet ("Skynet"), acquired on March 14,
1997, is a leading provider of satellite communications services in the United
States. Skynet owns and operates the Telstar satellite network and is expanding
its business internationally. On November 17, 1997, a joint venture including
Loral and another partner acquired 75% of SatMex, a satellite services provider
to Mexico and South America. Loral also manages and is the largest equity owner
of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system
scheduled for service initiation in early 1999. Loral is pursuing additional
satellite-based communications service opportunities, including CyberStar, a
proposed worldwide high-speed broadband data services system initially using
leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. In
addition, on March 20, 1998, Loral acquired Orion Network Systems, Inc.
("Orion"), a corporate data networking and satellite services company with
operations in the United States and Europe that will be expanded to Asia/
Pacific and South America in 1998 and the first half of 1999, respectively.
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"). Loral operates on a December 31 fiscal year-end. The space and
communications operations of Old Loral operated under a March 31 year-end.
RESULTS OF OPERATIONS
In 1997, Loral accelerated its transformation from a company with extensive
equity investments to a major satellite manufacturer and provider of satellite
services by making a number of acquisitions that significantly affected its
results of operations.
In February 1997, Loral agreed to acquire the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities
(see Note 3 to Loral's consolidated financial statements). On March 14, 1997,
Loral acquired Skynet from AT&T for $462.1 million in cash.
The acquisition of Skynet and the remaining equity interest in SS/L have
been accounted for as purchases. Loral's consolidated financial statements for
the year ended December 31, 1997, reflect the results of operations of SS/L from
January 1, 1997, the elimination of the minority interest of the SS/L equity not
owned by Loral during the period and the results of operations of Skynet from
March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the
equity method of accounting.
In 1997, Loral increased its ownership of Globalstar by exercising existing
warrants and rights to acquire 1,312,696 Globalstar ordinary partnership
interests for $34.8 million in cash and by acquiring 2,748,372 Globalstar
ordinary partnership interests from other Globalstar partners for $97.5 million
in cash, 1,255,684 shares of Loral common stock and a deferred purchase price of
$24.8 million. At December 31, 1997, Loral had a 40.1% interest in Globalstar's
ordinary partnership interests.
In connection with the privatization by the Mexican Government of its fixed
satellite services business, Loral and Telefonica Autrey formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Telefonica Autrey equity contribution of $50.9 million and debt
issued by Holdings. As part of the acquisition, Holdings issued a
20
<PAGE> 22
$125.1 million seven year Government Obligation bearing interest at 6.03% to the
Mexican Government in consideration for the assumption by SatMex of the debt
incurred by Holdings in connection with the acquisition. The debt of SatMex and
Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and
Telefonica Autrey have agreed to maintain assets in a collateral trust in an
amount equal to the value of the Government Obligation though December 30, 2000
and, thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. Loral has a 65% economic interest in Holdings and a
49% indirect economic interest in SatMex. Loral accounts for SatMex using the
equity method. The consolidated financial statements reflect the equity in net
loss of SatMex for the period November 17 to December 31, 1997.
On March 20, 1998, Loral acquired all of the outstanding stock, as defined,
of Orion in exchange for Loral common stock. Loral issued 17.9 million shares of
its common stock and assumed existing Orion options and warrants to purchase 1.9
million shares of Loral common stock representing an aggregate purchase price of
$467.0 million. Loral will include Orion's results from the date of acquisition
using the purchase method of accounting. Orion is a provider of satellite-based
communications services, focused primarily on private communications network
services, Internet services and video distribution and other satellite
transmission services. Orion provides multinational corporations with private
communications networks designed to carry high speed data, fax, video
teleconferencing, voice and other specialized services. Orion currently has one
satellite in orbit and two satellites under construction. The cost of the two
additional satellites under construction is fully funded. At December 31, 1997,
Orion had unrestricted cash and cash equivalents of $70.0 million, restricted
cash to be used for the satellites under construction and interest payments of
$356.9 million and debt of $747.1 million which is expected to remain
outstanding after the transaction. Orion's outstanding debt is non-recourse to
Loral.
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 this income, however, will be subject to taxation by certain
foreign countries.
The Company's U.S. subsidiaries are subject to U.S. taxes on their
worldwide income. In addition, a 30% U.S. withholding tax will be imposed on
dividends and interest paid by such subsidiaries to Loral Space & Communications
Ltd.
Comparison of Results of the Year Ended December 31, 1997
and the Nine Months Ended December 31, 1996
Revenues for the year ended December 31, 1997 totaled $1.5 billion before
elimination of intercompany sales of $200.1 million. SS/L's sales were $1.4
billion before elimination of intercompany eliminations of $199.3 million.
SS/L's commercial sales were $1.1 billion, including sales to Globalstar of
$408.1 million, and sales to the U.S. government were $90.5 million. Skynet's
sales were $69.3 million from date of acquisition to December 31, 1997. Revenue
for the nine months ended December 31, 1996, represented management fees earned
from SS/L of $5.1 million.
21
<PAGE> 23
Earnings before interest, taxes, depreciation and amortization
("EBITDA")(1) for 1997 is as follows (in millions):
<TABLE>
<S> <C>
SS/L........................................................ $99.7
Skynet -- from March 14, 1997............................... 42.0
Corporate expenses and intercompany eliminations............ (33.2)
------
EBITDA before development costs............................. 108.5
SatMex(2)................................................... 5.1
------
Adjusted EBITDA before development costs(3)................. $113.6
======
</TABLE>
- ---------------
(1) EBITDA should not be construed as an alternative to net income, as an
indicator of a company's operating performance, as cash flow from operations
or as a measure of a company's liquidity.
(2) Represents Loral's proportionate share of SatMex's EBITDA from November 17,
1997.
(3) Development costs for CyberStar were $32.2 million and Loral's proportionate
share of Globalstar's development costs was $33.3 million.
EBITDA before development costs was $108.5 million in 1997. CyberStar
development costs were $32.2 million and depreciation and amortization was $62.7
million, resulting in operating income for 1997 of $13.6 million. The nine
months ended December 31, 1996, reflected an operating loss of $12.2 million
primarily due to corporate expenses of $17.3 million.
In connection with delayed payment in 1997 by two Asian customers for three
satellites, SS/L stopped work, reduced backlog by $291 million, which will
reduce future sales, and recorded a charge of $23 million. If the current
programs for these three satellites are not restarted, the satellites will be
sold to other customers.
Interest income of $49.1 million for the year ended December 31, 1997
represents $42.6 million of interest earned on the investment of available cash
during the year and interest on the GTL Convertible Preferred Equivalent
Obligations ("GTL Convertible Preferreds") held by Loral (See Note 6 to Loral's
consolidated financial statements), and $6.5 million of interest earned on
orbital incentive payments. Interest income for the nine months ended December
31, 1996 of $34.7 million reflects the investment of available cash during the
period and interest on the GTL Convertible Preferreds.
Interest expense of $15.2 million, net of capitalized interest of $22.6
million, for 1997, reflects the assumption of SS/L's debt, borrowings under the
Credit Agreement (see Note 7 to Loral's consolidated financial statements) and
interest on Loral's outstanding Convertible Preferred Equivalent Obligations
("CPEOs") until June 5, 1997, when the CPEOs were exchanged for Loral 6% Series
C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). Preferred
dividends in 1997 of $26.3 million result from the exchange of the Company's
CPEOs for Series C Preferred Stock. Interest expense for the nine months ended
December 31, 1996 of $6.0 million reflects interest on the CPEOs for one
quarter.
The results of operations for 1997, reflect the gain on sale of K&F stock
of $79.6 million, net of expenses.
The Company's effective income tax rate for 1997 was 27.5%. The current
year 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.
The minority interest expense in 1997 reflects the reduction of SS/L's
income attributed to the Alliance Partners.
The equity in net loss of affiliates for 1997 of $47.3 million reflects
increased development costs at Globalstar as well as an increased ownership
percentage by Loral in Globalstar. In addition, in connection with Loral's
investment in SatMex in 1997, Loral recorded its share of SatMex's losses of
$6.4 million. The equity in net loss of affiliates for the nine months ended
December 31, 1996 reflects the Company's share of Globalstar losses of $18.1
million offset by the Company's share of SS/L's income of $13.4 million. In
1997, the Company discontinued using the equity method for SS/L and fully
consolidated SS/L's results of operations.
22
<PAGE> 24
As a result of the above, net income applicable to common stockholders for
1997 was $13.7 million, or $0.06 per diluted share, compared to $8.9 million, or
$0.04 per diluted share, for the nine months ended December 31, 1996. Diluted
weighted average shares were 243.6 million for 1997 and 229.4 million for the
nine months ended December 31, 1996.
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
For the nine months ended December 31, 1996, the consolidated financial
statements include the accounts of Loral Space & 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.
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.
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
operation of its satellite and telecommunications businesses on a stand-alone
basis.
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.
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.
SUMMARY RESULTS OF OPERATIONS OF AFFILIATES
GLOBALSTAR
Globalstar is a development stage partnership and has not commenced
commercial service operations. The net loss applicable to ordinary partnership
interests for the year ended December 31, 1997 was $88.8 million as compared to
$56.6 million for the nine months ended December 31, 1996. The increase in the
net loss is a result of increased marketing, general and administrative expenses
of $10.7 million and an increase in development costs of $31.7 million as a
result of increased activity in the development of Globalstar's user terminals,
offset by an increase in interest income of $15.6 million as a result of higher
average cash balances
23
<PAGE> 25
outstanding. Globalstar is expending significant funds for the construction,
testing and deployment of the Globalstar System and expects such losses to
continue through commencement of revenue generating service operations.
SATMEX
For the period November 17, 1997 to December 31, 1997, SatMex had revenues,
EBITDA, operating income and a net loss of $12.5 million, $10.5 million, $4.8
million and $13.1 million, respectively (unaudited). The net loss is primarily
attributed to interest expense of $16.2 million on debt issued to finance the
acquisition, which includes a charge for $8.9 million of fees associated with a
bridge loan. SatMex expects such losses to continue through 1999 until funds
from operations reduce outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, through incurrence of debt or
the issuance of additional equity.
At December 31, 1997, Loral had $226.5 million of cash and cash
equivalents. Loral intends to utilize its existing capital base and access to
the capital markets to construct and operate additional satellites, make
additional investments in Globalstar and Globalstar service provider
opportunities and invest in additional satellite communications service
opportunities.
On November 14, 1997, the Company, through its wholly owned subsidiary
Loral SpaceCom Corporation, entered into a $850 million credit facility with a
group of banks (see Note 7 to Loral's consolidated financial statements). The
facility consists of a $500 million revolving credit facility, a $275 million
term loan and a $75 million letter of credit facility. The facility replaced
SS/L's existing credit facility. The facility is secured by the stock of Loral
SpaceCom Corporation and SS/L and contains various covenants including an
interest coverage ratio, debt to capitalization ratios and restrictions on cash
transfers to its parent. At December 31, 1997, there was $435.4 million
outstanding under this agreement and other similar credit agreements with SS/L.
Skynet: Skynet currently has two high-powered satellites operating in
orbit. Loral intends to expand Skynet's business to become a worldwide satellite
service provider through the construction of additional satellites and has four
satellites under construction by SS/L. Loral anticipates that a portion of the
funds required for construction of these additional satellites will be provided
through additional borrowings or the issuance of additional equity.
Globalstar: On February 14, 1998, Globalstar launched its first four
satellites. Globalstar expects to begin commercial service in early 1999
following the launch of 44 satellites during 1998. The remaining 12 satellites,
including eight in-orbit spares, will be launched in the first half of 1999.
Globalstar's current budgeted expenditures for the design, construction and
deployment of the Globalstar System, including working capital, cash interest on
borrowings and operating expenses is approximately $2.7 billion. As of December
31, 1997, Globalstar had raised or received commitments for approximately $2.6
billion.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost estimated at $175 million. Further, in order to
accelerate the deployment of gateways around the world Globalstar has agreed to
finance approximately $80 million of the cost of up to 32 of the initial 38
gateways. Globalstar expects to recover this financing upon resale of such
gateways to its partners and service providers.
24
<PAGE> 26
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 $353 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors.
Commitments and Contingencies: 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 is currently financed without recourse
to Loral other than the indemnification described above.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
Cash Used and Provided. Cash used in operating activities for the year
ended December 31, 1997 was $230.2 million, primarily due to an increase in
satellite contracts in process and inventories of $152.8 million, a decrease in
customer advances of $57.8 million due to the progress on commercial satellite
contracts and an increase in deposits of $107.7 million, offset by funds
generated by earnings before depreciation and amortization, taxes, gain on sale
of K&F stock, minority interest and equity in net loss of affiliates of $110.2
million. Cash used in operating activities for the nine months ended December
31, 1996, was $3.0 million, primarily due to increases in other current assets,
offset by funds generated from earnings before depreciation, taxes and equity in
net loss of affiliates of $17.5 million.
Cash used in investing activities for the year ended December 31, 1997 was
$1.0 billion primarily due to the purchase of Skynet and the SS/L equity
interests (see Note 3 to Loral's consolidated financial statements); the
purchase of equity interests in Globalstar and SatMex (see Note 6 to Loral's
consolidated financial statements); capital expenditures of $255.3 million
primarily for the construction of the Telstar satellites by SS/L for Skynet and
facility expansion and renovation at SS/L; and other assets of $63.5 million,
offset by the proceeds from the sale of K&F stock. Cash used in investing
activities for the nine months ended December 31, 1996 was $2.0 million due
primarily to the purchase of $2.5 million principal amount of GTL Convertible
Preferred Equivalent Obligations in April 1996 and the purchase of SS/L equity
interests, offset by the sale of certain fixed assets.
Net cash provided by financing activities for the year ended December 31,
1997 and December 31, 1996 was $298.8 million and $1.2 billion, respectively,
primarily as a result of borrowings under credit facilities in 1997 and the net
proceeds from the Distribution and the net proceeds from the issuance of the
CPEOs in 1996.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of
25
<PAGE> 27
general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. SFAS 131 establishes
annual and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. SFAS 132 expands and standardizes the disclosure requirements for
pensions and other postretirement benefits. The Company is required to adopt
SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's consolidated
financial statements will reflect the appropriate disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited involvement with derivative financial instruments
and does not use such instruments for trading purposes. The derivative financial
instruments are used to manage foreign currency exchange risk.
At December 31, 1997, the Company had foreign currency exchange contracts
(forwards and swaps) with several banks to purchase and sell foreign currencies,
primarily Japanese yen, aggregating $175.1 million. Such contracts were
designated as hedges of certain foreign contracts and subcontracts to be
performed by SS/L through May 2006. The fair value of these contracts, based on
quoted market prices, was $139.0 million at December 31, 1997. At December 31,
1997, deferred gains on forward contracts to sell foreign currencies, primarily
yen, were $26.6 million and deferred losses on forward contracts to purchase
foreign currencies, primarily yen, were $9.5 million.
The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held at December 31,
1997 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):
<TABLE>
<CAPTION>
TO PURCHASE TO SELL
------------------ ------------------
AT AT AT AT
YEARS CONTRACT MARKET CONTRACT MARKET
TO MATURITY RATE RATE RATE RATE
----------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
1.............................................. $68,582 $59,937 $ 20,711 $14,766
2 to 5......................................... 5,804 4,939 65,276 48,975
6 to 10........................................ 14,750 10,385
------- ------- -------- -------
$74,386 $64,876 $100,737 $74,126
======= ======= ======== =======
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules on
pages 28 and 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in the Company's 1998
definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bernard L.
Schwartz........... 72 Chairman of the Board of Directors and Chief Executive
Officer since January 1996. Prior to that, Chairman and
Chief Executive Officer of Old Loral since 1972.
Gregory J. Clark..... 55 President and Chief Operating Officer since January 1998.
Prior to that, President of News Technology Group, a
division of News Corporation, since September 1994. Prior to
that, Director of Science and Technology of IBM in Australia
since 1988.
Michael P.
DeBlasio........... 61 First Senior Vice President and Chief Financial Officer
since February 1998. Prior to that, Senior Vice President
and Chief Financial Officer since March 1996. Prior to that,
Senior Vice President -- Finance of Old Loral since 1979.
Robert E. Berry...... 69 Senior Vice President since November 1996 and President of
Space Systems/Loral since 1990.
Nicholas C. Moren.... 51 Senior Vice President and Treasurer since February 1998.
Prior to that, Vice President and Treasurer since March
1996. Prior to that, Vice President and Treasurer of Old
Loral since April 1991.
Eric J. Zahler....... 47 Senior Vice President, General Counsel and Secretary since
February 1998. Prior to that, Vice President, General
Counsel and Secretary since March 1996. Prior to that, Vice
President and General Counsel of Old Loral since April 1992.
Prior to that, partner in the law firm of Fried, Frank,
Harris, Shriver & Jacobson.
W. Neil Bauer........ 51 Vice President since March 1998. Prior to that, Chief
Executive Officer and President of Orion Network Systems,
Inc. since September 1993. Prior to that, President of Orion
Network Systems, Inc. since March 1993.
Terry J. Hart........ 51 Vice President since February 1998 and President of Loral
Skynet since March 1997. Prior to that, Division Manager of
AT&T Skynet Satellite Services since 1991.
Ronald C. Maehl...... 50 Vice President since February 1998 and President of
CyberStar since March 1997. Prior to that, Senior Vice
President of Strategic Ventures of SS/L since April 1996.
Prior to that, Senior Vice President of Advance Programs of
SS/L since January 1993.
Laurence D. Atlas.... 40 Vice President, Government Relations -- Telecommunications
since May 1997. Prior to that, Associate Chief of the Common
Carrier Bureau of the FCC since January 1995. Prior to that,
Associate Chief of the FCC's Wireless Telecommunications
Bureau since November 1994. Prior to that, associate in the
law firm of Willkie Farr & Gallagher since 1982.
Jeanette H. Clonan... 49 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... 56 Vice President -- Administration since March 1997. Prior to
that, Vice President -- Administration of Old Loral since
1978.
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Avi Katz............. 39 Vice President, Deputy General Counsel and Assistant
Secretary since February 1998. Prior to that, Deputy General
Counsel and Assistant Secretary since August 1997. Prior to
that, Associate General Counsel and Assistant Secretary
since July 1996. Prior to that, associate in the law firm of
Willkie Farr & Gallagher since 1987.
Jerald A. Lindfelt... 51 Vice President -- Business Operations since March 1997.
Prior to that, Division President of Old Loral since July
1991.
Russell R. Mack...... 43 Vice President -- Business Ventures since February 1998.
Prior to that, Director of Business Planning and Development
since April 1996. Prior to that, Manager of Project Finance
of Old Loral since July 1991.
Harvey B. Rein....... 44 Vice President and Controller since April 1996. Prior to
that, Assistant Controller of Old Loral since 1985. \
Thomas B. Ross....... 68 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.
</TABLE>
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 1998 definitive proxy statement which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements............................... F-1
Loral Space & Communications Ltd.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996...................................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1997, for the nine months ended December
31, 1996 and for the year ended March 31, 1996......... F-4
Consolidated Statements of Shareholders' Equity/Invested
Equity for the year ended December 31, 1997, for the
nine months ended December 31, 1996 and for the year
ended March 31, 1996................................... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, for the nine months ended December
31, 1996 and for the year ended March 31, 1996......... F-6
Notes to Consolidated Financial Statements................ F-7
Space Systems/Loral, Inc.
Independent Auditors' Report.............................. F-29
Consolidated Balance Sheets as of December 31, 1996....... F-30
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Income for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-31
Consolidated Statements of Shareholders' Equity for the
nine months ended December 31, 1996 and the year ended
March 31, 1996......................................... F-32
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-33
Notes to Consolidated Financial Statements................ F-34
Globalstar, L.P. (A development stage limited partnership)
Independent Auditors' Report.............................. *
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... *
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and 1995 and cumulative..... *
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, 1995 and cumulative........... *
Consolidated Statements of Partners' Capital and
Subscriptions Receivable for the period March 23, 1994
(commencement of operations) to December 31, 1997...... *
Notes to Consolidated Financial Statements................ *
</TABLE>
- ---------------
* Incorporated herein by reference from the Annual Report on Form 10-K of
Globalstar Telecommunications Limited for the year ended December 31, 1997,
pages F-13 through F-32.
(a) 2. Financial Statement Schedules
Independent Auditors' Report............................ S-1
Schedule I -- Condensed Financial Information of
Registrant.............................................. S-2
Financial statement schedules not listed are either not required or
the information required is reflected in the consolidated financial
statements.
(a) 3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
2.1 Restructuring, Financing and Distribution Agreement, dated
as of January 7, 1996, among Loral Corporation, Loral
Aerospace Holdings, Inc., Loral Aerospace Corp., Loral
General Partner, Inc., Loral Globalstar L.P., Loral
Globalstar Limited, the Registrant and Lockheed Martin
Corporation(1)
2.2 Amendment to Restructuring, Financing and Distribution
Agreement, dated as April 15, 1996(1)
2.3 Agreement for the Purchase and Sale of Assets dated as of
September 25, 1996 by and between AT&T Corp., as Seller, and
Loral Space & Communications Ltd., as Buyer(2)
2.4 First Amendment to Agreement for the Purchase and Sale of
Assets dated as of March 14, 1997 by and between AT&T Corp.,
as Seller, and Loral Space & Communications Ltd., as
Buyer(3)
2.5 Agreement and Plan of Merger dated as of October 7, 1997 by
and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of
February 11, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.(5)
2.7 Second Amendment to Agreement and Plan of Merger dated as of
March 20, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.+
3.1 Memorandum of Association(1)
3.2 Memorandum of Increase of Share Capital(1)
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
3.3 Second Amended and Restated Bye-laws(1)
3.4 Schedule III to Second Amended and Restated Bye-laws
relating to Registrant's 6% Series C Convertible Redeemable
Preferred Stock(6)
4.1 Rights Agreement dated March 27, 1996 between the Registrant
and The Bank of New York, Rights Agent(1)
10.1 Shareholders Agreement dated as of April 23, 1996 between
Loral Corporation and the Registrant(1)
10.2 Tax Sharing Agreement dated as of April 22, 1996 between
Loral Corporation, the Registrant, Lockheed Martin
Corporation and LAC Acquisition Corporation(1)
10.3 Exchange Agreement dated as of April 22, 1996 between the
Registrant and Lockheed Martin Corporation(1)
10.4 Amended and Restated Agreement of Limited Partnership of
Globalstar, L.P., dated as of 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(7)
10.5 Service Provider Agreements by and between Globalstar, L.P.
and each of Loral General Partner, Inc. and Loral/DASA
Globalstar, L.P.(8)
10.6 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(8)
10.7 1996 Stock Option Plan(1)++
10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++
10.9 Employment Agreement between the Registrant and Bernard L.
Schwartz(1)++
10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement
between the Registrant and Bernard L. Schwartz+++
10.10 Registration Rights Agreement dated as of August 9, 1996
among Loral Space & Communications Ltd., Lehman Brothers
Capital Partners II, L.P., Lehman Brothers Merchant Banking
Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore
Investment Partnership-Japan L.P.(9)
10.11 Registration Rights Agreement dated November 6, 1996
relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006(6)
10.12 Registration Rights Agreement (Series C Preferred Stock)
dated as of March 31, 1997 between Loral Space &
Communications Ltd. and Finmeccanica S.p.A. and dated as
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.13 Registration Rights Agreement (Common Stock) dated as of
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.14 Alliance Agreement dated as of June 23, 1997 among Loral
Space & Communications Ltd., Aerospatiale SNI, Alcatel
Espace and Finmeccanica S.p.A.(10)
10.15 Principal Stockholder Agreement dated as of October 7, 1997
among Loral Space & Communications Ltd., Loral Satellite
Corporation, Orion Network Systems, Inc. and certain Orion
stockholders signatory thereto(4)
10.16 Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc., the Banks parties
thereto, Bank of America National Trust and Savings
Association, as Administrative Agent, and Istituto Bancario
San Paolo di Torino S.p.A, individually and as Italian
Export Financing and Arranger and as Selling Bank(11)
10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as
of June 30, 1997+
10.18 Purchase and Sale Agreement dated November 17, 1997 between
the Federal Government of the United Mexican States and
Corporativo Satelites Mexicanos, S.A. de C.V. for the
purchase and sale of the capital stock of Satelites
Mexicanos, S.A. de C.V. (English translation of Spanish
original)+
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
10.19 Membership Agreement dated and effective as of November 17,
1997 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de
C.V. and Firmamento Mexicano, S. de R.L. de C.V.+
10.20 Letter Agreement dated December 29, 1997 between Loral Space
& Communications Ltd., Telefonica Autrey S.A. de C.V.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Lehman Commercial Paper Inc. and related
Agreement between the Federal Government of United Mexican
States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma,
S.A. de C.V., Loral Space & Communications Ltd., Loral
SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de
C.V.+
12 Statement Re: Computation of Ratios+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
99.1 Consolidated Financial Statements of Globalstar, L.P. and
Independent Auditors' Report(12)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 (No. 1-14180).
(2) Incorporated by reference to the Registrant's Form 8-K filed on September
27, 1996.
(3) Incorporated by reference to the Registrant's Form 8-K filed on March 28,
1997.
(4) Incorporated by reference to the Registrant's Form 8-K filed on October 10,
1997.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference to the Registrant's Form 10-K for the nine month
period ended December 31, 1996.
(7) 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).
(8) Incorporated by reference to the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference to the Registrant's Form 8-K filed on August 13,
1996.
(10) Incorporated by reference to the Registrant's Form 8-K filed on July 8,
1997.
(11) Incorporated by reference to the Registrant's Form 8-K filed on December 9,
1997.
(12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed by Globalstar Telecommunications Limited
(File No. 0-25456).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT
--------------
<S> <C>
October 7, 1997 Item 5 - Loral entered into a Merger Agreement with Orion
Network Systems, Inc.
November 14, 1997 Item 5 - Loral SpaceCom Corporation entered into an $850
million credit facility. Loral joint venture entered into an
agreement to acquire 75% of SatMex.
</TABLE>
31
<PAGE> 33
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 30, 1998
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
BERNARD L. SCHWARTZ Chairman of the Board, Chief Executive March 30, 1998
- --------------------------------------------------- Officer and Director (Principal
Bernard L. Schwartz Executive Officer)
HOWARD GITTIS Director March 30, 1998
- ---------------------------------------------------
Howard Gittis
ROBERT B. HODES Director March 30, 1998
- ---------------------------------------------------
Robert B. Hodes
GERSHON KEKST Director March 30, 1998
- ---------------------------------------------------
Gershon Kekst
CHARLES LAZARUS Director March 30, 1998
- ---------------------------------------------------
Charles Lazarus
MALVIN A. RUDERMAN Director March 30, 1998
- ---------------------------------------------------
Malvin A. Ruderman
E. DONALD SHAPIRO Director March 30, 1998
- ---------------------------------------------------
E. Donald Shapiro
ARTHUR L. SIMON Director March 30, 1998
- ---------------------------------------------------
Arthur L. Simon
DANIEL YANKELOVICH Director March 30, 1998
- ---------------------------------------------------
Daniel Yankelovich
MICHAEL P. DEBLASIO First Senior Vice President and March 30, 1998
- --------------------------------------------------- Chief Financial Officer
Michael P. DeBlasio (Principal Financial Officer)
HARVEY B. REIN Vice President and Controller March 30, 1998
- --------------------------------------------------- (Principal Accounting Officer)
Harvey B. Rein
</TABLE>
32
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Loral Space & Communications Ltd. and Subsidiaries
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1997, nine months ended December 31, 1996
and year ended March 31, 1996.......................... F-4
Consolidated Statements of Shareholders' Equity/Invested
Equity for the year ended December 31, 1997, nine
months ended December 31, 1996 and year ended March 31,
1996................................................... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, nine months ended December 31, 1996
and year ended March 31, 1996.......................... F-6
Notes to Consolidated Financial Statements................ F-7
Space Systems/Loral, Inc.
Independent Auditors' Report.............................. F-29
Consolidated Balance Sheet as of December 31, 1996........ F-30
Consolidated Statements of Income for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-31
Consolidated Statements of Shareholders' Equity for the
nine months ended December 31, 1996 and the year ended
March 31, 1996......................................... F-32
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-33
Notes to Consolidated Financial Statements................ F-34
</TABLE>
F-1
<PAGE> 35
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, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity/invested equity and cash flows
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998
(March 20, 1998 as to the fifth
paragraph of Note 3)
F-2
<PAGE> 36
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 226,547 $1,180,752
Contracts in process...................................... 468,134
Inventories............................................... 98,325
Other current assets...................................... 51,612 29,555
---------- ----------
Total current assets........................................ 844,618 1,210,307
Property, plant and equipment, net.......................... 926,679 17,939
Cost in excess of net assets acquired, less amortization.... 361,411
Long-term receivables....................................... 78,639
Investments in affiliates................................... 472,639 443,057
Deposits.................................................... 154,970
Other assets................................................ 165,980 28,023
---------- ----------
$3,004,936 $1,699,326
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt................................... $ 2,146
Accounts payable.......................................... 231,519 $ 10,708
Accrued employment costs.................................. 38,797
Customer advances......................................... 68,287
Accrued interest and preferred dividends.................. 11,192 6,000
Other current liabilities................................. 25,931
Income taxes payable...................................... 25,934 2,311
Deferred income taxes..................................... 4,187 112
---------- ----------
Total current liabilities................................... 407,993 19,131
Deferred income taxes....................................... 99,696 4,611
Pension and other postretirement liabilities................ 48,398 19,723
Long-term liabilities....................................... 31,388 2,500
Long-term debt.............................................. 433,252
Minority interest........................................... 10,964
Convertible preferred equivalent obligations ($600,000
principal amount)......................................... 583,292
Commitments and contingencies (Notes 6, 7 and 12)
Shareholders' equity:
Series A convertible preferred stock, $.01 par value;
150,000,000 shares authorized, 45,896,977 shares
issued................................................. 459 459
Series B preferred stock, $.01 par value; 750,000 shares
authorized and unissued................................
6% Series C convertible redeemable preferred stock
($745,472 redemption value), $.01 par value; 20,000,000
shares authorized, 14,909,437 shares issued............ 733,762
Common stock, $.01 par value; 750,000,000 shares
authorized, 200,950,864 and 191,092,308 shares
issued................................................. 2,010 1,911
Paid-in capital........................................... 1,216,128 1,058,822
Treasury stock, at cost; 101,053 shares................... (1,680)
Retained earnings......................................... 22,566 8,877
---------- ----------
Total shareholders' equity.................................. 1,973,245 1,070,069
---------- ----------
$3,004,936 $1,699,326
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 37
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Revenues............................................... $1,312,591
Management fee from affiliate.......................... $ 5,088 $ 5,608
Costs and expenses..................................... 1,299,039 17,289 3,021
---------- -------- --------
Operating income (loss)................................ 13,552 (12,201) 2,587
Interest and investment income......................... 49,069 34,699
Interest expense....................................... 15,230 6,000 10,524
Gain on sale of K&F stock.............................. 79,591
---------- -------- --------
Income (loss) before income taxes, minority interest
and equity in net loss of affiliates................. 126,982 16,498 (7,937)
Income taxes........................................... 34,871 2,912 (2,780)
---------- -------- --------
Income (loss) before minority interest and equity in
net loss of affiliates............................... 92,111 13,586 (5,157)
Minority interest...................................... (4,834)
Equity in net loss of affiliates....................... (47,273) (4,709) (8,628)
---------- -------- --------
Net income (loss)...................................... 40,004 8,877 (13,785)
Preferred dividends and accretion...................... (26,315)
---------- -------- --------
Net income (loss) applicable to common stockholders.... $ 13,689 $ 8,877 $(13,785)
========== ======== ========
Earnings (loss) per share:
Basic................................................ $ 0.06 $ 0.04 $ (.08)
========== ======== ========
Diluted.............................................. $ 0.06 $ 0.04 $ (.08)
========== ======== ========
Weighted average shares outstanding:
Basic................................................ 242,070 228,997 183,580
========== ======== ========
Diluted.............................................. 243,591 229,396 183,580
========== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 38
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/INVESTED EQUITY
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND
YEAR ENDED MARCH 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
6% SERIES C
SERIES A CONVERTIBLE
CONVERTIBLE REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- ------------------ ----------------
SHARES SHARES SHARES PAID-IN INVESTED
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL EQUITY
------ ------ ------- -------- ------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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...............................
------ ---- ------- -------- ------- ------ ---------- ---------
Balance December 31, 1996................ 45,897 459 191,092 1,911 1,058,822
Shares issued:
Exercise of stock options and related
tax benefits, net of shares
tendered.............................. 208 2 2,015
Employee savings plan................... 352 4 6,997
Acquisition of equity interest in
SS/L.................................. 2,909 $149,600 8,043 80 130,820
Acquisition of Globalstar partnership
interests............................. 1,256 13 17,474
Mandatory exchange of Convertible
Preferred Equivalent Obligations, net
of unamortized issue costs............ 12,000 583,282
Preferred dividends $3.00 per share......
Accretion to Series C Convertible
Redeemable Preferred Stock redemption
value................................... 880
Net income...............................
------ ---- ------- -------- ------- ------ ---------- ---------
Balance at December 31, 1997............. 45,897 $459 14,909 $733,762 200,951 $2,010 $1,216,128 $ --
====== ==== ======= ======== ======= ====== ========== =========
<CAPTION>
TOTAL
TREASURY RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
-------- -------- -------------
<S> <C> <C> <C>
Balance March 31, 1995................... $ 251,819
Advances from Old Loral.................. 116,362
Net loss................................. (13,785)
Incorporation of Loral Space &
Communications Ltd......................
------- -------- ----------
Balance March 31, 1996................... 354,396
Advances from Old Loral.................. 2,425
April 23, 1996 Distribution:
Other assets transferred and
liabilities assumed, net from Old
Loral............................... 4,070
Common stock issued to Old Loral
shareholders and option holders..... 255,988
Sale of Series A Convertible Preferred
Stock............................... 344,000
Common stock issued to acquire interest
in SS/L................................. 100,313
Net income............................... $ 8,877 8,877
------- -------- ----------
Balance December 31, 1996................ 8,877 1,070,069
Shares issued:
Exercise of stock options and related
tax benefits, net of shares
tendered.............................. $(1,680) 337
Employee savings plan................... 7,001
Acquisition of equity interest in
SS/L.................................. 280,500
Acquisition of Globalstar partnership
interests............................. 17,487
Mandatory exchange of Convertible
Preferred Equivalent Obligations, net
of unamortized issue costs............ 583,282
Preferred dividends $3.00 per share...... (25,435) (25,435)
Accretion to Series C Convertible
Redeemable Preferred Stock redemption
value................................... (880)
Net income............................... 40,004 40,004
------- -------- ----------
Balance at December 31, 1997............. $(1,680) $ 22,566 $1,973,245
======= ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 39
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ----------------- ----------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $ 40,004 $ 8,877 $ (13,785)
Gain on the sale of K&F stock............................. (79,591)
Equity in net loss of affiliates.......................... 47,273 4,709 8,628
Minority interest......................................... 4,834
Deferred taxes............................................ 419 (926) 3,838
Accretion on GTL CPEOs.................................... (1,739)
Depreciation and amortization............................. 62,764 1,051
Changes in operating assets and liabilities, net of
acquisitions:
Contracts in process and inventories...................... (152,794)
Deposits.................................................. (107,670)
Other assets.............................................. (26,615) (9,252)
Accounts payable.......................................... 69,574 (1,832)
Customer advances......................................... (57,778)
Accrued expenses.......................................... (36,602) (4,506)
Taxes payable............................................. 24,873
Long-term liabilities..................................... (17,200) (1,124)
----------- ---------- ---------
Cash used in operating activities........................... (230,248) (3,003) (1,319)
----------- ---------- ---------
Investing activities:
Acquisition of businesses, net of cash acquired........... (545,642)
Proceeds from the sale of K&F stock, net of expenses...... 79,591
Investment in affiliates.................................. (237,899) (6,425) (105,231)
Other assets.............................................. (63,482) (9,800)
Proceeds from the sale of property, plant and equipment... 5,003
Capital expenditures...................................... (255,340) (540)
----------- ---------- ---------
Cash used in investing activities........................... (1,022,772) (1,962) (115,031)
----------- ---------- ---------
Financing activities:
Borrowings under revolving credit facility, net........... 32,812
Proceeds from issuance of term loan....................... 275,000
Proceeds from convertible preferred equivalent
obligations............................................. 583,292
Proceeds from exercise of stock options and issuances to
employee savings plan................................... 7,338
Contribution from minority partner........................ 9,100
Preferred dividends....................................... (25,435)
Proceeds from the Distribution............................ 612,274
Transaction expenses related to the Distribution.......... (12,286)
Advances from Loral Corporation prior to the
Distribution............................................ 2,425 116,362
----------- ---------- ---------
Cash provided by financing activities....................... 298,815 1,185,705 116,362
----------- ---------- ---------
(Decrease) increase in cash and cash equivalents............ (954,205) 1,180,740 12
Cash and cash equivalents -- beginning of period............ 1,180,752 12
----------- ---------- ---------
Cash and cash equivalents -- end of period.................. $ 226,547 $1,180,752 $ 12
=========== ========== =========
Non-cash transactions:
Mandatory exchange of Convertible Preferred Equivalent
Obligations............................................. $ 583,282
===========
Issuance of Series C Preferred Stock to acquire equity
interest in SS/L........................................ $ 149,600
===========
Issuance of Loral common stock to acquire equity interest
in SS/L and Globalstar partnership interests............ $ 148,387 $ 100,313
=========== ==========
Deferred purchase price to acquire Globalstar partnership
interests............................................... $ 24,787
===========
Assets transferred from Loral Corporation at the
Distribution............................................ $ 31,383
==========
Liabilities assumed from Loral Corporation at the
Distribution............................................ $ 27,313
==========
Transfer of GTL common stock to acquire equity interest in
SS/L.................................................... $ 5,158
==========
Supplemental Information:
Interest paid............................................. $ 40,866
===========
Taxes paid................................................ $ 8,901 $ 1,528
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 40
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. and subsidiaries (the "Company" or
"Loral") is one of the world's leading satellite companies, with substantial
activities in satellite manufacturing and satellite-based communications
services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and
manufacturer of space systems. Loral Skynet ("Skynet"), acquired March 14, 1997,
is a leading provider of satellite communications services in the United States.
Skynet owns and operates the Telstar satellite network and is expanding its
business internationally. On November 17, 1997, a joint venture including Loral
and another partner acquired 75% of SatMex, a satellite services provider to
Mexico and South America. Loral also manages and is the largest equity owner of
Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system
scheduled for service initiation in early 1999. Loral is pursuing additional
satellite-based communications service opportunities including CyberStar, a
proposed worldwide high-speed broadband data services system initially using
leased Ku-band transponder capacity on Skynet's Telstar 5 satellite.
Loral was formed to effectuate the distribution of Loral Corporation's
("Old Loral") space and communications businesses (the "Distribution") to
shareholders of Old Loral and holders of options to purchase Old Loral common
stock pursuant to a merger agreement (the "Merger") dated January 7, 1996
between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). The
Distribution of approximately 183.6 million shares of Loral common stock was
made on April 23, 1996. In connection with the Distribution, Lockheed Martin
contributed $612 million in cash to the Company. Of the amount contributed, $344
million represented the purchase of 45,896,977 shares of Loral Series A
Convertible Preferred Stock ("Series A Preferred Stock"). Such stock is subject
to certain voting limitations, restrictions on transfer and standstill
provisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Loral operates on a December 31 fiscal year-end. The consolidated financial
statements for the year ended December 31, 1997 and the nine months ended
December 31, 1996, include the accounts of Loral Space & Communications Ltd. and
its subsidiaries. The consolidated financial statements for the year ended
December 31, 1997, include the results of SS/L for the full year and Skynet from
March 14, 1997 (see Note 3). 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 year
ended March 31, 1996, 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.
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 Loral's revenue is associated with long-term
contracts which require significant estimates. These estimates include forecasts
of costs and schedules, estimating contract revenue related to contract
performance (including orbital incentives) and the potential for component
obsolescence in connection with long-term procurements. Other significant
estimates include the estimated useful lives of the Company's satellites.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
F-7
<PAGE> 41
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Concentration of Credit Risk and Major Customers
Financial instruments which potentially subject Loral to concentrations of
credit risk consist principally of cash and cash equivalents, foreign exchange
contracts and contracts in process and long-term receivables. Loral's cash and
cash equivalents are maintained with high-credit-quality financial institutions.
Loral'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.
Sales to foreign customers, primarily in Asia, represented 30% of revenues
for the year ended December 31, 1997. Sales to the U.S. government represented
7% of revenues for the year ended December 31, 1997.
Inventories
Inventories consist principally of common subassemblies not specifically
identified to contracts in process, and are valued at the lower of cost or
market. Cost is determined using the first-in-first-out (FIFO) or average cost
method.
Investments in Affiliates
Investments in affiliates are accounted for using the equity method. Income
and losses of the affiliates are recorded based on Loral's beneficial 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.
In connection with Loral's investment in Globalstar, a development stage
company, Loral capitalizes interest cost on its investment. At December 31, 1997
and 1996 the total amount of capitalized interest included in the investment in
Globalstar was $23.5 million and $10.3 million, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
primarily on the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the improvements.
Costs incurred in connection with the construction and successful
deployment of the Company's satellites and related equipment are capitalized.
Such costs include direct contract costs, allocated indirect costs, launch
costs, launch insurance and construction period interest. Capitalized interest
related to the construction of satellites for the year ended December 31, 1997
was $9.4 million. All capitalized satellite costs will be amortized over the
estimated useful life of the related satellite. The estimated useful life of the
satellites, ranging from 12 to 18 years, was determined by engineering analyses
performed at the in-service date. Losses from unsuccessful launches and in-orbit
failures of the Company's satellites, net of insurance proceeds, will be
recorded in the period when the loss occurs.
Cost in Excess of Net Assets Acquired
The excess of the cost of purchased businesses over the fair value of net
assets acquired is being amortized over 40 years using the straight line method.
Accumulated amortization was $10.8 million at December 31, 1997.
Valuation of Long-Lived Assets
The carrying value of Loral's long-lived assets is reviewed for impairment
whenever events or changes in circumstances indicate that the asset may not be
recoverable. Current and future profitability, as well as
F-8
<PAGE> 42
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
current and future undiscounted cash flows, excluding financing costs, are
primary indicators of recoverability. For the year ended December 31, 1997,
there was no adjustment to the carrying value of Loral's long-lived assets
resulting from these evaluations.
Other Assets
Other assets include a $25 million equity investment in CD Radio Inc.
representing approximately 12% of CD Radio's equity. The Company accounts for
this investment using the 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 Loral'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.
Skynet provides satellite capacity under lease agreements that generally
provide for the use of satellites and, in certain cases, earth stations for
periods generally ranging from one year to the life of the satellite. Some of
these agreements have certain obligations, including providing spare or
substitute capacity, if available, in the event of satellite failure. If no
spare or substitute capacity is available, the agreement may be terminated.
Revenue under transponder lease agreements is recognized as services are
performed.
Allocation of Certain Expenses
For the year ended March 31, 1996, 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 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 year ended 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 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.
F-9
<PAGE> 43
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Foreign Exchange Contracts
Loral 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.
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 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 year ended March 31, 1996, 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.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented and,
where appropriate, restated to conform to the requirements of SFAS 128 (see Note
14).
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued Statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. SFAS 131 establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. SFAS 132 expands and
standardizes the disclosure requirements for pensions and other postretirement
benefits. The Company is
F-10
<PAGE> 44
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
required to adopt SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's
consolidated financial statements will reflect the appropriate disclosures.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
current year presentation.
3. ACQUISITIONS
SS/L
At April 1, 1996, Loral had an effective 32.7% interest in SS/L. In 1996,
Loral 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 7.5 million newly
issued shares of Loral common stock, 534,512 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 agreed to acquire the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million. In March 1997, Loral acquired 24.5%
of SS/L's common stock for $93.5 million in cash and $93.5 million of Loral's
Convertible Preferred Equivalent Obligations ("CPEOs"). In June 1997, the
Company acquired the remaining 24.5% of SS/L's common stock for $187.0 million
in the form of 8,042,922 shares of Loral common stock and 1,063,663 shares of
Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock").
The aggregate purchase price of the 67.3% interest in SS/L acquired by Loral was
$493.2 million. The purchase price represented $174.4 million in excess of
SS/L's proportionate net book value which was allocated primarily to the
incremental value of SS/L's investment in Globalstar of $62.2 million and cost
in excess of net assets acquired of $105.9 million. The consolidated financial
statements include the results of operations of SS/L since January 1, 1997, with
a reduction for the earnings attributed to the minority shareholders.
Skynet
On March 14, 1997, Loral acquired Skynet from AT&T for $462.1 million in
cash. The fair value of assets and liabilities recorded in connection with the
purchase price allocation was $569.8 million and $107.7 million, respectively.
Loral's consolidated financial statements include the results of operations of
Skynet from the date of acquisition.
Had the acquisitions of SS/L, Skynet and the investment in SatMex (see Note
6) occurred on April 1, 1996 the unaudited pro forma revenue, net loss
applicable to common stockholders and related basic and diluted loss per share
for the year ended December 31, 1997 and the nine months ended December 31, 1996
would have been: $1.3 billion and $1.0 billion; $19.2 million and $26.1 million;
$0.08 and $0.11, and, $0.08 and $0.11, respectively. These results, which are
based on various assumptions, are not necessarily indicative of what would have
occurred had the acquisitions been consummated as of April 1, 1996.
Orion
On March 20, 1998, Loral acquired all of the outstanding stock, as defined,
of Orion Network Systems, Inc. ("Orion") in exchange for Loral common stock.
Loral issued 17.9 million shares of its common stock and assumed existing Orion
options and warrants to purchase 1.9 million shares of Loral common stock
representing an aggregate purchase price of $467.0 million. Loral will include
Orion's results from the date of acquisition using the purchase method of
accounting. Orion is a provider of satellite-based communications services,
focused primarily on private communications network services, Internet services
and video distribution and other satellite transmission services. Orion provides
multinational corporations with private communi-
F-11
<PAGE> 45
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS -- (CONTINUED)
cations networks designed to carry high speed data, fax, video teleconferencing,
voice and other specialized services. Orion currently has one satellite in orbit
and two satellites under construction.
Had the acquisitions of SS/L, Skynet, the investment in SatMex (see Note 6)
and Orion occurred on April 1, 1996 the unaudited pro forma revenue, net loss
applicable to common stockholders and related basic and diluted loss per share
for the year ended December 31, 1997 and the nine months ended December 31, 1996
would have been: $1.4 billion and $1.0 billion; $95.4 million and $112.2
million; $0.36 and $0.43; and, $0.36 and $0.43, respectively. These results,
which are based on various assumptions, are not necessarily indicative of what
would have occurred had the acquisitions been consummated as of April 1, 1996.
4. CONTRACTS-IN-PROCESS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
(IN THOUSANDS)
<S> <C>
U.S. government contracts:
Amounts billed............................................ $ 5,243
Unbilled contract receivables............................. 10,274
--------
15,517
--------
Commercial contracts:
Amounts billed............................................ 194,997
Unbilled contract receivables............................. 257,620
--------
452,617
--------
$468,134
========
</TABLE>
Unbilled amounts include recoverable costs and accrued profit on progress
completed which has not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and are reclassified to billed receivables.
Billed receivables relating to long-term contracts are expected to be
collected within one year. Loral classifies the orbital component of unbilled
receivables expected to be collected beyond one year as long term. Long-term
receivable balances related to satellite orbital incentive payments at December
31, 1997 are scheduled to be received as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $11,416
2000........................................................ 10,792
2001........................................................ 10,782
2002........................................................ 10,657
Thereafter.................................................. 34,992
-------
$78,639
=======
</TABLE>
Selling, general and administrative expenses for the year ended December
31, 1997 were $125.7 million and include independent research and development
costs, which are expensed as incurred, of $56.8 million.
F-12
<PAGE> 46
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements.................................. $ 24,999
Buildings................................................... 58,443
Leasehold improvements...................................... 10,234 $ 171
Equipment, furniture and fixtures........................... 154,684 20,083
Satellites and earth stations............................... 506,852
Satellites under construction............................... 233,204
Construction in progress.................................... 29,823
---------- -------
1,018,239 20,254
Accumulated depreciation.................................... (91,560) (2,315)
---------- -------
$ 926,679 $17,939
========== =======
</TABLE>
Depreciation expense was $52.0 million and $1.1 million for the year ended
December 31, 1997 and the nine months ended December 31, 1996. No depreciation
expense was allocated to the Space & Communications Operations of Old Loral for
the year ended March 31, 1996.
6. INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Globalstar.................................................. $383,714 $175,639
SatMex...................................................... 88,925
SS/L........................................................ 267,418
K&F......................................................... 23,568
Deferred K&F gain........................................... (23,568)
-------- --------
$472,639 $443,057
======== ========
</TABLE>
Equity in net income (loss) of affiliates consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
----------------- ------------------ --------------
<S> <C> <C> <C>
Globalstar.............................. $(42,503) $(18,105) $(20,980)
Tax benefit of Globalstar partnership
losses (see Note 8)................... 1,626 8,308
SatMex.................................. (6,396)
SS/L.................................... 13,396 4,044
-------- -------- --------
$(47,273) $ (4,709) $ (8,628)
======== ======== ========
</TABLE>
Globalstar
Loral is the managing partner of Globalstar. Globalstar will operate a
worldwide, LEO satellite-based digital telecommunications system (the
"Globalstar(TM) System") that is scheduled to commence service in early 1999.
The Globalstar System 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. Currently, Globalstar's designated service
providers have agreed to offer service and seek all necessary regulatory
approvals in more than 100 nations, accounting for about 88% of the world's
population. On February 14, 1998, Globalstar launched the first four satellites
of its 56 (including eight in-orbit spares) satellite constellation.
F-13
<PAGE> 47
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
In May, 1997, Globalstar Telecommunications Limited ("GTL"), a public
company that acts as a general partner of Globalstar, issued a two-for-one stock
split. Accordingly, all GTL share amounts have been adjusted to reflect the
two-for-one stock split. Prior to the two-for-one stock split, GTL's equity
securities and convertible securities were represented by equivalent Globalstar
partnership interests on a one-for-one basis. Globalstar's partnership interests
were not affected by the GTL stock split and, accordingly, GTL's equity
securities and convertible securities are now represented by equivalent
Globalstar partnership interests on a two-for-one basis.
At December 31, 1997, Loral had a direct and indirect ownership of
20,962,211 (40.1%) ordinary partnership interests of the total 52,319,076
Globalstar ordinary partnership interests outstanding. A portion of Loral's
investment in Globalstar is held in the form of 5,439,678 shares of GTL common
stock. At December 31, 1997, the market value of the GTL shares, based on the
last reported sales price, was $267.2 million.
On September 14, 1995, Old Loral in its capacity as managing general
partner of Globalstar, granted certain officers of Old Loral, who were also
officers of GTL and Globalstar, options to purchase 280,000 shares of the GTL
common stock owned by Loral at an exercise price of $10.00 per share. On
December 12, 1995, Loral granted non-employee directors of Loral options to
purchase 400,000 shares of the GTL common stock owned by Loral at an exercise
price of $16.69 per share. These options were 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 of Loral, who were also officers of GTL and Globalstar,
options to purchase 304,000 shares of the GTL common stock owned by Loral at an
exercise price of $12.50 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 "Globalstar Credit Agreement") with a group of banks. Lockheed
Martin, SS/L and certain other Globalstar partners have guaranteed $206.3
million, $11.7 million and $32.0 million of the Globalstar Credit Agreement,
respectively. In addition, Loral agreed to indemnify Lockheed Martin for any
liability in excess of $150 million. In exchange for the guarantee and
indemnity, GTL issued warrants to purchase 8,370,636 shares of GTL common stock
at $13.25 per share as follows: Loral and SS/L 2,275,044 warrants, Lockheed
Martin 5,022,380 warrants and certain other Globalstar partners 1,073,212
warrants. In February 1997, GTL accelerated the vesting and exercisability of
these warrants and the holders exercised such warrants. In addition, GTL
distributed to the holders of its common stock rights to subscribe for and
purchase 2,262,336 GTL shares for a price of $13.25 per share of which Loral
received rights to purchase 318,344 shares and agreed to purchase all shares not
purchased upon exercise of the rights. In March 1997, Loral exercised warrants
to purchase 2,275,044 shares of common stock of GTL for $30.1 million and, in
April 1997, Loral exercised its right as a shareholder in GTL to purchase an
additional 350,348 shares of GTL common stock for $13.25 per share. GTL used the
proceeds from the exercise of the warrants and the rights, to purchase
additional Globalstar ordinary partnership interests.
In March 1996, Loral purchased $100 million principal amount of GTL 6 1/2%
Convertible Preferred Equivalent Obligations, due 2006 par value $50 per share,
("GTL CPEOs") for $97 million. In April 1996, Loral purchased an additional $2.5
million principal amount of the GTL CPEOs for $2.4 million. Such amounts are
included in the investment in Globalstar. 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 3,153,846 shares of GTL common stock subject to adjustment for certain
anti-dilution provisions. Loral's interest income for the year and nine months
ended December 31, 1997 and 1996 includes $7.2 million and $5.5 million related
to its investment in GTL CPEOs.
F-14
<PAGE> 48
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
During 1997, Loral acquired 2,208,372 Globalstar ordinary partnership
interests from other Globalstar partners for $97.5 million in cash and 1,255,684
shares of Loral common stock. In addition, on October 21, 1997 Loral acquired
540,000 ordinary partnership interests of Globalstar from another Globalstar
partner, for $24.8 million. The purchase price is payable in installments during
1998 and bears interest at 6%. Any unpaid balance at December 31, 1998 is due in
cash.
Pursuant to the Globalstar partnership agreement, Loral is responsible for
managing the operations of Globalstar and is entitled to receive a Managing
Partner's Allocation on commencement of commercial operations.
SS/L is the prime contractor for the construction and launch of the
satellite constellation under a contract valued at $1.4 billion. SS/L has
awarded subcontracts to third parties, including other investors in Globalstar,
for substantial portions of its obligations under the contract. Revenue recorded
under the Globalstar contract for the year ended December 31, 1997 was $408.1
million. Billed and unbilled receivables from Globalstar at December 31, 1997,
were $84.2 million.
Globalstar's current budgeted expenditures for the cost for the design,
construction and development of the Globalstar System, including working
capital, cash interest on borrowings and operating expenses, are approximately
$2.7 billion. Globalstar has raised or received commitments for approximately
$2.6 billion in equity, debt and vendor financing. In addition, Globalstar will
purchase from SS/L eight additional spare satellites for $175 million 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, would be reimbursed to Globalstar.
SS/L provides Globalstar with 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. In addition, under the contract for the additional eight spare
satellites, SS/L will provide an additional $43 million of vendor financing of
which $19 million will be interest bearing. The repayment terms are
substantially the same as the prior vendor financing. At December 31, 1997,
$90.0 million was due under these arrangements, all of which was interest
bearing.
SatMex
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). Holdings acquired 75% of
the outstanding capital stock of Satelites Mexicanos, S.A. de C.V. ("SatMex")
for $646.8 million. The purchase price was financed by a Loral equity
contribution of $94.6 million, a Telefoncia Autrey equity contribution of $50.9
million and debt issued by Holdings. As part of the acquisition, Holdings issued
a
F-15
<PAGE> 49
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
$125.1 million seven year obligation bearing interest at 6.03% to the Mexican
Government (the "Government Obligation") in consideration for the assumption by
SatMex of the debt incurred by Holdings in connection with the acquisition. The
debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey.
However, Loral and Telefonica Autrey have agreed to maintain assets in a
collateral trust in an amount equal to the value of the Government Obligation
through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the
Government Obligation until maturity. Loral has a 65% economic interest in
Holdings and a 49% indirect economic interest in SatMex.
Loral, together with Telefonica Autrey, will be responsible for managing
SatMex and will receive an aggregate management fee, based on a sliding scale,
applied to SatMex's quarterly gross revenues up to a maximum of 3.75% of
cumulative gross revenues. In addition, Loral Skynet will license certain
intellectual property to SatMex for a fee of 1.5% of SatMex's gross revenues.
Such fees were not significant for the year ended December 31, 1997.
SS/L
In 1997, Loral discontinued the use of the equity method of accounting for
SS/L and consolidates SS/L's financial position and results of operations in its
financial statements (see Note 3).
The SS/L stockholders' agreement provided for management fees to be paid to
Loral, ranging from 0.5% to 1% of sales, as defined, depending upon SS/L's
operating performance. Such management fees were $5.1 million and $5.6 million
for the nine months ended December 31, 1996 and the year ended March 31, 1996,
respectively. The stockholders' agreement also required SS/L to pay Loral an
annual fee for overhead reimbursement, not to exceed 1% of SS/L's adjusted
sales, as defined, for each fiscal year. This fee amounted to $2.7 million and
$3.4 million for the nine months ended December 31, 1996 and for the year ended
March 31, 1996, respectively.
At December 31, 1996, other current assets include $9.3 million due from
SS/L primarily related to these management fees and overhead reimbursement.
K&F
Old Loral's 22.5% voting equity interest in K&F Industries, Inc. ("K&F")
was transferred to Loral at the Distribution. Loral used the equity method to
account for its investment in K&F; however, no income or loss was recognized due
to K&F's financial position. In December 1997, Loral sold its 22.5% equity
interest for $80.6 million and recorded a $79.6 million gain on the sale.
Summary Financial Data of Affiliates
The following table presents summary financial data for Globalstar at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 and cumulative (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, CUMULATIVE MARCH 23, 1994
----------------------------- (COMMENCEMENT OF OPERATIONS)
1997 1996 1995 TO DECEMBER 31, 1997
------- ------- ------- ----------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ -- $ -- $ -- $ --
Operating loss....................... 88,071 61,025 80,226 257,349
Net loss............................. 67,586 54,646 68,237 216,713
Preferred distributions.............. 21,202 17,323 38,525
Net loss applicable to ordinary
partnership interests.............. 88,788 71,969 68,237 255,238
</TABLE>
F-16
<PAGE> 50
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 493,780 $ 21,786
Total assets................................................ 2,149,053 942,913
Current liabilities......................................... 143,810 75,267
Long-term debt.............................................. 1,099,531 --
Long-term liabilities....................................... 221,795 250,423
Redeemable preferred partnership interests.................. 303,089 302,037
Ordinary partners' capital.................................. 380,828 315,186
</TABLE>
The following table presents unaudited summary financial data for SatMex at
December 31, 1997, and for the period November 17, 1997 (date of acquisition)
through December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 17, 1997
TO
DECEMBER 31, 1997
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 12,540
Operating income............................................ 4,757
Net loss.................................................... 13,058
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 62,457
Total assets................................................ 936,554
Current liabilities......................................... 5,438
Long-term debt.............................................. 570,000
Shareholders' equity........................................ 361,116
</TABLE>
The following table presents summary financial data for SS/L at December
31, 1996 and for the nine months ended December 31, 1996 and the year ended
March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $1,017,653 $1,121,619
Operating income............................................ 54,011 22,054
Net income.................................................. 31,025 12,367
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 521,510
Total assets................................................ 1,059,064
Current liabilities......................................... 377,929
Long term debt.............................................. 127,586
Other noncurrent liabilities................................ 72,666
Minority interest........................................... 1,990
Shareholders' equity........................................ 478,893
</TABLE>
F-17
<PAGE> 51
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Term loan, 7.2%............................................. $275,000
Revolving credit facility, 7.2%............................. 55,000
Note purchase facility...................................... 88,234
Export-Import credit facility............................... 17,164
--------
Total debt........................................ 435,398
Less, current maturities.................................... 2,146
--------
$433,252
========
</TABLE>
Loral SpaceCom Corporation ("Loral SpaceCom"), a wholly owned subsidiary of
Loral, and SS/L have entered into an $850 million amended and restated credit
and participation agreement (the "Credit Agreement") with a group of banks dated
November 14, 1997. The Credit Agreement provides for a $275 million term loan
facility, a $500 million revolving credit facility, of which up to $175 million
may be used for letters of credit, and a separate $75 million letter of credit
facility. Both the term loan facility and revolving credit facility are for a
period of five years. The separate letter of credit facility runs for a two-year
period. The term loan facility requires repayment in twelve consecutive
quarterly installments beginning December 31, 1999. The first four installments
are $18,750,000 each with the final eight installments being $25,000,000 each.
Borrowings under the facilities are secured by the stock of Loral SpaceCom and
SS/L and bear interest, at Loral SpaceCom's option, at various rates based on
margins over the lead bank's base rate or the London Interbank Offer Rate
("LIBOR") for periods of one to six months. Loral SpaceCom pays a commitment fee
on the unused portion of the facilities. The Credit Agreement contains customary
covenants including an interest coverage ratio and debt to capitalization
ratios. In addition, the Credit Agreement contains limitations on indebtedness,
liens, guarantee obligations, asset sales, dividends, investments and
transactions with affiliates. Under the terms of the Credit Agreement, Loral
SpaceCom may pay dividends to its parent if the cumulative dividend payments do
not exceed 50% of cumulative net income, as defined, and the ratio of funded
debt to EBITDA, as defined, is less than three to one. Currently, Loral
SpaceCom, a wholly owned subsidiary of Loral, has equity and intercompany debt
of approximately $1.1 billion, of which approximately $200 million can be paid
to its parent.
In 1994 SS/L entered into a $139.3 million 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. The outstanding
principal is to be repaid on the earlier of twenty-three months from the final
acceptance date of certain satellite deliveries or April 30, 2000. Interest is
charged at a weighted average annual rate of 4.26% and is payable semiannually.
All borrowings under this facility reduce the amount available under the Credit
Agreement.
SS/L borrowed a total of $42.9 million under an export-import credit
facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is
fully secured by a letter of credit arrangement with another bank. At December
31, 1997, no amounts remained available for borrowing under this facility. The
outstanding principal is to be repaid in semiannual installments through
November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable
semiannually on May 1 and November 1.
The aggregate maturities for the years 1998 through 2002 are as follows:
$2,146,000, $20,896,000, $83,396,000, $102,146,000 and $220,380,000.
F-18
<PAGE> 52
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Current:
U.S. Federal................................. $27,204 $2,913 $(5,772)
State and local.............................. 7,248 925 (660)
------- ------ -------
34,452 3,838 (6,432)
Deferred, principally U.S. Federal............. 419 (926) 3,652
------- ------ -------
Total provision (benefit) for income taxes..... $34,871 $2,912 $(2,780)
======= ====== =======
</TABLE>
The provision for income taxes excludes: current tax benefits related to
the exercise of stock options, credited directly to Stockholders' Equity, of
$0.5 million for the year ended December 31, 1997; a current tax benefit of $4.3
million and $0.2 million for the years ended December 31, 1997 and March 31,
1996, respectively, and, a deferred tax liability of $2.7 million and a benefit
of $8.1 million for the years ended December 31, 1997 and March 31, 1996,
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:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
----------------- ----------------- --------------
<S> <C> <C> <C>
Statutory U.S. Federal income tax
rate............................. 35.0% 35.0% (35.0)%
State and local income taxes, net
of Federal income tax............ 3.0 3.0 (4.0)
Foreign source income and losses
taxed at lower rate.............. (13.3) (21.3)
Non-deductible amortization of cost
in excess of net assets
acquired......................... 2.6
Undistributed income of
affiliates....................... 4.0
Other, net......................... .2 1.0
----- ----- -----
Effective income tax rate.......... 27.5% 17.7% (35.0)%
===== ===== =====
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $28.4 million and tax credit carryforwards of approximately $3.6
million which generally expire through 2012. For the twelve months ended
December 31, 1997 and the nine months ended December 31, 1996, income before
income taxes includes approximately $72.0 and $10.0 million, respectively, of
foreign source income.
F-19
<PAGE> 53
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED)
The significant components of the net deferred income tax liability are (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- ------
<S> <C> <C>
Postretirement benefits other than pensions............... $(14,927)
Inventoried costs......................................... (37,457)
Net operating loss and tax credit carryovers.............. (13,562)
Compensation and benefits................................. (11,129) $ 32
Other, net................................................ (74) 251
Pension costs............................................. 5,957 52
Property, plant and equipment............................. 54,838 4,388
Income recognition on long-term contracts................. 120,237
-------- ------
Net deferred income tax liability........................... $103,883 $4,723
======== ======
</TABLE>
9. SHAREHOLDERS' EQUITY
Series A Preferred Stock
Significant terms of the Company's Series A Preferred Stock include a
liquidation preference of $.01 per share prior to pro rata participation with
the common stock and the ability to convert to common stock upon the receipt of
certain antitrust clearance or sales to an unaffiliated third party. The Series
A Preferred Stock has the same voting rights as the Company's common stock
except, it has no right to vote for the election of directors.
Series B Preferred Stock
The Series B Preferred Stock will, if issued, be junior to any other series
of preferred stock which may be authorized and issued.
6% Series C Preferred Stock
On November 1, 1996, the Company sold $600 million of 6% Convertible
Preferred Equivalent Obligations which, were mandatorily exchanged on June 5,
1997 into shares of the Company's Series C Preferred Stock resulting in a
reclassification of these amounts into shareholders' equity. The Series C
Preferred Stock has an aggregate liquidation preference equal to the aggregate
redemption value and a mandatory redemption date of November 1, 2006. The Series
C Preferred Stock is convertible into shares of common stock of the Company at a
conversion price of $20 per share. At December 31, 1997, the outstanding Series
C Preferred Stock was convertible into 37,273,593 shares of Loral common stock.
The Series C Preferred Stock, with respect to dividend rights and rights
upon liquidation, winding up and dissolution, ranks pari passu with Loral's
Series A Preferred Stock and senior to or pari passu with all other existing and
future series of preferred stock of Loral and senior to Loral common stock. The
Series C Preferred Stock is redeemable in cash or Loral common stock at any
time, in whole or in part, at the option of the Company (at a premium which
declines over time) commencing November 5, 1999.
Stock Plans
In April 1996, Loral established the 1996 Stock Option Plan. An aggregate
of 12 million 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
F-20
<PAGE> 54
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY -- (CONTINUED)
exercisable as determined by the Board, generally over five years, and generally
expire no more than 10 years from the date of the grant.
As discussed in Note 2, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly, no compensation expense
based on the fair value method has been recognized in the financial statements
for employee stock arrangements.
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 as though the Company had adopted the fair value
method. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996: expected life, 6 months following vesting; stock
volatility, 25%; risk free interest rate, 5.5% to 6.55% based on date of grant;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1997 and 1996 awards, including
stock-based compensation awards to employees of the Company's affiliates, had
been amortized to expense over the vesting period of the awards, pro forma net
income applicable to common stockholders would have decreased by $4.4 million
($.02 per diluted share) and $4.1 million ($.02 per diluted share) to $9.3
million ($.04 per diluted share) and $4.8 million ($.02 per diluted share) for
the year and nine months ended December 31, 1997 and 1996, respectively.
A summary of the status of the Company's stock option plans as of December
31, 1997 and 1996 and changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding at March 31, 1996............................... -- $ --
Granted (weighted average fair value $2.93 per share)....... 6,412,000 10.60
Forfeited................................................... 500 10.50
--------- ------
Outstanding at December 31, 1996............................ 6,411,500 10.60
Granted (weighted average fair value $3.97 per share)....... 732,500 13.93
Exercised................................................... 207,750 10.50
Forfeited................................................... 175,800 12.98
--------- ------
Outstanding at December 31, 1997............................ 6,760,450 $10.90
========= ======
Options exercisable at December 31, 1997.................... 2,014,250 $10.53
========= ======
Options exercisable at December 31, 1996.................... 1,200,000 $10.50
========= ======
</TABLE>
At December 31, 1997, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $10.50 to $20.47 and 8.4
years, respectively. The range for the options exercisable at December 31, 1997
was $10.50 to $15.94. All options granted during the year were non-qualified
stock options. As of December 31, 1997, 5,031,800 shares of common stock were
available for future grant under the Plan.
F-21
<PAGE> 55
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
The Company maintains a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans and members in certain locations
may contribute to the pension plan in order to receive enhanced benefits.
Eligibility for participation in these plans vary and benefits are based on
members' compensation and/or years of service. In connection with the
Distribution, Loral assumed the obligations of such members previously employed
by Old Loral, in exchange for plan assets as defined. The Company's funding
policy is to fund the pension plan in accordance with the Internal Revenue Code
and regulations thereon and to fund the supplemental retirement plan on an
actuarial basis, including service cost and amortization amounts. Contributions
of $1.9 million were made for the year ended December 31, 1997, and 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 includes the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Service cost-benefits earned during the period..... $ 6,538 $ 268
Interest cost on projected benefit obligation...... 14,277 1,410
Actual return on plan assets....................... (28,044) (499)
Net amortization and deferral...................... 11,619 (77)
-------- ------
Total pension cost................................. $ 4,390 $1,102
======== ======
</TABLE>
The following presents the plans' funded status and amounts recognized in
the balance sheet (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
------------------------------ -------------
ASSETS EXCEED ACCUMULATED ACCUMULATED
ACCUMULATED BENEFITS BENEFITS
BENEFITS EXCEED ASSETS EXCEED ASSETS
------------- ------------- -------------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits............................. $154,328 $ 24,210 $ 27,831
======== ========= ========
Accumulated benefits........................ $156,443 $ 24,226 $ 27,845
Effect of projected future salary
increases................................ 22,929 568 694
-------- --------- --------
Projected benefits.......................... 179,372 24,794 28,539
Plan assets at fair value..................... 189,546 8,467 9,450
-------- --------- --------
Plan assets in excess of (less than) projected
benefit obligation.......................... 10,174 (16,327) (19,089)
Unrecognized prior service cost............... (72) 88
Unrecognized net loss (gain).................. 3,115 (1,048) (445)
-------- --------- --------
Prepaid (accrued) pension cost................ $ 13,217 $ (17,287) $(19,534)
======== ========= ========
</TABLE>
The principal actuarial assumptions were:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Discount rate............................................... 7.25% 7.75%
Rate of increase in compensation levels..................... 4.50% 4.50%
Expected long-term rate of return on plan assets............ 9.50% 9.50%
</TABLE>
F-22
<PAGE> 56
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
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.
Postretirement health care and life insurance costs include the following
components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
<S> <C> <C>
Service cost - benefits earned during the period... $ 915 $13
Interest cost on accumulated postretirement benefit
obligation....................................... 2,314 9
Actual return on plan assets....................... (136)
Net amortization and deferral...................... (1,137)
------- ---
Total postretirement health care and life insurance
costs............................................ $ 1,956 $22
======= ===
</TABLE>
The following presents the plans funded status and amounts recognized in
the balance sheet (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Retirees......................................... $16,695 $ --
Fully eligible active participants............... 3,864 30
Other active participants........................ 15,451 148
------- ----
Accumulated postretirement benefit obligations... 36,010 178
Plan assets at fair value.......................... 2,022
------- ----
Accumulated postretirement benefit obligations
in excess of plan assets......................... 33,988 178
Unrecognized prior service cost.................... 2,894
Unrecognized net gain (loss)....................... (5,771) 11
------- ----
Accrued postretirement health care cost............ $31,111 $189
======= ====
The principal actuarial assumptions were:
Discount rate...................................... 7.25% 7.75%
Expected long-term rate of return on plan assets... 9.50%
</TABLE>
The health care cost trend rates at December 31, 1997 and 1996, were
assumed to be 9.96% and 10.59%, respectively, 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 change the accumulated postretirement
benefit obligation at December 31, 1997 by approximately $6.7 million and the
aggregate service and interest cost components for 1997 by approximately $0.8
million.
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
F-23
<PAGE> 57
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
contributions in Loral common stock or cash were $5.6 million for the year ended
December 31, 1997 and $0.1 million for the nine months ended December 31, 1996.
11. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value:
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of the Series
C Preferred Stock and the CPEO's are based on market quotations and the fair
value of the Company's long-term debt is based on carrying value due to the
short-term variable interest rate on the outstanding borrowings.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $ 226,547 $ 226,547
Long-term debt, including current maturities................ 435,398 435,398
Series C Preferred Stock.................................... 733,762 916,930
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $1,180,752 $1,180,752
Convertible Preferred Equivalent Obligations................ 583,292 681,000
</TABLE>
Foreign Currency Hedges
At December 31, 1997, the Company had foreign currency exchange contracts
(forwards and swaps) with several banks to purchase and sell foreign currencies,
primarily Japanese yen, aggregating $175.1 million. Such contracts were
designated as hedges of certain foreign contracts and subcontracts to be
performed by SS/L through May 2006. The fair value of these contracts, based on
quoted market prices, was $139.0 million at December 31, 1997. At December 31,
1997, deferred gains on forward contracts to sell foreign currencies, primarily
yen, were $26.6 million and deferred losses on forward contracts to purchase
foreign currencies, primarily yen, were $9.5 million.
The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
F-24
<PAGE> 58
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
The maturity of foreign currency exchange contracts held at December 31,
1997 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):
<TABLE>
<CAPTION>
TO PURCHASE TO SELL
------------------ ------------------
AT AT AT AT
YEARS CONTRACT MARKET CONTRACT MARKET
TO MATURITY RATE RATE RATE RATE
----------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
1.............................................. $68,582 $59,937 $ 20,711 $14,766
2 to 5......................................... 5,804 4,939 65,276 48,975
6 to 10........................................ 14,750 10,385
------- ------- -------- -------
$74,386 $64,876 $100,737 $74,126
======= ======= ======== =======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities equipment and transponder capacity
under agreements expiring at various dates. Certain leases covering facilities
contain renewal and or purchase options which may be exercised by the Company.
Rent expense was $17.7 million for the year ended December 31, 1997.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998........................................................ $16,257
1999........................................................ 15,409
2000........................................................ 14,963
2001........................................................ 12,268
2002........................................................ 6,355
Thereafter.................................................. 33,389
-------
$98,641
=======
</TABLE>
At December 31, 1997 the Company had outstanding letters of credit of
approximately $71.5 million.
Due to the long lead times required to produce purchased parts, SS/L has
entered into various purchase commitments with suppliers. These commitments
aggregated $973.1 million at December 31, 1997.
Prior to its acquisition by Loral, Skynet sold several transponders under
which title to specific transponders was transferred to the customer upon the
customer's acceptance. Under the terms of the contracts, Skynet continues to
operate the satellites on which the transponders are located and provides a
warranty for a period of 10 to 14 years, generally the economic life of the
satellite. Depending on the contract, Skynet is required to replace transponders
failing to meet operating specifications. All customers are entitled to a refund
equal to the reimbursement value, as defined, in the event there is no repair or
replacement. The reimbursement value is determined based on the original
purchase price plus an interest factor from the time the payment is received to
acceptance of the transponder by the customer, reduced on a straight-line basis
over the warranty period. In case of satellite failure, the reimbursement value
may be paid from proceeds received from insurance policies.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested
F-25
<PAGE> 59
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
that SS/L structure an arrangement whereby the satellite under construction
would be sold to another customer. Management believes that these matters will
not have a material adverse effect on the financial condition or results of
operations of Loral.
13. RELATED PARTY TRANSACTIONS
In connection with contract performance, Loral provided services to and
acquired services from Lockheed Martin for the year ended December 31, 1997. A
summary of such transactions and balances is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenue from services sold.................................. $ 3,550
Cost of purchased services.................................. 78,160
Balance at year end:
Receivable................................................ $ 80
Payable................................................... 29,589
-------
Net payable................................................. $29,509
=======
</TABLE>
Loral's sales to, purchases from, and balances with the Alliance Partners
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenue from services sold.................................. $ 39,303
Cost of purchased services.................................. 147,777
Balance at year end:
Receivable................................................ $ 10,492
Payable................................................... 81,716
--------
Net payable................................................. $ 71,224
========
</TABLE>
14. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted average number
of shares of common stock and the Series A Preferred Stock outstanding. Diluted
earnings per share excludes the assumed conversion of the Series C Preferred
Stock as the effect would have been antidilutive. 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.
F-26
<PAGE> 60
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS PER SHARE -- (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)............................... $ 40,004 $ 8,877 $(13,785)
Preferred stock dividends and accretion......... (26,315)
-------- -------- --------
Numerator for basic and diluted earnings per
share -- net income (loss) applicable to
common stockholders.......................... $ 13,689 $ 8,877 $(13,785)
======== ======== ========
Denominator:
Weighted average shares:
Common stock................................. 196,173 186,799 183,580
Series A Preferred Stock..................... 45,897 42,198
-------- -------- --------
Denominator for basic earnings per share........ 242,070 228,997 183,580
Effect of dilutive securities:
Employee stock options....................... 1,521 399
-------- -------- --------
Denominator for diluted earnings per share...... 243,591 229,396 183,580
======== ======== ========
Basic earnings per share.......................... $ 0.06 $ 0.04 $ (.08)
======== ======== ========
Diluted earnings per share........................ $ 0.06 $ 0.04 $ (.08)
======== ======== ========
</TABLE>
15. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share
amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,*
--------- -------- ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenues........................... $340,353 $291,148 $371,118 $309,972
Income before income taxes and
equity in net loss of
affiliates....................... 19,476 3,120 9,663 94,723
Net income (loss).................. (406) (10,296) (3,962) 54,668
Preferred dividends and
accretion........................ (2,947) (11,633) (11,735)
Net income (loss) applicable to
common shareholders.............. (406) (13,243) (15,595) 42,933
Earnings per share -- basic........ 0.00 (0.06) (0.06) 0.17
Earnings per share -- diluted...... 0.00 (0.06) (0.06) 0.17
Market price per share
High............................. 19 1/2 17 1/2 21 24 1/4
Low.............................. 14 1/8 13 14 1/16 19
</TABLE>
- ---------------
* The results of operations for the quarter ended December 31, 1997, include a
$79.6 million gain on the sale of K&F stock.
F-27
<PAGE> 61
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share
amounts) -- (continued)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------- ------------- ------------
<S> <C> <C> <C> <C>
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 -- basic............. 0.01 0.01 0.02
Earnings per share -- diluted........... 0.01 0.01 0.02
Market price per share
High.................................. 18 1/2 16 5/8 19 5/8
Low................................... 10 1/2 11 1/8 15 1/4
</TABLE>
F-28
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
Space Systems/Loral, Inc.:
We have audited the accompanying consolidated balance sheet of Space
Systems/Loral, Inc. and its subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the nine months ended December 31, 1996 and for the year 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 the results of their operations and
their cash flows for the nine months ended December 31, 1996 and for the year
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-29
<PAGE> 63
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,181
Contracts in process, net................................. 376,847
Inventories............................................... 74,572
Deposits and other current assets......................... 50,910
----------
Total current assets................................... 521,510
Property, plant and equipment, net.......................... 166,786
Cost in excess of net assets acquired, less amortization.... 227,604
Long-term receivables....................................... 90,005
Investments................................................. 15,000
Prepaid pension costs and other assets...................... 38,159
----------
$1,059,064
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 122,549
Accrued payroll........................................... 25,515
Customer advances......................................... 163,819
Income taxes payable...................................... 3,052
Deferred income taxes..................................... 54,360
Other current liabilities................................. 8,634
----------
Total current liabilities.............................. 377,929
Long-term debt.............................................. 127,586
Deferred income taxes....................................... 37,787
Postretirement and other liabilities........................ 34,879
Minority interest in ISTI................................... 1,990
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
Retained earnings (accumulated deficit)................... 12,225
----------
Total shareholders' equity............................. 478,893
----------
$1,059,064
==========
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE> 64
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
<S> <C> <C>
Revenues.................................................... $1,017,653 $1,121,619
Costs and expenses.......................................... 953,496 1,087,213
---------- ----------
Gross profit................................................ 64,157 34,406
Amortization of cost in excess of net assets acquired....... 5,058 6,744
Management fee.............................................. 5,088 5,608
---------- ----------
Operating income............................................ 54,011 22,054
Interest income............................................. 9,179 9,652
Interest expense............................................ 3,098 3,301
---------- ----------
Income before income taxes, minority interest and equity in
net loss of affiliate..................................... 60,092 28,405
Provision for income taxes.................................. 27,643 15,180
---------- ----------
Income before minority interest and equity in net loss
of affiliate.............................................. 32,449 13,225
Minority interest in losses of ISTI......................... 125 151
Equity in net loss of Globalstar, net of tax benefit........ (1,549) (1,009)
---------- ----------
Net income.................................................. $ 31,025 $ 12,367
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE> 65
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEAR ENDED MARCH 31,
1996
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------ EARNINGS
SHARES (ACCUMULATED
ISSUED AMOUNT DEFICIT) TOTAL
------ -------- ------------ --------
<S> <C> <C> <C> <C>
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
===== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE> 66
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE YEAR ENDED
MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
----------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 31,025 $ 12,367
Depreciation and amortization............................. 23,242 29,993
Deferred income taxes..................................... 26,673 10,237
Minority interest in losses of ISTI....................... (125) (151)
Equity in net loss of LQSS................................ 1,549 1,009
Changes in operating assets and liabilities:
Contracts in process, including long-term
receivables.......................................... (152,454) (58,092)
Inventories............................................ (37,990) (26,729)
Deposits and other current assets...................... (39,212) 8,431
Prepaid pension cost and other assets.................. (16,208) 1,450
Accounts payable and other current liabilities......... (7,803) 79,450
Customer advances...................................... 37,501 10,368
Postretirement and other liabilities................... 317 (537)
-------- --------
Net cash (used in) provided by operating activities......... (133,485) 67,796
-------- --------
Investing activities:
Capital expenditures...................................... (26,731) (24,167)
Investment in ABCN........................................ (10,000) --
-------- --------
Net cash used in investing activities....................... (36,731) (24,167)
-------- --------
Financing activities:
Proceeds from borrowings.................................. 290,408 100,740
Repayment of debt......................................... (227,874) (69,728)
-------- --------
Net cash provided by (used in) financing activities......... 62,534 31,012
-------- --------
Net (decrease) increase in cash and cash equivalents........ (107,682) 74,641
Cash and cash equivalents, beginning of period.............. 126,863 52,222
-------- --------
Cash and cash equivalents, end of period.................... $ 19,181 $126,863
======== ========
Supplemental information:
Interest paid, net of amounts capitalized................. $ 2,562 $ 2,440
======== ========
Income taxes paid......................................... $ 1,449 $ 1,501
======== ========
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE> 67
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% and 10% of revenues for the
nine months ended December 31, 1996 and for the year ended March 31, 1996,
respectively. Sales to foreign customers, primarily in Asia, represented 25% and
27% of revenues for the nine months ended December 31, 1996 and for the year
F-34
<PAGE> 68
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ended March 31, 1996, 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.
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-35
<PAGE> 69
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 at December 31, 1996.
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 year 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:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
U.S. government contracts:
Amounts billed............................................ $ 11,880
Unbilled contract receivables............................. 11,828
--------
23,708
--------
Commercial contracts:
Amounts billed............................................ 145,447
Unbilled contract receivables............................. 207,692
--------
353,139
--------
$376,847
========
</TABLE>
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.
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.
F-36
<PAGE> 70
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS-IN-PROCESS: (CONTINUED)
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
$26,878,000 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):
<TABLE>
<S> <C>
1998........................................................ $11,367
1999........................................................ 11,413
2000........................................................ 10,793
2001........................................................ 10,783
Thereafter.................................................. 45,649
-------
$90,005
=======
</TABLE>
Selling, general and administrative expenses for the nine months ended
December 31, 1996 and the year ended March 31, 1996 were $45,231,000 and
$40,273,000 and include independent research and development costs of
$16,274,000 and $11,171,000, respectively.
3. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Land........................................................ $ 22,300
Buildings and improvements.................................. 65,448
Machinery, equipment, furniture and fixtures................ 178,137
Leasehold improvements...................................... 5,780
Construction-in-process..................................... 22,054
--------
293,719
Accumulated depreciation.................................... (126,933)
--------
$166,786
========
</TABLE>
Depreciation and amortization expense was $18,184,000 and $23,249,000 and
capitalized interest costs were $97,000 and $127,000 for the nine months ended
December 31, 1996 and the year ended March 31, 1996, respectively.
4. FINANCING ARRANGEMENTS:
Foreign currency exchange facilities:
At December 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. 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 at December 31, 1996. At December 31, 1996, deferred gains on
forward contracts to sell foreign currencies, primarily 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
F-37
<PAGE> 71
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
$5,106,000. 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):
<TABLE>
<CAPTION>
TO PURCHASE TO SELL
-------------------- --------------------
AT AT AT AT
YEARS CONTRACT MARKET CONTRACT MARKET
TO MATURITY RATE RATE RATE RATE
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Revolving credit agreement
(weighted average annual interest rate of 8.25%).......... $ 59,000
Note purchase facility
(weighted average annual interest rate of 4.26%).......... 49,276
Export -- Import credit facility
(weighted average annual interest rate of 5.63% and 5.8%,
respectively)............................................. 19,310
--------
$127,586
========
</TABLE>
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.
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
F-38
<PAGE> 72
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal............................................... $ 683 $ 1,836
State, local & foreign................................ 287 3,107
------- -------
970 4,943
Deferred, principally federal........................... 26,673 10,237
------- -------
Total................................................. $27,643 $15,180
======= =======
</TABLE>
The provision for income taxes excludes a deferred tax benefit of $834,000
and $544,000 for the nine months ended December 31, 1996 and the year ended
March 31, 1996, 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:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Provision at statutory federal income tax rate.......... $21,032 $ 9,942
State income taxes, net of federal income tax benefit... 4,042 2,219
Non-deductible goodwill amortization.................... 1,770 2,360
Losses of ISTI.......................................... 229 330
Non-deductible meals, entertainment and
lobbying expense...................................... 370 208
Other................................................... 200 121
------- -------
Total provision for income taxes.............. $27,643 $15,180
======= =======
</TABLE>
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.
F-39
<PAGE> 73
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES: (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Postretirement benefits other than pensions............... $ 13,849
Net operating loss carryforwards.......................... 7,288
Compensation and benefits................................. 3,842
Other, net................................................ 3,464
--------
28,443
Deferred tax liabilities:
Income recognition on long-term contracts................. 86,761
Property, plant and equipment............................. 25,059
Pension costs............................................. 8,770
--------
120,590
--------
Net deferred income tax liability........................... $ 92,147
========
</TABLE>
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. 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 and $1,553,000 for the nine
months ended December 31, 1996 and the year ended March 31, 1996, 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 year ended March 31, 1996 was $280,627,000 and
$336,977,000, respectively. Billed and unbilled receivables from Globalstar were
$22,572,000 and $130,694,000 at December 31, 1996.
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
F-40
<PAGE> 74
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS: (CONTINUED)
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, 1996, $130.7 million was due under this arrangement, of
which $72.0 million 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 and
$5,608,000 for the nine months ended December 31, 1996 and the year ended March
31, 1996 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 and $3,427,000
for the nine months ended December 31, 1996 and for the year ended March 31,
1996, 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 for the
year ended March 31, 1996.
F-41
<PAGE> 75
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 year ended March 31, 1996. A summary of such
transactions and balances is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Revenue from services sold.............................. $ 3,174 $ 1,096
Cost of purchased services.............................. 124,275 28,228
Balances at year end:
Receivable............................................ $ 1,650 $ 430
Payable............................................... 3,572 15,823
------- --------
Net payable............................................. $ 1,922 $ 15,393
======= ========
</TABLE>
SS/L's sales to, purchases from, and balances with the Alliance partners
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Revenue from services sold.............................. $55,019 $ 32,561
Cost of purchased services.............................. 150,608 249,092
Balances at year end:
Receivable............................................ $ 8,526 $ 15,066
Payable............................................... 41,335 38,257
</TABLE>
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 year ended March 31, 1996, SS/L employees were eligible to
participate in Old Loral's stock option plans. At March 31, 1996, options to
purchase 466,304 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 year ended March 31, 1996, 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 year ended March 31, 1996, $4,510,000 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-42
<PAGE> 76
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):
<TABLE>
<S> <C>
1997........................................................ $ 9,875
1998........................................................ 8,574
1999........................................................ 7,776
2000........................................................ 7,284
2001........................................................ 6,848
Thereafter.................................................. 22,954
-------
$63,311
=======
</TABLE>
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 and
$6,440,000 for the nine months ended December 31, 1996 and the year ended March
31, 1996, 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-43
<PAGE> 77
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 year ended March 31, 1996 were
$3,990,000. Plan assets are invested primarily in U.S. government and agency
obligations and listed stocks and bonds.
Net pension costs include the following components:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Service cost -- benefits earned during the period....... $ 3,808 $ 3,676
Interest cost on projected benefit obligation........... 8,205 10,070
Actual loss (return) on plan assets..................... (9,934) (27,838)
Net amortization and deferral........................... 574 18,110
------- --------
Net pension costs....................................... $ 2,653 $ 4,018
======= ========
</TABLE>
The following table sets forth the Plan's funded status:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $130,363
========
Accumulated benefits...................................... $134,507
Effect of projected future salary increases............... 16,981
--------
Projected benefits........................................ 151,488
Plan assets at fair value................................... 167,635
--------
Plan assets in excess of (less than) projected benefit
obligation................................................ 16,147
Unrecognized net prior service cost......................... 60
Unrecognized net loss....................................... 5,183
--------
Prepaid pension cost included in other assets in the
accompanying balance sheet................................ $ 21,390
========
The principal actuarial assumptions are as follows:
Discount rate............................................. 7.75%
Rate of increase in compensation levels................... 4.50%
Expected long-term rate of return on plan assets.......... 9.50%
</TABLE>
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-44
<PAGE> 78
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:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Service cost -- benefits earned during the period....... $ 622 $ 405
Interest cost on accumulated postretirement benefit
obligation............................................ 1,599 1,549
Net amortization and deferrals.......................... (916) (1,316)
------- -------
Total postretirement health care and life insurance
costs................................................. $ 1,305 $ 638
======= =======
</TABLE>
The following table reconciles the amounts recognized in the balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $15,260
Fully eligible plan participants.......................... 3,517
Other active plan participants............................ 10,541
-------
Total accumulated postretirement benefit obligation......... 29,318
Fair value of assets........................................ (2,055)
-------
Unfunded accumulated postretirement benefit obligation...... 27,263
Unrecognized prior service gain related to plan
amendments................................................ 12,742
Unrecognized net (loss) gain................................ (6,225)
-------
Accrued postretirement health care and life insurance
costs..................................................... $33,780
=======
</TABLE>
The principal assumptions used in determining the pension benefit
obligation are as follows:
<TABLE>
<S> <C>
Discount rate............................................... 7.75%
Rate of increase in compensation levels..................... 4.50%
Present healthcare cost trend rate.......................... 10.59%
Ultimate trend rate by the year 2004........................ 5.50%
</TABLE>
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 and
$2,852,000 for the nine months ended December 31, 1996 and the year ended March
31, 1996, respectively.
F-45
<PAGE> 79
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-46
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of Loral Space &
Communications Ltd. (a Bermuda company) as of December 31, 1997 and 1996, and
for the year ended December 31, 1997, the nine months ended December 31, 1996,
and the year ended March 31, 1996, and have issued our report thereon dated
March 6, 1998 (March 20, 1998 as to the fifth paragraph of Note 3), included
elsewhere in this Annual Report on Form 10-K. Our audits also included the
financial statement schedule listed in Item 14(a)2 of this Annual Report on Form
10-K. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998
S-1
<PAGE> 81
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LORAL SPACE & COMMUNICATIONS LTD.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 171,850 $1,175,018
Other current assets...................................... 3,864 9,795
---------- ----------
Total current assets........................................ 175,714 1,184,813
Note receivable from unconsolidated subsidiary.............. 349,000
Investments in affiliates................................... 410,221 443,057
Investment in unconsolidated subsidiaries................... 776,493 19,427
Due from unconsolidated subsidiaries........................ 245,089 191
Other assets................................................ 69,555 13,476
---------- ----------
$2,026,072 $1,660,964
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities............ $ 29,187 $ 340
Accrued interest and preferred dividends.................. 9,478 6,000
Income taxes payable...................................... 12,004 1,263
Deferred income taxes..................................... 1,796
---------- ----------
Total current liabilities................................... 52,465 7,603
Deferred income taxes....................................... 362
Convertible preferred equivalent obligations ($600,000
principal amount)......................................... 583,292
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred stock, $.01 par value;
150,000,000 shares authorized, 45,896,977 shares
issued................................................. 459 459
Series B preferred stock, $.01 par value; 750,000 shares
authorized and unissued................................
6% Series C convertible redeemable preferred stock
($745,472 redemption value), $.01 par value; 20,000,000
shares authorized, 14,909,437 shares issued............ 733,762
Common stock, $.01 par value; 750,000,000 shares
authorized, 200,950,864 and 191,092,308 shares
issued................................................. 2,010 1,911
Paid-in capital........................................... 1,216,128 1,058,822
Treasury stock, at cost; 101,053 shares................... (1,680)
Retained earnings......................................... 22,566 8,877
---------- ----------
Total shareholders' equity.................................. 1,973,245 1,070,069
---------- ----------
$2,026,072 $1,660,964
========== ==========
</TABLE>
See note to financial statements.
S-2
<PAGE> 82
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT.)
LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Management fee from affiliate.......................... $ 5,608
Costs and expenses..................................... $ 14,123 $ 6,561 3,021
-------- -------- --------
Operating income (loss)................................ (14,123) (6,561) 2,587
Interest and investment income......................... 60,915 34,717
Interest expense....................................... 695 6,000 10,524
Gain on sale of K&F stock.............................. 79,591
-------- -------- --------
Income (loss) before income taxes, minority interest
and equity in net income (loss) of affiliates and
subsidiaries......................................... 125,688 22,156 (7,937)
Income taxes........................................... 19,644 1,263 (2,780)
-------- -------- --------
Income (loss) before minority interest and equity in
net loss of affiliates............................... 106,044 20,893 (5,157)
Equity in net loss of unconsolidated subsidiaries...... (21,007) (7,307)
Equity in net loss of affiliates....................... (45,033) (4,709) (8,628)
-------- -------- --------
Net income (loss)...................................... 40,004 8,877 (13,785)
Preferred dividends and accretion...................... (26,315)
-------- -------- --------
Net income (loss) applicable to common stockholders.... $ 13,689 $ 8,877 $(13,785)
======== ======== ========
Earnings (loss) per share:
Basic................................................ $ 0.06 $ 0.04 $ (.08)
======== ======== ========
Diluted.............................................. $ 0.06 $ 0.04 $ (.08)
======== ======== ========
Weighted average shares outstanding:
Basic................................................ 242,070 228,997 183,580
======== ======== ========
Diluted.............................................. 243,591 229,396 183,580
======== ======== ========
</TABLE>
See note to financial statements.
S-3
<PAGE> 83
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT.)
LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ----------------- ----------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $ 40,004 $ 8,877 $ (13,785)
Gain on the sale of K&F stock............................. (79,591)
Equity in net loss of affiliates.......................... 45,003 4,709 8,628
Equity in net loss of unconsolidated subsidiaries......... 21,007 7,307
Deferred taxes............................................ (2,158) 3,838
Accretion on GTL CPEOs.................................... (1,739)
Depreciation and amortization............................. 78
Changes in operating assets and liabilities, net of
acquisitions:
Due from unconsolidated subsidiaries...................... (244,898) 191
Accounts payable.......................................... 4,218 (217)
Accrued expenses.......................................... 3,283 5,340
Taxes payable............................................. 10,741 1,263
Other assets and liabilities.............................. (82,367) (5,010)
----------- ---------- ---------
Cash used in operating activities........................... (286,419) 22,460 (1,319)
----------- ---------- ---------
Investing activities:
Proceeds from the sale of K&F stock, net of expenses...... 79,591
Investment in affiliates.................................. (232,729) (6,425) (105,231)
Investments in unconsolidated subsidiaries................ (144,060) (26,734)
Other assets.............................................. (52,454) (9,800)
----------- ---------- ---------
Cash used in investing activities........................... (349,652) (33,159) (115,031)
----------- ---------- ---------
Financing activities:
Issuance of note to unconsolidated subsidiary, net of
repayments.............................................. (349,000)
Proceeds from convertible preferred equivalent
obligations............................................. 583,292
Proceeds from exercise of stock options and issuances to
employee savings plan................................... 7,338
Preferred dividends....................................... (25,435)
Proceeds from the Distribution............................ 612,274
Transaction expenses related to the Distribution.......... (12,286)
Advances from Loral Corporation prior to the
Distribution............................................ 2,425 116,362
----------- ---------- ---------
Cash provided by financing activities....................... (367,097) 1,185,705 116,362
----------- ---------- ---------
(Decrease) increase in cash and cash equivalents............ (1,003,168) 1,175,006 12
Cash and cash equivalents -- beginning of period............ 1,175,018 12
----------- ---------- ---------
Cash and cash equivalents -- end of period.................. $ 171,850 $1,175,018 $ 12
=========== ========== =========
Non-cash transactions:
Mandatory exchange of Convertible Preferred Equivalent
Obligations............................................. $ 583,282
===========
Issuance of Series C Preferred Stock to acquire equity
interest in SS/L........................................ $ 149,600
===========
Issuance of Loral common stock to acquire equity interest
in SS/L and Globalstar partnership interests............ $ 148,387 $ 100,313
=========== ==========
Deferred purchase price to acquire Globalstar partnership
interests............................................... $ 24,787
===========
Assets transferred from Loral Corporation at the
Distribution............................................ $ 31,383
==========
Liabilities assumed from Loral Corporation at the
Distribution............................................ $ 27,313
==========
Transfer of GTL common stock to acquire equity interest in
SS/L.................................................... $ 5,158
==========
Supplemental information:
Interest paid............................................. $ 22,823
===========
Taxes paid................................................ $ 6,205
===========
</TABLE>
See note to financial statements.
S-4
<PAGE> 84
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO FINANCIAL STATEMENTS
1. Loral Space & Communications Ltd. ("Loral"), a Bermuda company, is a
holding company which is the ultimate parent of all Loral subsidiaries and is
the registrant of all Loral securities. The accompanying financial statements
reflect the financial position, results of operations and cash flows of Loral on
a separate company basis. All subsidiaries of Loral are reflected as investments
accounted for under the equity method of accounting. Accordingly intercompany
payables and receivables have not been eliminated.
Loral's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are the management fee charged by Loral SpaceCom Corporation ("SpaceCom") to
Loral and intercompany payable and receivables resulting primarily from the
funding of the construction of the Telstar Satellites. The note receivable from
SpaceCom relates to the Loral Skynet acquisition and bears interest at 8.2% per
annum. Principal payments are restricted to a maximum of $149,000,000 by a
financing arrangement entered into by SpaceCom.
No cash dividends were paid to Loral by its subsidiaries or its affiliates
during the year ended December 31, 1997, the nine months ended December 31, 1996
or the year ended March 31, 1996.
S-5
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<C> <S> <C>
2.1 Restructuring, Financing and Distribution Agreement, dated
as of January 7, 1996, among Loral Corporation, Loral
Aerospace Holdings, Inc., Loral Aerospace Corp., Loral
General Partner, Inc., Loral Globalstar L.P., Loral
Globalstar Limited, the Registrant and Lockheed Martin
Corporation(1)
2.2 Amendment to Restructuring, Financing and Distribution
Agreement, dated as April 15, 1996(1)
2.3 Agreement for the Purchase and Sale of Assets dated as of
September 25, 1996 by and between AT&T Corp., as Seller, and
Loral Space & Communications Ltd., as Buyer(2)
2.4 First Amendment to Agreement for the Purchase and Sale of
Assets dated as of March 14, 1997 by and between AT&T Corp.,
as Seller, and Loral Space & Communications Ltd., as
Buyer(3)
2.5 Agreement and Plan of Merger dated as of October 7, 1997 by
and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of
February 11, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.(5)
2.7 Second Amendment to Agreement and Plan of Merger dated as of
March 20, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.+
3.1 Memorandum of Association(1)
3.2 Memorandum of Increase of Share Capital(1)
3.3 Second Amended and Restated Bye-laws(1)
3.4 Schedule III to Second Amended and Restated Bye-laws
relating to Registrant's 6% Series C Convertible Redeemable
Preferred Stock(6)
4.1 Rights Agreement dated March 27, 1996 between the Registrant
and The Bank of New York, Rights Agent(1)
10.1 Shareholders Agreement dated as of April 23, 1996 between
Loral Corporation and the Registrant(1)
10.2 Tax Sharing Agreement dated as of April 22, 1996 between
Loral Corporation, the Registrant, Lockheed Martin
Corporation and LAC Acquisition Corporation(1)
10.3 Exchange Agreement dated as of April 22, 1996 between the
Registrant and Lockheed Martin Corporation(1)
10.4 Amended and Restated Agreement of Limited Partnership of
Globalstar, L.P., dated as of 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(7)
10.5 Service Provider Agreements by and between Globalstar, L.P.
and each of Loral General Partner, Inc. and Loral/DASA
Globalstar, L.P.(8)
10.6 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(8)
10.7 1996 Stock Option Plan(1)++
10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++
10.9 Employment Agreement between the Registrant and Bernard L.
Schwartz(1)++
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<C> <S> <C>
10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement
between the Registrant and Bernard L. Schwartz+++
10.10 Registration Rights Agreement dated as of August 9, 1996
among Loral Space & Communications Ltd., Lehman Brothers
Capital Partners II, L.P., Lehman Brothers Merchant Banking
Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore
Investment Partnership-Japan L.P.(9)
10.11 Registration Rights Agreement dated November 6, 1996
relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006(6)
10.12 Registration Rights Agreement (Series C Preferred Stock)
dated as of March 31, 1997 between Loral Space &
Communications Ltd. and Finmeccanica S.p.A. and dated as
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.13 Registration Rights Agreement (Common Stock) dated as of
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.14 Alliance Agreement dated as of June 23, 1997 among Loral
Space & Communications Ltd., Aerospatiale SNI, Alcatel
Espace and Finmeccanica S.p.A.(10)
10.15 Principal Stockholder Agreement dated as of October 7, 1997
among Loral Space & Communications Ltd., Loral Satellite
Corporation, Orion Network Systems, Inc. and certain Orion
stockholders signatory thereto(4)
10.16 Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc., the Banks parties
thereto, Bank of America National Trust and Savings
Association, as Administrative Agent, and Istituto Bancario
San Paolo di Torino S.p.A, individually and as Italian
Export Financing and Arranger and as Selling Bank(11)
10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as
of June 30, 1997+
10.18 Purchase and Sale Agreement dated November 17, 1997 between
the Federal Government of the United Mexican States and
Corporativo Satelites Mexicanos, S.A. de C.V. for the
purchase and sale of the capital stock of Satelites
Mexicanos, S.A. de C.V. (English translation of Spanish
original)+
10.19 Membership Agreement dated and effective as of November 17,
1997 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de
C.V. and Firmamento Mexicano, S. de R.L. de C.V.+
10.20 Letter Agreement dated December 29, 1997 between Loral Space
& Communications Ltd., Telefonica Autrey S.A. de C.V.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Lehman Commercial Paper Inc. and related
Agreement between the Federal Government of United Mexican
States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma,
S.A. de C.V., Loral Space & Communications Ltd., Loral
SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de
C.V.+
12 Statement Re: Computation of Ratios+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<C> <S> <C>
99.1 Consolidated Financial Statements of Globalstar, L.P. and
Independent Auditors' Report(12)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 (No. 1-14180).
(2) Incorporated by reference to the Registrant's Form 8-K filed on September
27, 1996.
(3) Incorporated by reference to the Registrant's Form 8-K filed on March 28,
1997.
(4) Incorporated by reference to the Registrant's Form 8-K filed on October 10,
1997.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference to the Registrant's Form 10-K for the nine month
period ended December 31, 1996.
(7) 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).
(8) Incorporated by reference to the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference to the Registrant's Form 8-K filed on August 13,
1996.
(10) Incorporated by reference to the Registrant's Form 8-K filed on July 8,
1997.
(11) Incorporated by reference to the Registrant's Form 8-K filed on December 9,
1997.
(12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed by Globalstar Telecommunications Limited
(File No. 0-25456).
+ Filed herewith.
++ Management compensation plan.
<PAGE> 1
AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER
This AMENDMENT NO. 2, dated as of March 20, 1998 (the "Amendment"),
amends the AGREEMENT AND PLAN OF MERGER, dated October 7, 1997 (the "Merger
Agreement"), as amended on February 11, 1998, by and among Orion Network
Systems, Inc., a Delaware corporation ("Company"), Loral Space & Communications
Ltd., a Bermuda company ("Acquiror") and Loral Satellite Corporation, a Delaware
corporation ("Merger Sub").
WHEREAS, the parties have entered into the Merger Agreement
(capitalized terms used in this Amendment and not otherwise defined herein shall
have the meanings set forth in the Merger Agreement);
WHEREAS, the parties to the Merger Agreement desire to amend various
provisions of the Merger Agreement and set forth certain agreements among the
parties; and
WHEREAS, pursuant to Section 9.4 of the Merger Agreement, the Merger
Agreement may be amended with the written consent of the parties thereto.
NOW, THEREFORE, in consideration of the foregoing premises, it is
hereby agreed by and among, the Company, Acquiror and Merger Sub as follows:
(1) Section 10.1 shall be amended to read as follows:
"The representations, warranties and agreements in this
Agreement (and in any certificate delivered in connection with
the Closing) shall be deemed to be conditions to the Merger
(or the Exchange Offer, as applicable) and shall not survive
the Effective Time (or consummation of the Exchange Offer, as
applicable) or termination of this Agreement, except for the
agreements set forth in Articles I (the Merger) and II
(Conversion of Securities; Exchange of Certificates) and
Sections 7.7 (Indemnification and Insurance), 7.8 (Employee
Benefits Matters) 7.9 (Further Action) and 7.15(g) (Subsequent
Merger), each of which shall survive the Effective Time (or
consummation of the Exchange Offer, as applicable)
indefinitely, and Sections 7.2 (Confidentiality), 7.17
(Private Letter Ruling), 9.2 (Effect of Termination) and 9.3
(Expenses), each of which shall survive termination of this
Agreement indefinitely."
(2) Pursuant to Section 9.5(c) of the Merger Agreement, with
respect to the closing conditions set forth in Sections 8.2(c)
and 8.3(c) of the Merger Agreement, the parties hereby
acknowledge
<PAGE> 2
and agree that on February 26, 1998 the FCC granted the FCC
Application by initial order, and Acquiror, Merger Sub and the
Company waive the portions of such closing conditions that
require that the grant of the FCC Application be by Final
Order.
(3) The Exchange Ratio, which has been calculated in accordance
with Section 2.1 of the Merger Agreement as set forth on
Exhibit A hereto, is .71553.
(4) This Amendment may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which when executed and delivered shall
be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 2 to the Agreement and Plan of Merger to be executed and delivered as of the
date first written above.
LORAL SPACE & COMMUNICATIONS LTD.
By: /s/ Avi Katz
Avi Katz
Vice President
LORAL SATELLITE CORPORATION
By: /s/ Avi Katz
Avi Katz
Vice President
ORION NETWORK SYSTEMS, INC.
By: /s/ David J. Frear
David J. Frear
Senior Vice President
<PAGE> 4
EXHIBIT A
<TABLE>
<CAPTION>
CLOSING DATE TRADING DATE INTRA DAY AVG 20 DAY AVG IMPLIED EXCHANGE RATIO
------------ ------------ ------------- ---------- ----------------------
<S> <C> <C> <C> <C>
2/23/98 2/6/98 23.5022
2/24/98 2/9/98 23.8906 22.5144 0.77728
2/25/98 2/10/98 24.495 22.75546 0.76905
2/26/98 2/11/98 24.0362 22.92992 0.76319
2/27/98 2/12/98 23.6283 23.07363 0.75844
3/2/98 2/13/98 23.7657 23.213735 0.75386
3/3/98 2/17/98 23.7887 23.33944 0.7498
3/4/98 2/18/98 23.8853 23.448945 0.7463
3/5/98 2/19/98 24.1456 23.52671 0.74384
3/6/98 2/20/98 25.237 23.63675 0.74037
3/9/98 2/23/98 25.5097 23.76496 0.73638
3/10/98 2/24/98 25.1063 23.883955 0.73271
3/11/98 2/25/98 25.33 23.97767 0.72985
3/12/98 2/26/98 25.0202 24.04818 0.72771
3/13/98 2/27/98 25.4303 24.17237 0.72397
3/16/98 3/2/98 25.4896 24.352195 0.71862
3/17/98 3/3/98 24.9971 24.45594 0.71557
3/18/98 3/4/98 24.9698 24.511735 0.71553
3/19/98 3/5/98 25.496 24.586905 0.71553
3/20/98 3/6/98 26.0068 24.68652 0.71553
</TABLE>
Determination Price: 24.68652
Exchange Ratio: 0.71553
<PAGE> 1
Exhibit 10.9.1
AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment (the "Amendment") to the Agreement dated as of April 5,
1996 (the "Agreement"), between Loral Space & Communications Ltd. and
Bernard L. Schwartz, is made and is effective as of March 1, 1998.
1. The first sentence of Section 3(a) of the Agreement is hereby
amended to read as follows:
"For services rendered by Schwartz during the term of this Agreement, the
Company shall pay to Schwartz a base salary at the rate of $956,300 per
year (adjusted as provided in Section 3(b)), for the period commencing on
the Distribution Date to February 28, 1998, and a base salary at the rate
of $1,600,000 per year (adjusted as provided in Section 3(b)), commencing
on March 1, 1998."
2. This Amendment shall be construed in accordance with and governed by
the laws of the State of New York.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date set forth above.
Loral Space & Communications Ltd.
By: /s/ Eric J. Zahler
-----------------------------
Eric J. Zahler
Senior Vice President
/s/ Bernard L. Schwartz
-----------------------------
Bernard L. Schwartz
<PAGE> 1
AGREEMENT OF LIMITED PARTNERSHIP
OF
CYBERSTAR, L.P.
a Delaware limited partnership
Dated as of
June 30, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. CONTINUATION OF PARTNERSHIP.........................................................................2
SECTION 1.1. Continuation ...........................................................................2
SECTION 1.2. Name ...................................................................................2
SECTION 1.3. Registered Office; Principal Office.....................................................2
SECTION 1.4. Purpose ................................................................................2
SECTION 1.5. Power of Attorney...................................................................... 3
SECTION 1.6. Term ...................................................................................4
SECTION 1.7. Title to Partnership Property.......................................................... 4
SECTION 1.8. Effectiveness of Agreement............................................................. 4
ARTICLE II. DEFINITIONS .......................................................................................5
SECTION 2.1. Definitions ............................................................................5
ARTICLE III. REPRESENTATIONS AND WARRANTIES...................................................................13
SECTION 3.1. Representations and Warranties of Each Partner.........................................13
SECTION 3.2. Representations and Warranties of Each Limited Partner.................................14
ARTICLE IV. CAPITAL CONTRIBUTIONS.............................................................................15
SECTION 4.1. Phase I Commitments of the General Partner and GP Affiliates...........................15
SECTION 4.2. Phase I Commitments of the Unaffiliated Phase I Partners...............................15
SECTION 4.3. Participation Bonus; Non Participation Consequences....................................16
SECTION 4.4. Additional Partners....................................................................17
SECTION 4.5. Capital Accounts.......................................................................19
SECTION 4.6. Interest ..............................................................................20
SECTION 4.7. No Withdrawal..........................................................................20
SECTION 4.8. Loans .................................................................................20
SECTION 4.9. Preemptive Rights......................................................................21
SECTION 4.10. Sale of Units and Partnership Securities...............................................23
SECTION 4.11. Business Plan..........................................................................24
ARTICLE V. ALLOCATIONS AND DISTRIBUTIONS......................................................................25
SECTION 5.1. Allocations Generally..................................................................25
SECTION 5.2. Regulatory Allocations.................................................................26
SECTION 5.3. Other Allocations When Book Value Differs from Tax Basis...............................26
SECTION 5.4. Distributions..........................................................................28
-i-
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VI. MANAGEMENT AND OPERATION OF BUSINESS..............................................................29
SECTION 6.1. Management ............................................................................29
SECTION 6.2. Limitation on Authority of the General Partner.........................................32
SECTION 6.3. Partners' Committee and Partners' Meetings.............................................34
SECTION 6.4. FCC and Related Matters................................................................35
SECTION 6.5. Certificate of Limited Partnership.....................................................35
SECTION 6.6. Reliance by Third Parties..............................................................35
SECTION 6.7. Expenses and Reimbursement of the General Partner......................................36
SECTION 6.8. Cooperation with SkyBridge.............................................................36
SECTION 6.9. Outside Activities.....................................................................36
SECTION 6.10. Resolution of Conflicts of Interest....................................................39
SECTION 6.11. Partnership Funds......................................................................41
SECTION 6.12. Loans from the General Partner.........................................................41
SECTION 6.13. Indemnification of Partners............................................................42
SECTION 6.14. Liability of the General Partner.......................................................44
SECTION 6.15. Other Matters Concerning the General Partner...........................................45
SECTION 6.16. Conversion to Corporate Form...........................................................45
ARTICLE VII. RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS...................................................47
SECTION 7.1. Limitation of Liability................................................................47
SECTION 7.2. Management of Business.................................................................47
ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS..........................................................48
SECTION 8.1. Records and Accounting.................................................................48
SECTION 8.2. Fiscal Year ...........................................................................48
SECTION 8.3. Reports ...............................................................................48
SECTION 8.4. Disclosure to Limited Partners.........................................................48
SECTION 8.5. Determination of Book Value of Partnership Assets......................................49
ARTICLE IX. TAX MATTERS ......................................................................................50
SECTION 9.1. Preparation of Tax Returns.............................................................50
SECTION 9.2. Tax Elections..........................................................................51
SECTION 9.3. Tax Controversies......................................................................51
SECTION 9.4. Taxation as a Partnership..............................................................51
ARTICLE X. TRANSFER OF INTERESTS..............................................................................52
SECTION 10.1. Transfer .............................................................................52
SECTION 10.2. Transfer of Units.....................................................................53
SECTION 10.3. Change of Control.....................................................................56
ARTICLE XI. ADMISSION OF SUCCESSOR PARTNERS...................................................................58
SECTION 11.1. Admission of Successor Limited Partner................................................58
SECTION 11.2. Admission of Successor General Partner................................................59
-ii-
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
SECTION 11.3. Amendment of Agreement and of Certificate of Limited Partnership......................59
ARTICLE XII. RIGHT TO BECOME LIMITED PARTNER..................................................................59
SECTION 12.1. Right of the General Partner to Become a Limited Partner..............................59
SECTION 12.2. Withdrawal of Limited Partner.........................................................59
ARTICLE XIII. DISSOLUTION AND LIQUIDATION.....................................................................60
SECTION 13.1. Dissolution ..........................................................................60
SECTION 13.2. Winding Up and Liquidation............................................................61
SECTION 13.3. Cancellation of Certificate of Limited Partnership....................................62
SECTION 13.4. Return of Capital.....................................................................62
SECTION 13.5. Waiver of Partition...................................................................63
SECTION 13.6. Deficit Upon Liquidation..............................................................63
ARTICLE XIV. AMENDMENT OF PARTNERSHIP AGREEMENT...............................................................63
SECTION 14.1. Amendments to be Adopted Without Consent of the Partners..............................63
SECTION 14.2. Amendment Procedures..................................................................64
ARTICLE XV. GENERAL PROVISIONS................................................................................64
SECTION 15.1. Addresses and Notices.................................................................64
SECTION 15.2. Titles and Captions...................................................................64
SECTION 15.3. Pronouns and Plurals..................................................................64
SECTION 15.4. Further Action........................................................................64
SECTION 15.5. Binding Effect........................................................................65
SECTION 15.6. Survival of Certain Provisions........................................................65
SECTION 15.7. Integration ..........................................................................65
SECTION 15.8. Creditors ............................................................................65
SECTION 15.9. Waiver ...............................................................................65
SECTION 15.10. Counterparts.........................................................................65
SECTION 15.11. Dispute Resolution...................................................................66
SECTION 15.12. Governing Law........................................................................66
SECTION 15.13. Confidentiality......................................................................67
SECTION 15.14. Invalidity of Provisions.............................................................69
SECTION 15.15. Number; Gender; Without Limitation; Interpretation of Certain Defined Terms..........69
SECTION 15.16. No Right to Partition................................................................70
SIGNATURE PAGES ..............................................................................................66
SCHEDULE A Partners, Capital Contributions and Units
SCHEDULE B Notices
SCHEDULE C Installments of Loral Cash Capital Contributions
SCHEDULE D Similar Businesses
SCHEDULE E Exclusive Benefit Letter
</TABLE>
<PAGE> 5
AGREEMENT OF LIMITED PARTNERSHIP
OF
CYBERSTAR, L.P.
This AGREEMENT OF LIMITED PARTNERSHIP is entered into and shall be
effective as of the 30th day of June 1997, by and between Loral CyberStar,
L.L.C., a limited liability corporation organized and existing under the laws of
the State of Delaware ("Loral CyberStar, L.L.C." or the "General Partner"),
Loral Broadband Holdings, L.P., a limited partnership organized and existing
under the laws of the State of Delaware ("Loral Broadband"), and those
additional Persons who have executed this Agreement as limited partners and
whose names and states or countries of formation are set forth on Schedule A
attached hereto and made a part hereof as limited partners (each of whom shall
become a Limited Partner of the Partnership upon such execution), pursuant to
the provisions of the Delaware Act on the following terms and conditions:
WHEREAS, Loral Broadband, in accordance with the Delaware Act, has
heretofore formed a limited partnership under the name "CyberStar, L.P."
pursuant to a Certificate of Limited Partnership, filed with the office of the
Secretary of State of Delaware on May 29, 1997;
WHEREAS, the General Partner and Loral Broadband desire to pursue the
research, development, construction, launch and operation of a worldwide
geostationary orbit satellite communications project, presently denoted
"CyberStar," and a predecessor service, utilizing leased transponders, presently
denoted "CyberLink", to support interactive, broadband, multimedia applications
(the "Project");
WHEREAS, Loral Space & Communications Ltd. ("Loral Space") has received
a license (the "FCC License") from the United States Federal Communications
Commission (the "FCC") to construct, launch and operate CyberStar;
WHEREAS, each of the Limited Partners desires to invest in the Project,
and the General Partner and Loral Broadband desire for the Limited Partners to
invest in the Project and to become limited partners of the Partnership, all in
accordance with and subject to the terms and conditions of this Agreement; and
NOW, THEREFORE, the Partners, in consideration of the premises and
their mutual agreements as hereinafter set forth, do hereby agree as follows:
<PAGE> 6
ARTICLE I.
CONTINUATION OF PARTNERSHIP
SECTION 1.1. Continuation. The parties hereto do hereby agree to
continue the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act. The rights and obligations of the Partners and the
administration and termination of the Partnership shall be governed by this
Agreement and the Delaware Act.
SECTION 1.2. Name. The name of the Partnership shall continue to be,
and the business of the Partnership shall continue to be conducted under, the
name of "CyberStar, L.P." The Partnership's business may be conducted under any
other name or names deemed advisable by the General Partner; provided, however,
that the General Partner may not select the name of any Limited Partner or any
similar name without the prior written consent of such Limited Partner. The
General Partner may change the name of the Partnership at any time and from time
to time. Notice will be given to the Limited Partners within ten days after any
change in the name of the Partnership and the General Partner shall file an
amendment to the Certificate of Limited Partnership reflecting such change in
accordance with the Delaware Act.
SECTION 1.3. Registered Office; Principal Office. Unless and until
changed by the General Partner, the registered office of the Partnership in the
State of Delaware shall continue to be located at c/o The Corporation Trust
Company, 1209 Orange Street, Wilmington, Delaware 19801, and the registered
agent for service of process on the Partnership at such registered office shall
continue to be Corporation Trust Company. The principal office of the
Partnership shall be located at such place as the General Partner may from time
to time designate to the Limited Partners. Notice will be given to the Limited
Partners within ten days after any change in the principal office of the
Partnership and the General Partner shall file an amendment to the Certificate
of Limited Partnership reflecting such change in accordance with the Delaware
Act. The Partnership may maintain offices at such other places as the General
Partner deems advisable.
SECTION 1.4. Purpose. The purpose and business of the Partnership shall
be:
(a) directly or indirectly to (i) conduct (or cause to be conducted)
research concerning the Project, and (ii) develop, design, deploy, exploit, own
and operate the Project;
(b) to acquire, hold, own, operate, lease, manage, maintain, improve,
repair, replace, reconstruct, sell, transfer, assign, exchange, contribute or
otherwise dispose of and use the assets of the Partnership; and
<PAGE> 7
(c) to enter into any lawful transaction and engage in any lawful
activity incidental to or in furtherance of the foregoing purposes.
Without in any way limiting the generality of the foregoing provisions
of this Section 1.4, the Partners acknowledge that the Partnership may enter
into transactions and agreements which provide that the Project is to be
developed on behalf of the Partnership by one or more Persons other than the
Partnership, which Persons may include GP Affiliates.
SECTION 1.5. Power of Attorney.
(a) Each Limited Partner hereby irrevocably appoints and empowers the
General Partner and, if a Liquidator shall have been selected pursuant to
Section 13.2, the Liquidator and each of their authorized officers and
attorneys-in-fact with full power of substitution as its true and lawful agent
and attorney-in-fact (each an "Attorney"), with full power and authority in its
name, place and stead, for so long as such Attorney is the General Partner or
Liquidator or an authorized officer or attorney-in-fact of the General Partner
or Liquidator, to:
(i) make, execute, swear to, acknowledge, publish, deliver,
file and record in the appropriate public offices (A) any duly approved
amendments to this Agreement or to the Certificate of Limited
Partnership pursuant to the Delaware Act and to the laws of any state
in which such documents are required to be filed; (B) any certificates,
instruments or documents as may be required by, or may be appropriate
under, the laws of any state or other jurisdiction in which the
Partnership is doing or intends to do business; (C) any other
instrument which may be required to be filed by the Partnership under
the laws of any state or other jurisdiction or by any governmental
agency, or which the General Partner or Liquidator deems advisable to
file; (D) any documents which may be required to effect the
continuation of the Partnership, the admission, withdrawal or
substitution of any Partner pursuant to Article XI or Article XII
hereof, the dissolution and termination of the Partnership pursuant to
the terms of this Agreement, or the surrender of any rights or the
assumption of any additional responsibilities by the General Partner;
and (E) any document which may be required to effect any duly approved
amendment to this Agreement; and
(ii) sign, execute, swear to and acknowledge all ballots,
consents, approvals, waivers, certificates and other instruments
appropriate or necessary, to make, evidence, give, confirm or ratify
any vote, consent, approval, agreement or other action which is made or
given by the Partners hereunder or is consistent with the terms of this
Agreement and/or appropriate or necessary to effectuate the terms or
intent of this Agreement; provided, however,
<PAGE> 8
that when the Consent of the Partners or the Approval of the Founding
Partners is required under the terms of this Agreement or the consent
of a Partner is required pursuant to Section 14.2, an Attorney may
exercise the power of attorney made in this subsection (ii) only after
the necessary consent or approval has been received.
(b) To the maximum extent permitted by applicable law, the foregoing
grant of authority (i) is a special power of attorney, coupled with an interest,
and it shall be irrevocable and shall survive the death, incompetency,
disability, liquidation, dissolution, bankruptcy or termination of any Partner
and shall extend to such Partner's heirs, successors, assigns and personal
representatives; (ii) may be exercised by an Attorney for each and every Limited
Partner acting as attorney-in-fact for each and every Limited Partner; and (iii)
shall survive the assignment by any Limited Partner of all or any of its Units
and shall be fully binding upon such assignee. Each Limited Partner hereby
agrees to be bound by any representations made by an Attorney acting in good
faith pursuant to such power of attorney in furtherance of the Partnership's
business. Each Partner shall execute and deliver to the General Partner or
Liquidator, within 15 days after receipt of a request therefor, such further
designations, powers of attorney and other instruments as the General Partner or
Liquidator deems necessary to effectuate this Agreement and the purposes of the
Partnership.
SECTION 1.6. Term. The Partnership commenced business as a limited
partnership on May 29, 1997, upon the filing of the Certificate of Limited
Partnership with the Secretary of State of the State of Delaware; the
Partnership shall continue in existence until the termination of the Partnership
in accordance with the provisions of Article XIII hereof.
SECTION 1.7. Title to Partnership Property. All property owned by the
Partnership, whether real or personal, tangible or intangible, shall be deemed
to be owned by the Partnership as an entity, and no Partner, individually, shall
have any ownership of such property. The Partnership shall hold all of its
assets in its own name or, in the case of marketable securities, in its own name
or in street name.
SECTION 1.8. Effectiveness of Agreement. This Agreement shall become
effective as of the date first above written (the "Effective Date") as among the
parties hereto as of the Effective Date and, with respect to other parties, as
of the date of execution of this Agreement by such parties, pursuant to Section
4.4 or Article XI hereof.
<PAGE> 9
ARTICLE II.
DEFINITIONS
SECTION 2.1. Definitions. Any capitalized term used herein and not
otherwise defined shall have the meaning ascribed to such term in this Article
II. For purposes of this Agreement, the following terms shall have the following
meanings:
"Additional Capital Contribution" has the meaning specified in Section
4.3(b)(i).
"Additional Partner" means any Limited Partner or General Partner
admitted to the Partnership pursuant to Section 4.4(b).
"Additional Units" means any Units, or any securities convertible or
exchangeable into, or exercisable for, Units, issued by the Partnership after
the Effective Date, including, without limitation, Units issued to existing
Partners pursuant to Sections 4.1(b) and (c), 4.2, 4.3, 4.4(a) and 4.9, and
those issued to Additional Partners pursuant to Sections 4.1(b) and (c), 4.2 and
4.4(a).
"Adjusted Income" for a period means any positive amount computed as
the sum of Net Income or Net Loss (computed before deduction for allocations
pursuant to Section 5.1(a)) plus the amount of depreciation and amortization
taken into account in computing Net Income or Net Loss.
"Affiliate" means any Person who directly or indirectly controls, is
controlled by, or is under common control with the Person in question, provided
that the Partnership and any Person in which it directly or indirectly owns any
interest shall in no event constitute an Affiliate of any Partner for purposes
of this Agreement. As used in this definition of "Affiliate," the term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise. The terms "controlled"
and "common control" shall have correlative meanings.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership of CyberStar, L.P., as the same may be modified, supplemented, or
amended in accordance with the terms hereof.
"Approval of the Founding Partners" means the written consent of all of
the Founding Partners, provided that such consent shall not be required of any
Founding Partner that is a Delinquent Partner.
"Book Up Gain" and "Book Up Loss" have the meanings specified in
Section 8.5(d).
<PAGE> 10
"Book Value" has the meaning determined under Section 8.5.
"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the governments of the United States or
France shall not be regarded as a Business Day.
"Business Plan" means the business plan and budget prepared annually by
the General Partner pursuant to Section 4.11.
"Capital Account" means each capital account maintained pursuant to
Section 4.5.
"Capital Contribution" means any cash or property that a Partner
contributes to the Partnership pursuant to Sections 4.1, 4.2, 4.3, 4.4, 4.9 or
4.10.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of CyberStar, L.P. filed on May 29, 1997 with the Secretary of State
of Delaware pursuant to the Delaware Act, as it may be amended from time to
time.
"Code" means the U.S. Internal Revenue Code of 1986, as amended.
"Communications Act" means the U.S. Communications Act of 1934, as
amended.
"Confidential Information" has the meaning specified in Section 15.13.
"Consent of the Partners" means, in the case of actions specified in
Sections 4.11(d)(i) and 6.2(a), the approval of Partners holding 65% of the
Units outstanding and, as to any other action or proposed action by the
Partnership, the approval of Partners holding a majority of the Units
outstanding; provided, however, that (i) to the extent that any Partner and its
Affiliates (other than a Founding Partner, Affiliates of a Founding Partner or a
Partner formed solely for the purpose of consummating the Initial Public
Offering) hold, in the aggregate, more than 20% of the outstanding Units, such
excess Units shall not be deemed to be outstanding for purposes of determining
whether the Consent of the Partners has been obtained and (ii) the Units held by
a Delinquent Partner shall not be deemed to be outstanding for purposes of
determining whether the Consent of the Partners has been obtained. Such
approvals may be given in writing or through votes cast at a meeting of the
Partners held in accordance with Section 6.3(d). The determination of the number
of Units held by each Partner shall be made as of the record date specified in
the notice delivered by the General Partner to seek such approval (or, in the
case of actions decided at a Partner's Meeting, in the notice delivered by the
Partnership to each of the Partners to call such meeting), provided that such
date shall be not less than ten (10) Business
<PAGE> 11
Days and not more than sixty (60) Business Days prior to the date of such
notice.
"Cost" shall mean all direct costs customarily charged directly to
projects plus reasonable and allocable indirect costs (e.g., overhead, R&D and
G&A) charged consistently with past practices and customary cost accounting
principles.
"CyberStar Service" means the transmission and/or reception of data and
other signals through the Project satellite constellation.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership
Act, 6 Del. C. ss. 17-101, et seq., as it may be amended from time to time, and
any successor to such Act.
"Delinquent Partner" means any Partner that: (i) has failed to make a
Capital Contribution required by Section 4.1 or 4.2; (ii) has failed to make a
Capital Contribution specified in a Sale Notice after delivering written notice
of its election to accept the offer contained in such Sale Notice, pursuant to
Section 4.9; (iii) has failed to make a loan pursuant to a Participation Rights
Notice after delivering written notice of its election to accept the offer
contained in such Participation Rights Notice, pursuant to Section 6.12; or (iv)
is otherwise in uncured, material default of its obligations under this
Agreement, including, but not limited to, those contained in Section 6.4,
Section 6.9, Article X and Section 15.13.
"Effective Date" has the meaning specified in Section 1.8.
"Eligible Phase I Partner" means an Unaffiliated Phase I Cash Partner
that: (i) has participated, on a pro rata basis and as set forth in Section 4.3,
in all Funded Contribution Requests and (ii) is not a Delinquent Partner.
"FCC" has the meaning specified in the recitals.
"FCC License" has the meaning specified in the recitals.
"Fiscal Year" has the meaning specified in Section 8.2.
"Founding Partners" mean Loral Broadband Holdings, L.P. and Audelec.
"Funded Contribution Request" means a Contribution Request in which
both the General Partner (or a GP Affiliate) and one or more Unaffiliated Phase
I Cash Partners have participated or which is substantially similar to the terms
and conditions on which a financially responsible third party (other than the
General Partner or a GP Affiliate) has made, or has entered into a binding
commitment to make, a Capital Contribution in exchange for a Unit or Units.
<PAGE> 12
"GAAP" means U.S. generally accepted accounting principles as in effect
from time to time.
"General Partner" means Loral CyberStar, L.L.C. or any additional or
successor Person admitted as a general partner pursuant to the terms of this
Agreement, but any Person who ceases to be a general partner of the Partnership
shall not be a General Partner.
"GP Affiliate" shall mean any Affiliate of the General Partner.
"Initial Public Offering" shall mean the first underwritten sale of
equity securities issued directly by the Partnership, a successor entity or a
Partner formed for such purpose (the net proceeds of which are contributed to
the Partnership), to the public pursuant to a Registration Statement, provided
that (i) such sale is not solely effected to implement an employee benefit plan
or a transaction to which Rule 145, as promulgated under the Securities Act, is
applicable, and (ii) the sum of the gross proceeds raised from such sale exceeds
U.S. $150,000,000.00.
"Investor Documents" has the meaning specified in Section 3.2.
"Investment Notice" has the meaning specified in Section 6.9.
"Involuntary Transfer" means any transfer, proceeding or action (other
than to an Affiliate) by or in which the Partner shall be deprived or divested
of any right, title or interest in or to any Units, including, without
limitation, any seizure under levy of attachment or execution, any foreclosure
upon a pledge of such Units, any transfer in connection with bankruptcy (whether
pursuant to the filing of a voluntary or an involuntary petition under Title II
of the United States Code or any modifications or revisions thereto) or other
court proceeding to a debtor in possession, trustee in bankruptcy or receipt or
other officer or agency, or any transfer to a state or to a public officer or
agency pursuant to any statute pertaining to escheat or abandoned property.
"Limited Partner" means each of the limited partners identified as such
on Schedule A as attached hereto on the date hereof, any Additional Limited
Partner admitted as such pursuant to Section 4.4, or any successor limited
partner admitted as such pursuant to the terms of this Agreement; provided,
however, that any Person who ceases to be a limited partner of the Partnership
shall not be a Limited Partner. Except as otherwise explicitly provided in this
Agreement: (i) the Limited Partners shall constitute a single class or group of
limited partners for all purposes of the Delaware Act, and (ii) whenever a vote
of the Limited Partners is required by either the Delaware Act or the
<PAGE> 13
terms of this Agreement, the Limited Partners shall vote as a single class or
group.
"Liquidator" has the meaning specified in Section 13.2.
"Loral" has the meaning specified in Section 4.1.
"Loral Broadband" has the meaning specified in the recitals.
"Loral Space" has the meaning specified in the recitals.
"Net Income" or "Net Loss" shall mean, with respect to any Fiscal Year,
the taxable income or loss of the Partnership as determined for federal income
tax purposes, with the following adjustments: (1) such taxable income shall be
increased or such loss shall be reduced by the amount, if any, of tax-exempt
income received or accrued by the Partnership; (2) such taxable income shall be
reduced or such loss shall be increased by the amount, if any, of all
expenditures of the Partnership described in section 705(a)(2)(B) of the Code,
including expenditures treated as described therein under Reg. ss.
1.704-1(b)(2)(iv)(i); (3) such taxable income shall be increased or such loss
reduced by the excess, if any, of the fair market value of distributed property
over its Book Value and such taxable income shall be reduced or such loss shall
be increased by the excess, if any, of the Book Value of distributed property
over its fair market value; (4) the items of income, gain, loss and deduction
allocated under Section 5.2 shall not be taken into account; (5) allocations of
Adjusted Income under Section 5.1(a) shall be deducted; and (6) income, gain,
loss, depreciation or amortization with respect to Partnership property shall be
determined with reference to the Book Value of such property.
"Nonperformance" means continuing gross negligence or willful
misconduct by the General Partner in performing its obligations under this
Agreement which results in a material adverse effect upon the assets or business
of the Partnership that is not otherwise cured by the General Partner after
written notice thereof.
"Parent" means, with respect to any Person, such other Person who owns,
directly or indirectly, at least a majority (by number of votes) of the
outstanding stock of any class or classes (or equivalent interests) of such
Person, if as direct or indirect holder of the stock of such class or classes
(or equivalent interests) it (a) is ordinarily, in the absence of contingencies,
entitled to vote for the election of a majority of the directors (or Persons
performing similar functions) of such Person, even though the right so to vote
has been suspended by the happening of such a contingency, or (b) is at the time
entitled, as such holder, to vote for the election of the majority of the
directors (or Persons performing similar functions) of such Person, whether or
not the right so to vote exists by reason of the happening of a contingency.
<PAGE> 14
"Parent's Guarantee" shall mean a document, executed in form and
substance to the satisfaction of the General Partner (or, in the case of a
Parent's Guarantee delivered by the General Partner, to the satisfaction of each
of the Founding Partners), evidencing that a Parent of a Partner, or of a Person
succeeding to a Partner or of a Person subscribing to Additional Units: (i) will
guarantee the obligations of such Partner or Person under this Agreement and
under any Investor Documents and (ii) will itself (including its Subsidiaries)
be bound by the provisions of Sections 6.9 and 15.13 of this Agreement.
"Participation Bonus" has the meaning specified in Section 4.3(a).
"Participation Rights Closing" has the meaning set forth in Section
6.12(b).
"Participation Rights Notice" has the meaning set forth in Section
6.12(b).
"Partner" means any General Partner or Limited Partner.
"Partners' Committee" has the meaning specified in Section 6.3.
"Partnership" means CyberStar, L.P., a Delaware limited partnership
formed on May 29, 1997 and continued pursuant to this Agreement.
"Passive Investment" means an investment made with an investment
related purpose, and not with the purpose or the effect of changing or
influencing the policies, operations, management, or control of the entity into
which the investment is made (or of such entity's Affiliates).
"Percentage Interest" means, for each Partner, the ratio, expressed as
a percentage, that the number of Units held by such Partner bears to the total
number of Units outstanding, as such percentages are set forth on Schedule A
attached hereto, as it is amended from time to time.
"Person" means an individual or a corporation, partnership, limited
liability company, trust, unincorporated organization, association or other
entity.
"Phase I" means the period of time from the Effective Date through and
including March 31, 1998.
"Phase I Budget" means the budget for the Partnership for Phase I, as
previously provided to each of the Unaffiliated Phase I Partners, and as it may
be amended from time to time.
"Phase I Closing" means the closing of the sale of the Units offered
during the Phase I Financing, including, without
<PAGE> 15
limitation, the initial closing which shall occur on June 30, 1997 and each
subsequent closing which shall occur on subsequent dates chosen by the General
Partner.
"Phase I Financing" means the Partnership's sale of up to 1,760 Units
during Phase I, in order to raise an aggregate of up to US $185,000,000.00 in
Capital Contributions, made in both the form of cash and in kind.
"Phase I Partner" means any Person who purchases, in cash or in kind,
Units at any Phase I Closing, in accordance with Schedule A attached hereto and
made a part hereof at any Phase I Closing.
"Preemptive Rights Closing" has the meaning specified in Section
4.9(c).
"Preferred Return" means, cumulatively, the sum of (x) 2.5% of the
Partnership's gross operating revenues for each quarter plus (y) 1% of that
portion of the Partnership's gross operating revenues for each calendar quarter
that, when aggregated with gross operating revenues earned by the Partnership
earlier in the Fiscal Year, exceeds $500,000,000 plus (z) interest compounded
monthly at the rate publicly announced by Citibank N.A. from time to time in New
York City as its prime rate, on the amount by which, at the end of each quarter,
the cumulative Preferred Return exceeds cumulative distributions under Section
5.4(a).
"Project" has the meaning specified in the recitals.
"Quarterly Meeting" has the meaning specified in Section 6.3(b).
"Registration Statement" means any registration statement filed in
compliance with the Securities Act and declared effective by the U.S. Securities
and Exchange Commission.
"Sale Notice" has the meaning specified in Section 4.9(b).
"Section 704(c) Property" has the meaning specified in Section 5.3.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"SkyBridge" has the meaning specified in Section 6.8.
"Strategic Investor" means any Person (other than the General Partner
or a GP Affiliate) whom the General Partner believes, because of the nature of
such Person's business, the Partnership has a strategic interest in allowing to
acquire an interest in the Partnership.
<PAGE> 16
"Subject Partner" means, (i) for the purposes of Section 4.9, each
Partner that is not a Delinquent Partner at the time that a Sale Notice is
issued pursuant to Section 4.9(b) or at any time prior to the Preemptive Rights
Closing following such issuance and (ii) for the purposes of Section 6.12, each
Partner that is not a Delinquent Partner at the time that a Participation Rights
Notice is issued pursuant to Section 6.12(b) or at any time prior to the
Participation Rights Closing following such issuance.
"Subsidiary" of any Person shall mean any other Person at least a
majority (by number of votes) of the stock of any class or classes (or
equivalent interests) of which is at the time owned by such Person or by one or
more Subsidiaries of such Person or by such Person and one or more Subsidiaries
of such Person, if the holders of the stock of such class or classes (or
equivalent interests) (a) are ordinarily, in the absence of contingencies,
entitled to vote for the election of a majority of the directors (or Persons
performing similar functions) of such business entity, even the right so to vote
has been suspended by the happening of such a contingency, or (b) are at the
time entitled, as such holders, to vote for the election of the majority of the
directors (or persons performing similar functions) of such business entity,
whether or not the right so to vote exists by reason of the happening of a
contingency.
"Treasury Regulations" means the United States income tax regulations
promulgated under the Code by the United States Department of Treasury and
codified at Title 26 of the Code of Federal Regulations. References herein to
temporary or final regulations also refer to corresponding provisions of
successor and superseding regulations.
"Unaffiliated Phase I Cash Partner" means an Unaffiliated Phase I
Partner that makes its contribution in cash at any Phase I Closing, in
connection with the Phase I Financing in accordance with the Capital
Contribution amounts set forth on Schedule A attached hereto and made a part
hereof at any Phase I Closing.
"Unaffiliated Phase I Partner" means any Phase I Partner other than the
General Partner or a GP Affiliate.
"Ultimate Parent" means, with respect to any Partner, the Parent of
such Partner that is not a Subsidiary of another Person; provided, however, that
the Ultimate Parent of a state-owned entity shall be that Parent that is not a
Subsidiary of any Person other than a government or a governmental agency.
"Unit" means an equity interest in the Partnership of a General
Partner, a Limited Partner, or both, as the context may require. Units may be
issued on a fractional basis.
<PAGE> 17
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of Each Partner. Each of
the Partners represents and warrants to the other Partners as follows:
(a) Such Partner is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation and has all
requisite power and authority to own, lease and operate its assets, properties
and business and to carry on its business as now conducted.
(b) Such Partner has full power and authority to execute and deliver
this Agreement and to perform fully its obligations hereunder. No other action
on the part of such Partner is necessary to authorize the execution and delivery
of this Agreement or the performance by such Partner of its obligations
hereunder or the consummation of the transactions contemplated hereby.
(c) This Agreement has been duly and validly executed and delivered by
such Partner and constitutes the valid and legally binding obligation of such
Partner in accordance with its terms.
(d) The execution and delivery of this Agreement, the performance by
such Partner of its obligations pursuant to the terms hereof and the
consummation of the transactions contemplated hereby do not and shall not, with
or without the giving of notice or lapse of time, or both: (i) violate or
conflict with such Partner's charter, by-laws or other organizational documents;
(ii) violate or conflict with any law by which such Partner, or any of its
respective assets or properties are bound or affected; (iii) violate or conflict
with any judgment, order, writ or decree of any court, arbitrator or
administrative body applicable to such Partner, or by which the assets or
property of such Partner are bound or affected; (iv) violate or conflict with or
result in the breach of (or give rise to any right of termination, cancellation
or acceleration under) any material contract to which such Partner is a party or
by which any of its respective assets or properties is bound; or (v) result in
the creation of any encumbrance or charge upon any assets of the Partner.
(e) No permit, consent, approval or authorization of, or declaration to
or filing with, any governmental authority or any other Person is required in
connection with such Partner's execution and delivery of this Agreement or the
performance by it of its obligations hereunder or the consummation of the
transactions contemplated hereby.
(f) The Partner is not a party to, or to its knowledge, is not
threatened with, any litigation or judicial, administrative
<PAGE> 18
or arbitration proceedings that in the aggregate are likely to have a material
adverse effect on the transactions contemplated hereby.
SECTION 3.2. Representations and Warranties of Each Limited Partner. In
addition to any representations and warranties made in any subscription
agreement or similar instrument executed in connection with its acquisition of
its Units (the "Investor Documents") each of the Limited Partners represents and
warrants to the Partnership, to the other Limited Partners and to the General
Partner as follows:
(a) Such Limited Partner is an "accredited investor" within the meaning
of Rule 501(a)(1), (2), (3) or (7) of Regulation D promulgated under the
Securities Act.
(b) Such Limited Partner is familiar with the existing or proposed
business, financial condition, properties, operations, and prospects of the
Partnership; it has asked such questions, and conducted such due diligence,
concerning such matters and concerning its acquisition of Units as it has
desired to ask and conduct, and all such questions have been answered to its
full satisfaction; it has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of an
investment in the Partnership, it understands that owning Units involves various
risks, including: (1) the restrictions on transfers of Units, (ii) the lack of
any public market for Units, (iii) the risk of owning its Units for an
indefinite period of time, (iv) the risk of losing its entire investment in the
Partnership, (v) risks inherent in the start-up of any business in a
highly-regulated, high technology industry, (vi) the uncertainties and
difficulties involved in obtaining the approximately $3.9 billion of financing
needed for the development and implementation of the Project and to begin its
operations, (vii) the potential for delay in development and implementation of
the Project, including risks inherent in the construction and deployment of a
complex satellite system, (viii) risks associated with the need to negotiate
procurement contracts with suppliers on terms acceptable to the Partnership,
(ix) complexity of technologies that have not been implemented in the past, (x)
competition from other satellite systems that have been or may be announced,
(xi) obsolescence, (xii) licensing and other regulatory risks and complexities,
and (xiii) numerous other risks and uncertainties that are associated with a
project of this scope and nature. Such Limited Partner is able to bear the
economic risk of such investment; it is acquiring its Units for investment,
solely for its own beneficial account and not with a view to or any present
intention of directly or indirectly selling, transferring, offering to sell or
transfer, participating in any distribution or otherwise transferring of all or
a portion of its Units; and it acknowledges that the Units have not been
registered under the Securities Act or any other applicable federal or state
securities laws, and that the Partnership has no intention, and shall not have
any obligation,
<PAGE> 19
to register or to obtain an exemption from registration for the Units, or to
take action so as to permit sales pursuant to the Securities Act (including
Rules 144 and 144A thereunder).
ARTICLE IV.
CAPITAL CONTRIBUTIONS
SECTION 4.1. Phase I Commitments of the General Partner and GP
Affiliates.
(a) As of the Effective Date, the General Partner and/or GP Affiliates
(collectively, "Loral") will receive:
(i) 280 Units in consideration for Loral's efforts to
initiate, conceptualize, develop, and promote the Project; and
(ii) 160 Units in consideration for Loral Space's agreement to
utilize the FCC License for the exclusive benefit of the Partnership.
An executed copy of such agreement is attached as Schedule E hereto.
(b) Loral will receive 520 Units in return for cash Capital
Contributions made pursuant to the installments specified in Schedule C attached
hereto.
(c) Any Units issued to Loral pursuant to subsections 4.1 (a) or (b)
may be issued as general partner or limited partner Units, and in such
proportion and to such entities as may be determined by the General Partner, in
its sole discretion.
(d) Upon the issuance of Units to Loral pursuant to subsections 4.1 (b)
or (c), the General Partner shall: (i) pursuant to Section 4.4 (b), if a GP
Affiliate receiving any such Units is not yet a Partner, effectuate the
admission of such GP Affiliate as an Additional Partner and (ii) pursuant to
Section 4.4 (c), amend Schedule A and, if such GP Affiliate is not yet a
Partner, Schedule B.
SECTION 4.2. Phase I Commitments of the Unaffiliated Phase I Partners.
(a) Each Unaffiliated Phase I Partner shall make a Capital
Contribution, and shall receive limited partner Units, both in accordance with
the Investor Documents executed by such Partner and accepted by the Partnership.
Upon each issuance of Units pursuant to this Section 4.2, the General Partner
shall: (i) pursuant to Section 4.4(b), if the Person receiving such Units is not
yet a Partner, effectuate the admission of such Person as an Additional Partner
and (ii) pursuant to Section 4.4(c), amend Schedule A and, if such Person is not
yet a Partner, Schedule B.
<PAGE> 20
SECTION 4.3. Participation Bonus; Non Participation Consequences.
(a) Upon the earlier of (i) that point in time immediately prior to the
closing of the Initial Public Offering or (ii) the first Business Day that
occurs six (6) months following the date on which the Project begins offering
CyberStar Service to customers on a commercial basis, the Partnership shall
issue to each of the Eligible Phase I Partners that number of Units (or, if the
Partnership has converted to corporate form, that number of shares of capital
stock of such corporation having the same relative rights and preferences with
respect to distributions as such number of Units) (the "Participation Bonus")
equal to the product of 75 Units multiplied by a fraction, the numerator of
which shall be the number of Units purchased by such Eligible Phase I Partner
during the Phase I Financing, as set forth in Schedule A attached hereto, and
the denominator of which shall be the number of Units purchased by all Eligible
Phase I Partners during the Phase I Financing, as derived from Schedule A
attached hereto.
(b) Following the final Phase I Closing, the General Partner, in its
sole discretion, may from time to time, request additional Capital Contributions
from each of the Unaffiliated Phase I Cash Partners by delivering to such
Partners a written notice (the "Contribution Request") specifying:
(i) the amount of the additional Capital Contribution being
requested of such Unaffiliated Phase I Cash Partner (the "Additional
Capital Contribution") and of all Unaffiliated Phase I Cash Partners
(the "Aggregate Additional Capital Contribution") and the price per
Unit being offered to the Unaffiliated Phase I Cash Partners. The
Additional Capital Contribution requested of any Unaffiliated Phase I
Cash Partner shall be equal to the product of the Aggregate Additional
Capital Contribution multiplied by a fraction, the numerator of which
shall be the number of Units purchased by such Unaffiliated Phase I
Cash Partner during the Phase I Financing, as set forth in Schedule A
attached hereto, and the denominator of which shall be 800 Units;
(ii) the manner in which, and the expected date on which, such
Aggregate Additional Capital Contribution is to be applied;
(iii) the date (the "Contribution Date") on which such
Additional Capital Contribution is due; and
(iv) The bank account of the Partnership to which such
Additional Capital Contribution shall be paid.
The Contribution Request must be delivered no less than fifteen (15) Business
Days before the Contribution Date, in the case of
<PAGE> 21
those Aggregate Additional Capital Contributions that are included in a Business
Plan previously delivered to the Partners pursuant to Section 4.11, and no less
than sixty (60) Business Days before the Contribution Date, in the case of all
other Aggregate Additional Capital Contributions.
(c) No Partner shall be obligated to make any Additional Capital
Contribution. In order to be an Eligible Phase I Partner and avoid the
consequences of Section 4.3(d), however, an Unaffiliated Phase I Cash Partner
must make all Additional Capital Contributions requested by Funded Contribution
Requests delivered pursuant to Section 4.3(b) above. All such Additional Capital
Contributions shall be paid to the Partnership by wire transfer of immediately
available funds in U.S. dollars by 3:00 P.M. (New York City time) on the later
of: (i) the Contribution Date or (ii) that date that occurs ten (10) Business
Days following each Unaffiliated Phase I Cash Partner's receipt of written
notice from the General Partner that the Contribution Request is a Funded
Contribution Request.
(d) If any Partner fails to make any Additional Capital Contribution
requested by a Funded Contribution Request delivered in accordance with Section
4.3(b) that sets forth a price per Unit higher than the average price per Unit
paid by such Partner, then upon the closing of such Funded Contribution Request,
the number of Units owned by such Partner shall be reduced to the number of
Units such Partner would have owned had all of its prior purchases of Units been
effected at the price per Unit paid in connection with such Funded Contribution
Request, provided that no such reduction will be made if the capital
contributions of investors who were not theretofore Partners or Affiliates of
Partners account for less than 60% of the total amount paid (by both existing
and new Partners) in connection with such Funded Contribution Request and such
Partner made no less than 50% of the Additional Capital Contribution so
requested. Any such reduction will have prospective effect only, and will not
affect the Partner's Capital Account until future allocations of income, gain,
loss or deduction are made with respect to the adjusted number of Units.
(e) Nothing in this Section 4.3 shall prevent the General Partner from
seeking Capital Contributions from any of the Partners or any of their
Affiliates pursuant to Sections 4.4, 4.9 and 4.10. An Unaffiliated Phase I Cash
Partner shall not become a general partner of the Partnership, or otherwise hold
a general Unit in the Partnership, solely as a result of such Partner's purchase
of limited partner Units (whether pursuant to a Contribution Request or
otherwise) or of such Partner's receipt of its Participation Bonus.
SECTION 4.4. Additional Partners. (a) Subject to Sections 4.9, and 6.2,
the Partnership is hereby authorized (through a private placement, in connection
with the Initial Public Offering or subsequent public offerings or otherwise) to
offer Additional
<PAGE> 22
Units and to admit as Partners those Persons who subscribe to purchase
Additional Units and who are acceptable to the General Partner in its sole
discretion.
(b) At each closing following the Effective Date at which Additional
Units are issued, the Capital Contributions of those Persons then being admitted
as Additional Partners shall be transferred to the Partnership, which amounts
shall be credited to their respective Capital Accounts pursuant to Section 4.5
hereof. A Person shall be admitted as an Additional Partner only upon the
Partnership's acceptance of payment of the appropriate Capital Contribution from
the Person subscribing to Additional Units and upon furnishing by each Person to
the General Partner of evidence of acceptance in form satisfactory to the
General Partner of all of the terms and conditions of this Agreement, including
the power of attorney granted in Section 1.5, and such other documents or
instruments (including, without limitation, Investor Documents and Parent's
Guarantees) as may be required in the sole discretion of the General Partner to
effect such Person's admission as an Additional Partner.
(c) Upon the admission of a Person as an Additional Partner, (i) the
schedule of Partners as set forth on Schedule A attached hereto shall be amended
to reflect such Person's name, state or country of formation, whether such
Person is being admitted as a general partner or a limited partner, such
Person's Capital Contribution, the amount to be reflected in such Person's
Capital Account following such subscription, the percentage of all capital
contributed to the Partnership that has been contributed by such Person, and the
Units and the Percentage Interest held by such Person following such
subscription and (ii) the schedule of addresses as set forth on Schedule B
attached hereto shall be amended to reflect the addresses of such Person for the
purposes of Section 15.1 hereof. Upon the issuance of Additional Units to an
existing Partner, the schedule of Partners as set forth on Schedule A hereto
shall be amended to reflect whether such Additional Units are general partner
interests or limited partner interests, the total amount of capital contributed
by such Partner to the Partnership as of such date, such Partner's Capital
Account, the percentage of capital contributed to the Partnership that has been
contributed by such Partner, and the Units and Percentage Interest held by such
Partner following such issuance.
SECTION 4.5. Capital Accounts.
(a) The Partnership shall maintain a separate account for each Partner
as part of its books and records. A Partner's "Capital Account" shall be
credited with (i) the amount of cash and the Book Value of other property
contributed to the Partnership by the Partner, (ii) allocations of Adjusted
Income, Net Income and Book Up Gain to the Partner, (iii) allocations of gain
and income to the Partner under Section 5.2 and (iv) the amount of any
Partnership liabilities assumed by such Partner or
<PAGE> 23
secured, in whole or in part, by any Partnership assets that are distributed to
such Partner, and shall be debited with (i) allocations of Net Loss and Book Up
Loss to the Partner, (ii) allocations of deduction and loss to the Partner under
Section 5.2, (iii) the amount of cash distributions and the fair market value of
any property distributed to the Partner and (iv) the amount of any Partner
liabilities assumed by the Partnership or secured, in whole or in part, by any
assets contributed by such Partner to the Partnership. The foregoing provisions
and the other provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Treasury Regulations under Section
704(b) of the Code and, to the extent not inconsistent with the provisions of
this Agreement, shall be interpreted and applied in a manner consistent with
such Regulations. Schedule A attached hereto sets forth the respective Capital
Accounts of the Partners as of the Effective Date.
(b) A transferee of a Unit will succeed to the portion of the Capital
Account of the Partner transferring such Unit which relates to the Unit
transferred.
SECTION 4.6. Interest. No interest shall be paid by the Partnership on
Capital Contributions, on balances in Partners' Capital Accounts or on any other
funds distributed or distributable under this Agreement.
SECTION 4.7. No Withdrawal. No Partner shall have the right to the
withdrawal or reduction of any part of its Capital Contribution. It is the
intent of the Partners that no distribution to the Limited Partners of cash
pursuant to Section 5.4 shall be deemed a return or withdrawal of capital, even
if such return or distribution represents, for federal income tax purposes or
otherwise (in whole or in part), a distribution of depreciation or any other
non-cash item accounted for as a loss or deduction from or offset to the
Partnership's income, and that the Limited Partners shall not be obligated to
pay any such amount to, or for the account of, the Partnership or any creditor
of the Partnership; provided, however, that if any court of competent
jurisdiction holds that, notwithstanding the provisions of this Agreement, any
Limited Partner is obligated to make any such payment, such obligation shall be
the obligation of such Limited Partner and not of the General Partner.
SECTION 4.8. Loans. Loans by a Partner to the Partnership shall not be
considered Capital Contributions.
<PAGE> 24
SECTION 4.9. Preemptive Rights.
(a) The Partnership hereby grants to each of the Partners a preemptive
right, in accordance with the procedures set forth in this Section 4.9, with
respect to the issuance and sale by the Partnership of Additional Units
("Preemptive Securities") other than those:
(i) issued or sold in connection with the Phase I Financing;
(ii) issued or sold to a Strategic Investor;
(iii) issued or sold pursuant to, in connection with, or
following the Initial Public Offering;
(iv) issued or sold in connection with any merger,
consolidation, acquisition or other business combination involving the
Partnership or any subsidiary of the Partnership; or
(v) issued or sold under any employee benefit or similar plan
or arrangement.
(b) At least thirty (30) days prior to the sale of the Preemptive
Securities, the Partnership shall deliver a written notice (a "Sale Notice") to
each Subject Partner setting forth:
(i) the number of Preemptive Securities to be sold;
(ii) the price for which and other terms and conditions upon
which such Preemptive Securities are to be sold; and
(iii) all written information distributed to offerees of such
Preemptive Securities, together with an irrevocable offer from the
Partnership to issue and sell to each Subject Partner, at the same
price per Preemptive Security and on the same other terms and
conditions set forth in the Sale Notice, the number of Preemptive
Securities equal to the product of the total number of Preemptive
Securities set forth in the Sale Notice multiplied by a fraction, the
numerator of which is the number of Units held by such Subject Partner
at the time the Sale Notice is issued, and the denominator of which is
the number of Units held by all Subject Partners at such time.
(c) The Subject Partners shall have absolute discretion to accept or
decline such offers. If a Subject Partner wishes to accept any of the offers
made pursuant to Section 4.9(b), it shall give the Partnership irrevocable
written notice (which notice must specify acceptance of all Preemptive
Securities offered to such Subject Partner in the Sale Notice) of its election
to accept such offer within fifteen (15) days of the
<PAGE> 25
date (the "Sale Notice Delivery Date") on which the Partnership delivers the
applicable Sale Notice. The closing thereunder (a "Preemptive Rights Closing")
shall occur five (5) days thereafter (or, if such day is not a Business Day, on
the next Business Day thereafter) at the offices of the Partnership or at such
other time and place as the parties shall agree.
(d) If any portion (the "Remaining Portion") of the total number of
Preemptive Securities set forth in the Sale Notice is not subscribed to by the
Subject Partners within fifteen (15) days of the Sale Notice Delivery Date, the
Partnership shall have the right, until the one hundred twenty-first (121st) day
following the Sale Notice Delivery Date, to sell Preemptive Securities to any
Person(s) at a price per Preemptive Security not less than 95% of the price
specified in the Sale Notice, and on terms and conditions that are otherwise
substantially similar to the terms and conditions set forth in the Sale Notice;
provided, however, that if, as a condition of such proposed sale, such Person
requires the Partnership to sell a number of Preemptive Securities greater than
the number of Preemptive Securities included in the Remaining Portion, then such
sale shall be subject to the requirements of Section 4.9(e).
(e) If, as a condition of a proposed sale of Preemptive Securities
under Section 4.9(d), the Partnership is being required to sell a number of
Securities greater than the number of Preemptive Securities included in the
Remaining Portion, the Partnership shall provide those Subject Partners that
have purchased the Preemptive Securities set forth in the applicable Sale Notice
(the "Exercising Partners") with a notice (the "Subsequent Sale Notice") setting
forth:
(i) the number of Preemptive Securities that the Partnership
plans to sell pursuant to Section 4.9(d); and
(ii) the price for which and other terms and conditions upon
which such Preemptive Securities are to be sold.
Each of the Exercising Partners shall have the following option (but not the
obligation) to purchase Preemptive Securities at the price and on terms and
conditions substantially similar to those specified in the Sale Notice: upon the
Partnership's delivery of the Subsequent Notice, the Exercising Partner shall
have ten (10) days from the date (the "Subsequent Notice Date") upon which the
Partnership delivers the Subsequent Sale Notice to deliver to the Partnership an
irrevocable written notice (the "Subsequent Sale Election Notice") committing to
purchase a specified number of Preemptive Securities that does not exceed the
number of Preemptive Securities included in the Remaining Portion. If the total
number of Preemptive Securities subscribed to by Exercising Partners through the
delivery to the Partnership of Subsequent Sale Election Notices within ten (10)
days of the Subsequent Sale Notice Date is greater than or equal to the number
of Preemptive
<PAGE> 26
Securities included in the Remaining Portion, then the Partnership shall sell
the Preemptive Securities subscribed to in such Subsequent Sale Election Notices
and the Partnership shall not complete the sale described in the Subsequent Sale
Notice. The closing of such sales pursuant to Subsequent Sale Election Notices
(also, a "Preemptive Rights Closing") shall occur on the fifteenth (15th) day
after the Subsequent Sale Notice Date (or, if such date is not a Business Day,
on the next Business Day thereafter) at the offices of the Partnership or at
such other time and place as the parties shall agree and the Partnership shall
not complete the sale described in the Subsequent Sale Notice. If the total
number of Preemptive Securities subscribed to by Exercising Partners through the
delivery to the Partnership of Subsequent Sale Election Notices within ten (10)
days of the Subsequent Sale Notice Date is less than the number of Preemptive
Securities included in the Remaining Portion, then none of Exercising Partners
shall have the option to purchase Preemptive Securities under this Section
4.9(e) and the Partnership shall have the right to complete the sale described
in the Subsequent Sale Notice.
(f) In connection with any proposed or contemplated sale of Additional
Units, upon the request of the Partnership, each Subject Partner shall indicate
to the Partnership its good faith intentions (which indications shall not be
binding) with respect to whether or not it will exercise the preemptive rights
described herein.
(g) Notwithstanding anything to the contrary in this Agreement, no
Limited Partner shall become a general partner of the Partnership or otherwise
hold general partner Units in the Partnership as a result of such Limited
Partner's purchase of any Preemptive Securities.
SECTION 4.10. Sale of Units and Partnership Securities.
(a) Subject to the provisions of Sections 4.9 and 6.2, the Partnership
may, upon the determination of the General Partner, issue or sell, on such terms
as the General Partner deems (in its sole and complete discretion) appropriate
and in the best interests of the Partnership (including by way of a private
placement, the Initial Public Offering or otherwise), Additional Units to the
Partners and to Additional Partners from time to time and to admit such
Additional Partners to the Partnership as Additional Partners pursuant to
Section 4.4, without being required to obtain the approval of the Limited
Partners or any other Persons who may acquire an interest in the Units; provided
that any sale of Units that is effectuated prior to the Initial Public Offering
at a per Unit price below that paid by the Founding Partners during Phase I (or
on terms and conditions, including side agreements, contemporaneous commitments
and the like, that, in the aggregate, are materially more favorable to such new
investors than those applicable to the Founding
<PAGE> 27
Partners' investments during Phase I) shall require the Approval of the Founding
Partners.
(b) The Partnership may, upon the determination of the General Partner,
issue or sell any other type of security of the Partnership from time to time to
Partners or other Persons on terms and conditions established in the sole and
complete discretion of the General Partner, including, without limitation,
unsecured and secured debt obligations of the Partnership without being required
to obtain the approval of the Limited Partners, or any other Persons who may
acquire an interest in any Unit or any combination of any of the foregoing.
(c) There shall be no limit on the number of Units or other securities
that may be issued and the General Partner shall have the sole and complete
discretion in determining the consideration and terms and conditions with
respect to any future issuance of Units or other securities.
SECTION 4.11. Business Plan.
(a) The General Partner shall prepare (or cause to be prepared), on an
annual basis, a Business Plan (the "Business Plan") in accordance with this
Section 4.11.
(b) A proposed version of the Business Plan shall be delivered to the
Partners along with the prior written notice to be delivered pursuant to Section
6.3 in connection with the final Quarterly Meeting of each Fiscal Year,
beginning with the final Quarterly Meeting to be held in 1997. Such proposed
Business Plan shall contain the following elements:
(i) a budget for the following Fiscal Year (the "Annual
Budget") containing:
(A) schedules of estimated capital expenditures and
other costs for each quarter;
(B) a projected income and expense statement for each
quarter; and
(C) a projected year-end balance sheet for each
quarter; and
(ii) a forecast for the immediately succeeding five Fiscal
Years (the "Five-Year Forecast") setting forth:
(A) the information contained in subsections
4.11(b)(i)(A-C) above, for each of the five Fiscal Years
included therein, on an annual basis; and
(B) a projected schedule of sources and uses of funds
for each of the five Fiscal Years included therein.
<PAGE> 28
(c) Following consultation with the Partners' Committee, the General
Partner shall adopt the Business Plan prior to the beginning of the Fiscal Year
covered by the Annual Budget contained in such Business Plan. A copy of such
Business Plan shall be delivered to each of the Partners prior to the beginning
of such Fiscal Year.
(d) The Business Plan may be amended from time to time by the General
Partner in its sole discretion following consultation with the Partners'
Committee; provided that:
(i) if such amendment would materially change the purpose of
the Partnership from that set forth in Section 1.4, the Consent of the
Partners shall be required; or
(ii) if such amendment would increase the aggregate amount of
the total capital expenditures and other costs contained in the Phase I
Budget by more than 15%, the Approval of the Founding Partners shall be
required.
ARTICLE V.
ALLOCATIONS AND DISTRIBUTIONS
SECTION 5.1. Allocations Generally.
(a) As of the end of each quarter, Loral Broadband will be allocated
Adjusted Income until such Adjusted Income has been allocated to Loral Broadband
on a cumulative basis for the current quarter and all prior quarters in an
amount equal to its Preferred Return.
(b) Except as provided in Section 5.1(c), Net Income and Net Loss shall
be allocated to the Capital Accounts of the Partners as follows:
(i) Net Income of the Partnership for each Fiscal Year shall
be allocated to the Partners (other than Delinquent Partners) in
proportion to their respective Percentage Interests.
(ii) Net Loss of the Partnership for each Fiscal Year shall be
allocated to the Partners in proportion to their respective Percentage
Interests.
(c) For all periods following adoption of a plan of liquidation, after
first making any allocations pursuant to Section 8.5(d), Net Income and Net Loss
shall be allocated to the Capital Accounts of the Partners as follows:
(i) Net Income of the Partnership for each Fiscal Year shall
be allocated:
<PAGE> 29
(A) first, to the Partners (other than Delinquent
Partners) so as to cause, as nearly as practicable, the
Capital Account balances of the Partners to be in proportion
to their respective Percentage Interests; and
(B) thereafter, to the Partners (other than the
Delinquent Partners) in proportion to their respective
Percentage Interests.
(ii) Net Loss of the Partnership for each Fiscal Year shall be
allocated to the Partners as follows:
(A) first, to the Partners so as to cause, as nearly
as practicable, the Capital Account balances of the Partners
to be in proportion to their respective Percentage Interests;
and
(B) thereafter, to the Partners in proportion to
their respective Percentage Interests.
SECTION 5.2. Regulatory Allocations. Section 704 of the Code and the
Treasury Regulations promulgated thereunder (including but not limited to the
provisions of the Treasury Regulations addressing qualified income offset
provisions, minimum gain chargeback requirements and allocations of deductions
attributable to nonrecourse debt and partner nonrecourse debt) are hereby
incorporated by reference. If, as a result of the provisions of section 704 of
the Code and the Treasury Regulations, items of income, gain, loss or deduction
are allocated to the Partners in a manner that is inconsistent with the manner
in which the Partners intend to divide Partnership distributions as reflected in
this Agreement, items of future income and loss shall be allocated among the
Partners in accordance with the Treasury Regulations so as to prevent such
allocations from distorting the manner in which Partner distributions will be
divided among the Partners pursuant to this Agreement.
SECTION 5.3. Other Allocations When Book Value Differs from Tax Basis.
When the Book Value of a Partnership asset is different from its adjusted tax
basis for income tax purposes, then, solely for federal, state and local income
tax purposes, and not for purposes of computing Capital Accounts, income, gain,
loss, deduction and credit with respect to such assets ("Section 704(c)
Property") shall be allocated among the Partners to take this difference into
account in accordance with the principles of Code Section 704(c), using the
traditional method set forth in Treasury Regulation Section 1.704-3(b)(1). In
addition, under the principles of Treasury Regulation Section 1.704-3(b)(2)
Example 2(ii)(C), in order to prevent the shifting of tax consequences with
respect to built-in gain or built-in loss with respect to Partnership property
that has an adjusted Book Value different from its adjusted federal income tax
basis,
<PAGE> 30
taxable gain on the sale of that property shall be allocated among the Partners
to offset the ceiling rule limitation of Treasury Regulation Section
1.704-3(b)(1).
SECTION 5.4. Distributions.
(a) On or before the last day of each calendar quarter the Partnership
shall make distributions to Loral Broadband until the cumulative sum of such
distributions is equal to the cumulative allocations of Adjusted Income to Loral
Broadband under Section 5.1(a). If the cumulative allocations of Adjusted Income
have not yet been finally determined by the end of the calendar quarter,
distributions under this Section 5.4(a) shall be made on the basis of estimates
and, when the cumulative allocations are finally determined, any excess
distribution shall be promptly returned and any under distribution shall be
promptly distributed.
(b) Thereafter, subject to Section 6.2(a)(i), any or all remaining
amounts of undistributed Net Income may be distributed at the General Partner's
sole discretion to each of the Partners in proportion to their respective
Percentage Interests.
(c) Each Partner authorizes the Partnership to withhold and pay over
any withholding or other tax payable by the Partnership as a result of such
Partner holding an interest in the Partnership. Such amounts, if withheld from
distributions to a Partner, shall be treated as a distribution to the Partner
and a payment of the withheld tax by such Partner to the appropriate taxing
authorities. In the event that current distributions to any Partner are not
sufficient to cover the withheld tax, the amount withheld in excess of the
amount covered by distributions to such Partner shall be a loan to such Partner
with respect to whom such withholding has been undertaken and such Partner
hereby grants the Partnership a security interest in its entire interest in the
Partnership at the time any such loan is made to it to secure the repayment of
such loan. Such loans shall bear interest at the rate publicly announced by
Citibank N.A. from time to time in New York City as its prime rate, shall be
compounded monthly, and shall be payable on demand. The Partnership may apply
future distributions to such Partner against amounts due under the loan. In the
event that the Internal Revenue Service shall determine that the amount of taxes
that should have been withheld with respect to a Partner is in excess of the
amount withheld by the Partnership, that Partner shall indemnify the Partnership
for the amount of any such shortfall with interest and penalties.
<PAGE> 31
ARTICLE VI.
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 6.1. Management.
(a) Except as specifically provided to the contrary in this Agreement,
the business and affairs of the Partnership shall be carried on and managed by
the General Partner, who shall have full, exclusive and complete discretion and
control with respect thereto. The General Partner shall have all powers
necessary, convenient and appropriate to carry out the purposes and business of
the Partnership and, except as otherwise provided by the Delaware Act or this
Agreement, shall possess and enjoy all of the rights and powers and shall be
subject to all restrictions of a general partner of a partnership without
limited partners under the laws of the State of Delaware.
(b) The General Partner shall, in good faith, use its best reasonable
efforts to carry out the purposes of the Partnership through implementation of
the Business Plan and shall devote to the administration and management of the
business and affairs of the Partnership such time as the General Partner shall
deem necessary or appropriate for the administration and management of such
business and affairs. The General Partner may, subject to the provisions of
Section 6.2, contract or otherwise deal with any Person, including GP Affiliates
and their employees, to perform any acts or services for the Partnership as the
General Partner shall approve. Any such delegee having access to confidential
information shall be deemed to be bound by a confidential agreement containing
substantially the same terms as Section 15.13. Without limitation on any power
that may be conferred upon it hereunder or by law, and except as hereinafter
stated and subject to the limitations explicitly set forth in Sections 6.1(a)
and 6.2, the General Partner shall have the power, on behalf of the Partnership,
to:
(i) make and enter into such contracts and incur expenses and
other liabilities on behalf of the Partnership, as the General Partner
deems necessary or appropriate for the efficient conduct and operation
of the Partnership's business;
(ii) compromise, submit to arbitration, sue on or defend all
claims in favor of or against the Partnership; commence or defend
litigation that pertains to the Partnership or any Partnership assets,
and arrange for the settlement of any pending or threatened litigation,
by or against the Partnership, through compromise, arbitration or
otherwise;
(iii) make and revoke any election permitted the Partnership
by any taxing authority;
<PAGE> 32
(iv) do all acts the General Partner deems necessary or
appropriate for the protection and preservation of the Partnership's
assets;
(v) make distributions and allocations to the Partners in
accordance with Article V hereof;
(vi) designate such officers of the Partnership and other
Persons as authorized signatories with the authority to execute on
behalf of the Partnership, any documents or instruments of any kind
that the General Partner may deem appropriate or advisable to carry out
the purposes of the Partnership taking into consideration the terms and
conditions of such document or instrument;
(vii) prepare, execute and file U.S., federal, state and local
and foreign income tax returns and pay any taxes on behalf of the
Partnership and the Partners;
(viii) make all payments of the Partnership under the terms of
this Agreement, including such payments, fees and reimbursements as the
General Partner or any of the GP Affiliates may be entitled to receive
under the terms of this Agreement;
(ix) contest any determination by the Internal Revenue Service
or any other taxing authority which the General Partner deems to be
adverse to the best interests of the Partnership;
(x) invest Partnership funds on a temporary basis pending
distribution in such investments (other than investments in a GP
Affiliate) as the General Partner deems appropriate, provided that the
General Partner shall not invest Partnership funds in such a manner
that the Partnership will be considered to be holding itself out as
being engaged primarily in the business of investing, reinvesting, or
trading in securities or will otherwise be deemed to be an investment
company under the Investment Company Act of 1940, as amended;
(xi) employ Persons (including any Affiliate or employee of
any Affiliate of any Partner) for the research and development of the
Project and/or the operation and management of the Partnership and
engage such other experts and advisers as the General Partner may deem
necessary or advisable, in each case, on such terms and for such
compensation as the General Partner may determine;
(xii) borrow money on behalf of the Partnership as the General
Partner deems necessary or appropriate and in the best interests of the
Partnership and make, accept, endorse and execute promissory notes,
drafts, bills of exchange and other instruments and evidences of
indebtedness in
<PAGE> 33
connection therewith and secure the payment of any such Partnership
indebtedness by mortgage, pledge or assignment of or security interest
in all or any part of the property then owned or thereafter acquired by
the Partnership and guarantee like obligations of others;
(xiii) call a meeting of the Partners' Committee from time to
time as the General Partner deems necessary or advisable;
(xiv) acquire (a) all or any portion of the equity or other
interests in any Person or (b) any other assets whether or not in the
ordinary course of business of the Partnership;
(xv) sell, lease, lease back, license, contribute, assign,
exchange or otherwise dispose of the assets of the Partnership,
including, without limitation, pursuant to a transaction where the
assets of the Partnership are transferred to a Person in exchange for
equity interests in such Person; provided, however that in the event of
a cash sale of all or substantially all of the assets of the
Partnership (other than to a Person controlled by the Partnership), the
Partnership shall distribute the proceeds of such sale to the Partners
as soon as practicable thereafter;
(xvi) commence any litigation or arbitration that pertains to
the Partnership or any Partnership assets, or arrange for the
settlement of any pending or threatened litigation, by or against the
Partnership, through compromise, arbitration or otherwise;
(xvii) effectuate the Initial Public Offering, or any other
underwritten sale of securities to the public pursuant to a
Registration Statement, by: (A) creating, admitting as a partner in
accordance with Section 6.16(c), and issuing Units to, a corporate
Partner and causing securities of such corporate Partner to be
registered for sale to the public, provided that the General Partner
has received the Approval of the Founding Partners with respect to such
issuance, (B) registering Units for sale to the public, provided that
the General Partner has received the Approval of the Founding Partners
with respect to such sale, or (C) converting the Partnership to a
corporate entity, pursuant to Section 6.16, in order to cause the
capital stock of such entity to be registered for sale to the public;
(xviii) convert the Partnership to another form, pursuant to
Section 6.16; and
(xix) engage in any kind of activity and enter into and
perform obligations of any kind (with the General Partner, a GP
Affiliate or otherwise) necessary to, in
<PAGE> 34
connection with, or incidental to, the accomplishment of the purposes
and business of the Partnership, so long as said activities and
obligations may be lawfully engaged in or performed by a limited
partnership under the Delaware Act.
(c) The General Partner may delegate any of such foregoing powers and
any additional powers conferred upon it under this Agreement or by law to
officers of the Partnership or other Persons. The Partners hereby agree that
each such authorized officer of the Partnership or such other Person is
authorized to execute, deliver and perform any agreements, acts, transactions
and matters in connection with the exercise of power hereunder on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Partnership, except in connection with acts otherwise prohibited by this
Agreement, the Delaware Act or any applicable law, rule or regulation.
SECTION 6.2. Limitation on Authority of the General Partner.
(a) Notwithstanding anything herein to the contrary, the General
Partner shall not undertake, on behalf of the Partnership, any of the actions
specified in this Section 6.2(a) without the Consent of the Partners:
(i) make any distributions other than those required by
Section 5.4(a) to the Partners in excess of accumulated undistributed
Net Income, as of the end of the preceding calendar quarter;
(ii) make any material amendments or modifications to this
Agreement, except as otherwise provided in Section 14.1;
(iii) merge or combine the Partnership with another Person or
cause or permit the dissolution (except as provided by Section 6.16),
and/or liquidation of the Partnership, or convert the Partnership to
another form (except as provided by Section 6.16);
(iv) take any action for the (a) commencement of a voluntary
case under any applicable bankruptcy, insolvency or similar law now or
hereafter in effect, (b) consent to the entry of any order for relief
in an involuntary case under any such law to the extent that the giving
or withholding of such consent is within the Partnership's discretion,
(c) consent to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of it or of any substantial part of its property or (d)
making by it of a general assignment for the benefit of creditors; or
(v) sell all or substantially all of the Partnership's assets;
provided that this provision shall not apply to the
<PAGE> 35
mortgage, hypothecation, pledge or grant of a security interest in all
or substantially all of the Partnership's assets or to the forced sale
of any assets pursuant to a foreclosure of, or other realization on,
any such encumbrance.
(b) Notwithstanding anything herein to the contrary, the Partnership
shall not enter into any binding transaction (the "Proposed Transaction") with
the General Partner or a GP Affiliate (the "Proposed Contractor") except
pursuant to the provisions of this Section 6.2(b).
(i) The Partnership shall deliver to the Founding Partners
written notice (the "Contract Proposal") of the material terms and
conditions of the Proposed Transaction at least ten (10) days before
the execution of such contract.
(ii) If any Founding Partner determines in good faith that the
Proposed Transaction, as described in the Contract Proposal, does not
contain commercially fair and reasonable terms and conditions, such
Founding Partner shall, within seven (7) days of receiving the Contract
Proposal, submit to the General Partner a certification (the
"Certificate of Objection"), signed by the chief executive officer of
such Founding Partner's Ultimate Parent stating with particularity the
reasons for such determination, including a statement as to (A) which
terms and conditions in the Contract Proposal are not commercially fair
and reasonable and (B) what terms and conditions such Founding Partner
would deem to be commercially fair and reasonable for the Proposed
Transaction.
(iii) If the General Partner has not received a Certificate of
Objection within ten (10) days of delivery of the Contract Proposal to
the Founding Partners, the General Partner may cause the Partnership to
execute any documents to bind the Partnership to the Proposed
Transaction.
(iv) If the General Partner has received a Certificate of
Objection within ten (10) days of delivery of the Contract Proposal to
the Founding Partners, the Founding Partner that has submitted the
Certificate of Objection shall negotiate in good faith with the
Partnership and the Proposed Contractor regarding the terms of the
Proposed Transaction.
(v) In the event that, notwithstanding the negotiations
conducted pursuant to subsection 6.2(b)(iv) above, the Founding
Partner's determination that the Proposed Transaction does not contain
commercially fair and reasonable terms remains unchanged, then: (a) in
the case of a Proposed Transaction in the form of a contract to provide
goods or services to the Partnership, the General Partner may cause the
Partnership to execute a contract with
<PAGE> 36
the Proposed Contractor on a "cost plus" basis, with a profit margin
above Cost not to exceed 12%, and on terms and conditions that the
General Partner certifies are otherwise commercially fair and
reasonable, and (b) in all Proposed Transactions other than contracts
to provide goods and services to the Partnership, the General Partner
may cause the Partnership to execute any documents to bind the
Partnership to the Proposed Transaction, so long as such documents
contain terms and conditions that the General Partner certifies are
commercially fair and reasonable.
SECTION 6.3. Partners' Committee and Partners' Meetings.
(a) Each Partner (other than a Delinquent Partner) shall have the right
to designate two representatives (the "Partners' Committee Representatives") to
participate in meetings of the Partners' Committee, which shall be an advisory
committee that serves as a forum for the exchange of information and ideas
regarding the Project.
(b) The Partnership shall hold a quarterly meeting of the Partners'
Committee ("Quarterly Meeting") on fifteen (15) days prior written notice to the
Partners. Each Quarterly Meeting shall be held no sooner than thirty (30) days
and no later than sixty (60) days after delivery to the Partners of the
quarterly financial statements for the preceding fiscal quarter pursuant to
Section 8.3(b). At the Quarterly Meeting, the General Partner, through its
representatives or other Persons designated by the General Partner, will review
the activities of the Partnership during the preceding quarter, discuss the
plans and budget for the current quarter and any amendments to the Business Plan
and answer whatever questions may be raised by the Partners' Committee
Representatives. The General Partner shall consider the recommendations of the
Partners' Committee in good faith, but under no circumstances shall the General
Partner be bound by such recommendations.
(c) The General Partner, at its sole discretion, may call a meeting of
the Partners' Committee at any other time by providing notice to each of the
Partners in the manner set forth in Section 15.1 as soon as practicable but in
no event less than five (5) days prior to the date called for such a meeting.
(d) In the event that the General Partner, at its sole discretion,
calls a meeting of the Partners (other than any Delinquent Partners) (a
"Partners' Meeting") in order to obtain the Consent of the Partners for any
action or proposed action by the Partnership, it shall cause the Partnership to
give such notice to each of the Partners in the manner set forth in Section 15.1
as soon as practicable but in no event less than fifteen (15) days prior to the
date called for a meeting of senior management representatives (the "Partners'
Meeting Representatives") of the Partners regarding such proposal. Each Partner
(other than a Delinquent Partner) shall have the right to
<PAGE> 37
designate one Partners' Meeting Representative to vote on its behalf at such
meeting. In lieu of voting at such a meeting, any Partner may provide written
consent of the proposed action.
SECTION 6.4. FCC and Related Matters. The Limited Partners hereby
understand, agree and acknowledge that they shall use all reasonable efforts to
assist and support the Partnership and its Affiliates (or other Persons who
acquire from the Partnership or its direct or indirect transferee the right to
develop, own, and/or operate the Project) in obtaining all necessary or useful
FCC licenses and all other U.S. and foreign governmental licenses and approvals.
SECTION 6.5. Certificate of Limited Partnership. The General Partner,
on May 29, 1997, filed the Certificate of Limited Partnership with the Secretary
of State of the State of Delaware as required by the Delaware Act and shall file
such other certificates or documents as may be deemed by the Partnership to be
reasonable and necessary or appropriate for the qualification and operation of a
limited partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware or any other state in which the Partnership
may elect to do business. To the extent that the General Partner in its
discretion determines such action to be reasonable and necessary or appropriate
and to the extent consistent with this Agreement, the General Partner shall file
amendments to the Certificate of Limited Partnership and do all the things to
maintain the Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) under the laws of the State of Delaware
or any other state in which the Partnership may elect to do business.
SECTION 6.6. Reliance by Third Parties. Notwithstanding any other
provision of this Agreement to the contrary, no lender or purchaser, including
any purchaser of property from the Partnership or any other Person dealing with
the Partnership, shall be required to look to the application of proceeds
hereunder or to verify any representation by the General Partner as to the
extent of the interest in the assets of the Partnership that the General Partner
is entitled to encumber, sell or otherwise use, and any such lender or purchaser
shall be entitled to rely exclusively on the representations of the General
Partner as to its authority to enter into such financing or sale arrangements
and shall be entitled to deal with the General Partner as if it were the sole
party in interest therein, both legally and beneficially. In no event shall any
Person dealing with the General Partner or the General Partner's representative
with respect to any business or property of the Partnership be obligated to
ascertain that the terms of this Agreement have been complied with, or be
obligated to inquire into the necessity or expedience of any act or action of
the General Partner or the General Partner's representative; and every contract,
agreement, deed, mortgage, security agreement, promissory note or other
instrument or document executed by the General Partner or the
<PAGE> 38
General Partner's representative with respect to any business or property of the
Partnership shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (a) at the time of the execution
and/or delivery thereof this Agreement was in full force and effect, (b) such
instrument or document was duly executed in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership, and (c) the
General Partner's representative was duly authorized and empowered to execute
and deliver any and every such instrument or document for and on behalf of the
Partnership.
SECTION 6.7. Expenses and Reimbursement of the General Partner.
(a) All expenses incurred after the Effective Date in connection with
the organization of the Partnership (other than expenses borne by the General
Partner or any GP Affiliate for which Units are received pursuant to Section
4.1) will be borne by the Partnership and, to the extent not otherwise allocated
by Article V, charged to the Partners' Capital Accounts according to their
Percentage Interests.
(b) The General Partner shall be reimbursed on a monthly basis for all
fair and reasonable expenses it incurs or makes on behalf of the Partnership
(including amounts paid to any Person to perform services for the Partnership or
the General Partner or who is an employee of the Partnership or the General
Partner). Such reimbursement shall be in addition to any reimbursement to a
General Partner as a result of indemnification pursuant to Section 6.13 hereof.
SECTION 6.8. Cooperation with SkyBridge. Each of the Partners hereby
acknowledges and agrees that (i) the Partnership may engage in efforts with
SkyBridge Limited Partnership ("SkyBridge") to develop synergies and
complementarities between the Project and the project to be developed and
operated by SkyBridge, including, but not limited to, efforts with respect to
system architecture, financing, regulatory, operational and marketing matters,
and (ii) the General Partner and/or a GP Affiliate may invest in SkyBridge
without creating any conflict with the fiduciary or other duties of the General
Partner hereunder.
SECTION 6.9. Outside Activities.
(a) Subject to the requirements of applicable law, each Partner agrees
that each Partner and its partners, associates, employees, Affiliates and agents
may engage in other business activities or possess interests in other business
activities of every kind and description, independently or with others, except
that no such Partner or any of its Affiliates shall possess (together with its
Affiliates) any economic interest, directly or indirectly, in any Similar
Business (as defined in Section 6.9(b) below) until the earlier of:
<PAGE> 39
(1) the third anniversary of the date on which the Partner and
all of its Affiliates cease to be Partners of the Partnership; or
(2) the third anniversary of the date on which the Project
first provides services, on a commercial basis, through satellites
using the Ka-band frequency spectrum; or
(3) the date following the termination, winding up and
liquidation of the Partnership (other than pursuant to Section 6.16);
provided, however, that such prohibition shall not apply to:
(i) a Passive Investment representing not more than 5% of the
equity securities of any entity engaged in a Similar Business;
(ii) an interest (other than an equity interest) arising from
the sale or provision of goods or services (except services as a
reseller, distributor, or service provider with respect to the Similar
Business) in the ordinary course of business of a Partner or its
Affiliates;
(iii) a non-Passive Investment in, or an investment
representing more than 5% of the equity securities of, any entity
engaged in a Similar Business, if (and only if) the Partner can
demonstrate to the reasonable satisfaction of the General Partner that:
(x) the investment is primarily motivated by the receipt by the Partner
or one of its Affiliates of, or a reasonable expectation that the
Partner or one of its Affiliates will receive, a contract of
significance (in relation to the amount of the investment) for the
provision of goods and/or services (except services as a reseller,
distributor, or service provider with respect to the Similar Business)
to such entity; and (y) there is a reasonable expectation that the
investment will become, within five (5) or fewer years of its having
been made, a Passive Investment of less than 5% of the equity
securities of such entity (as the result of, for example, dilution
brought about by investments received from third parties);
(iv) any investment by a Partner or any of its Affiliates in
an entity (or in an Affiliate of such an entity) of which the Partner
or one of its Affiliates was a general partner prior to the Effective
Date; or
(v) any investment by a Partner or any of its Affiliates in a
business that is added to Schedule D pursuant to Section 6.9(b) if such
investment: (A) is consummated prior to the Schedule D Notice Date (as
such term is defined in Section 6.9(b)) and such Partner or Affiliate
has delivered to the General Partner, at least fifteen (15) Business
Days prior to such consummation, a notice (the "Investment Notice")
that (x) specifies the
<PAGE> 40
terms and conditions of the proposed investment and (y) provides
sufficient information to enable the General Partner to determine
whether the proposed investment could constitute an investment in a
business described in Sections 6.9(b)(i) or 6.9(b)(ii), (B) is made
pursuant to a binding commitment on the part of such Partner or
Affiliate to invest, provided that such binding commitment was
effective prior to the Schedule D Notice Date and such Partner or
Affiliate has delivered to the General Partner, at least fifteen (15)
Business Days prior to entering into such a commitment, an Investment
Notice regarding such commitment to invest or (C) is made pursuant to
options, warrants or similar contingent interests purchased by such
Partner or Affiliate prior to the Schedule D Notice Date and such
Partner or Affiliate has delivered to the General Partner, at least
fifteen (15) Business Days prior to effectuating such purchase, an
Investment Notice regarding such purchase.
(b) A "Similar Business" means any of the businesses listed on Schedule
D, and any business that the General Partner may after the Effective Date, on
notice to the Partners, add to Schedule D. The General Partner may add a
business to Schedule D only if the business (i) has a primary objective of
providing interactive broadband transmission services via geostationary
satellites to fixed terminals with space-based return link: (A) using the
Ku-band spectrum and offering a similar set of services to that contemplated by
CyberStar (i.e., electronic data package delivery, electronic data package
transfer, real-time streaming, broadband Internet access, multi-use two-way
broadband interconnect) or (B) using the Ka-band spectrum, or (ii) does, or is
reasonably expected to, generate material earnings by providing such
transmission services. Such addition to Schedule D will become effective upon
the date on which the General Partner delivers the notice of such addition that
is required by this Section 6.9(b), unless such notice specifies a later
effective date (in either case, the "Schedule D Notice Date").
SECTION 6.10. Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement (including in
Section 6.2(b)), whenever a potential conflict of interest exists or arises
between the General Partner or any of the GP Affiliates, on the one hand, and
the Partnership or any Partner, on the other, any resolution or course of action
by the General Partner or such GP Affiliate(s) in respect of such conflict of
interest shall be permitted and deemed approved by all Partners, and shall not
constitute a breach of this Agreement, of any agreement contemplated herein, or
of any duty stated or implied by law or equity, if the resolution or course of
action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but not
required in connection with the resolution of such conflict of interest to seek
the approval from Partners holding a majority of outstanding Units (other than
<PAGE> 41
those held by any Delinquent Partners) (a "Special Approval") of a resolution of
such conflict or course of action. Any conflict of interest and any resolution
of such conflict of interest shall be conclusively deemed fair and reasonable to
the Partnership if such conflict of interest or resolution is (i) approved by a
Special Approval, (ii) on terms no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
fair to the Partnership, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership). The General Partner
may also adopt a resolution or course of action that has not received a Special
Approval. The General Partner (and the Partners determining to grant a Special
Approval) shall be authorized in connection with its determination of what is
"fair and reasonable" to the Partnership and in connection with its resolution
of any conflict of interest to consider (A) the relative interests of any party
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person; (C)
any applicable generally accepted accounting practices or principles; and (D)
such additional factors as the General Partner (or, as applicable, each of the
Partners) determines in its sole discretion to be relevant, reasonable or
appropriate under the circumstances. Nothing contained in this Agreement,
however, is intended to, nor shall it be construed to, require the General
Partner (or the Partners) to consider the interests of any Person other than the
Partnership. In the absence of bad faith by the General Partner, the resolution,
action or terms so made, taken or provided by the General Partner with respect
to such matters shall not constitute a breach of this Agreement or any other
agreement contemplated herein or a breach of any standard of care or duty
imposed herein or therein or, to the extent permitted by law, under the Delaware
Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of the GP Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a grant
of similar authority or latitude, except as otherwise explicitly provided
herein, the General Partner or such GP Affiliate shall be entitled to consider
only such interests and factors as it desires and shall have no duty or
obligation to give any consideration to any interest of, or factors affecting
any Limited Partner, (ii) it may make such decision in its sole discretion
(regardless of whether there is a reference to "sole discretion" or
"discretion") unless another express standard is provided for, or (iii) in "good
faith" or under another express standard, the General Partner or such GP
Affiliate shall act under such express standard and shall not be subject to any
other or different standards imposed by this Agreement, any other
<PAGE> 42
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. The General Partner shall have no duty, express or implied, to
sell or otherwise dispose of any asset of the Partnership.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
SECTION 6.11. Partnership Funds. The funds of the Partnership shall be
deposited in such Partnership account or accounts as are designated by the
General Partner and shall not be commingled with any other funds. All
withdrawals from or charges against such accounts shall be made by duly
authorized officers or agents of the Partnership. Funds of the Partnership may
be invested as determined by the General Partner, except in connection with acts
otherwise prohibited by this Agreement.
SECTION 6.12. Loans from the General Partner. (a) The General Partner
or any GP Affiliate may lend to the Partnership funds needed by the Partnership
subject to the provisions of Section 6.12(b), or provide a guarantee of any
indebtedness incurred by the Partnership, for such periods of time as the
General Partner may determine. The Partnership shall reimburse the General
Partner or GP Affiliate, as the case may be, for any additional costs incurred
by the General Partner or GP Affiliate in connection with: (i) the borrowing of
funds obtained by the General Partner or GP Affiliate and loaned to the
Partnership or (ii) in connection with the provision by the General Partner or
GP Affiliate of a guarantee of any indebtedness incurred by the Partnership.
(a)(b) At least fifteen (15) days prior to the issuance of debt by the
Partnership to the General Partner or a GP Affiliate, the Partnership shall
deliver a written notice (a "Participation Rights Notice") to each Subject
Partner, setting forth:
(i) the amount of debt to be issued,
(ii) the interest rate at which and other terms and conditions
upon which such debt is to be issued and
(iii) an irrevocable offer from the Partnership to issue and
sell to each Subject Partner, on the same terms and conditions set
forth in the Participation Rights Notice, the amount of debt equal to
the product of the total amount of debt to be issued, as set forth in
the Participation Rights Notice, multiplied by a fraction, the
numerator of which is the number of Units held by the Subject Partner
at the time the Participation Rights Notice is issued, and the
<PAGE> 43
denominator of which is the number of Units held all Subject Partners
at such time.
The Subject Partners shall have absolute discretion to accept or decline such
offers. If a Subject Partner wishes to accept any offer made pursuant to this
Section 6.12, it shall give the Partnership irrevocable written notice of its
election to accept such offer within ten (10) days of its receipt of the
applicable Participation Rights Notice (which notice must specify acceptance of
all debt offered to such Subject Partner in the Participation Rights Notice),
and the closing thereunder (the "Participation Rights Closing") shall occur five
(5) days thereafter (or, if not a Business Day, on the next Business Day
thereafter) at the offices of the Partnership or at such other time and place as
the parties shall agree.
SECTION 6.13. Indemnification of Partners.
(a) The Partnership shall indemnify and hold harmless the Partners,
Affiliates of Partners (other than Delinquent Partners) and all of their
respective officers, directors, partners, shareholders, employees, and agents
(individually, an "Indemnitee"), from and against any and all losses, claims,
demands, costs, damages, liabilities, joint and several, expenses of any nature
(including attorneys' fees and disbursements), judgments, fines, settlements,
and other amounts arising from any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, in which an
Indemnitee may be involved, or threatened to be involved, as a party or
otherwise ("Indemnifiable Loss" or "Indemnifiable Losses"), arising out of or
incidental to the business of the Partnership, regardless of whether an
Indemnitee continues to be a Partner, an Affiliate, or an officer, director,
partner, shareholder, employee, or agent of a Partner or of an Affiliate at the
time any such Indemnifiable Loss is paid or incurred, if the Indemnitee's
conduct did not constitute actual fraud, gross negligence, knowing breach of
specific provisions of this Agreement or willful or wanton misconduct. The
termination of any action, suit, or proceeding by settlement or upon a plea of
nolo contendere, or its equivalent, shall not, in and of itself, create a
presumption or otherwise constitute evidence that the Indemnitee's actions
constituted actual fraud, gross negligence or willful or wanton misconduct.
(b) Expenses (including legal fees and expenses) incurred in defending
any proceeding subject to Section 6.13(a) shall be paid by the Partnership in
advance of the final disposition of such proceeding upon receipt of an
undertaking (which need not be secured) by or on behalf of the Indemnitee to
repay such amount if it shall ultimately be determined, by a court of competent
jurisdiction or otherwise, that the Indemnitee is not entitled to be indemnified
by the Partnership as authorized hereunder.
<PAGE> 44
(c) The indemnification provided by this Section 6.13 shall be in
addition to any other rights to which each Indemnitee may be entitled under any
agreement or vote of the Partners, as a matter of law or otherwise, both as to
action in the Indemnitee's capacity as a Partner or as a partner, shareholder,
officer, director, employee or agent of a Partner, or as to action in the
Indemnitee's capacity as a Person serving at the request of the Partnership as
set forth above, and shall continue as to an Indemnitee who has ceased to serve
in such capacity and shall inure to the benefit of the heirs, successors,
assigns, administrators and personal representatives of the Indemnitee. Such
indemnification, however, shall only apply to Indemnifiable Losses incurred by
virtue of the Indemnitee's status as a Partner, Affiliate or officer, director,
partner, shareholder, employee or agent thereof, and not as to Indemnifiable
Losses incurred in other capacities (for example, by virtue of contracting with
the Partnership to provide CyberStar Service or to provide services or products
to the Partnership).
(d) The Partnership may purchase and maintain insurance on behalf of
any one or more Indemnitees and other such Persons as the General Partner may
determine against any liability which may be asserted against or expense which
may be incurred by such Person in connection with the Partnership's activities,
whether or not the Partnership would have the power to indemnify such Person
against such liability under the provisions of this Agreement.
(e) Any indemnification hereunder shall be satisfied only out of the
assets of the Partnership and no Partner shall be subject to personal liability
by reason of these indemnification provisions.
(f) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 6.13 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
(g) The provisions of this Section 6.13 are for the benefit of the
Indemnitees and the heirs, successors, assigns, administrators and personal
representatives of the Indemnitees and shall not be deemed to create any rights
for the benefit of any other Persons.
(h) Any Person that proposes to assert the right to be indemnified
under this Article VI shall, promptly after receipt of notice of any action
which is subject to indemnification hereunder, notify the Partnership of the
commencement of such action, enclosing a copy of all papers served. The failure
so to notify the Partnership of any such action shall not relieve the
Partnership from any liability that it may have to any indemnified party
hereunder, except to the extent the Partnership is prejudiced thereby. In case
any such action shall be brought
<PAGE> 45
and notice given to the Partnership of the commencement thereof, the Partnership
shall be entitled to participate in, and to assume the defense thereof, with
counsel reasonably satisfactory to the indemnified party, and after notice from
the Partnership to such indemnified party of its election so to assume the
defense thereof, the Partnership shall not be liable to such indemnified party
for any legal or other expenses, except as provided below and except for the
reasonable costs of investigation subsequently incurred by such indemnified
party at the request of the Partnership in connection with the defense thereof.
The indemnified party shall have the right to employ separate counsel and to
participate in (but not control) any such action, but the fees and expenses of
such counsel shall be the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party has been authorized by the
Partnership, (ii) the employment of separate counsel is necessitated by a
conflicting interest among indemnified parties, or (iii) the Partnership shall
not in fact have employed counsel to assume the defense of such action. In each
such case, the fees and expenses of counsel shall be at the expense of the
Partnership. The Partnership shall not be liable for any settlement of any
action or claims effected without its written consent unless the Partnership has
failed to assume the defense of any such action or claims.
SECTION 6.14. Liability of the General Partner.
(a) Notwithstanding anything to the contrary in this Agreement, the
General Partner, the GP Affiliates and all officers, directors, partners,
shareholders, employees and agents of the General Partner and the GP Affiliates
shall not be liable to the Partnership or to the Limited Partners for any losses
sustained or liabilities incurred as a result of any act or omission of the
General Partner, a GP Affiliate or any such officers, directors, partners,
shareholders, employees or agents if the conduct of the General Partner, such GP
Affiliate or such officer, director, partner, shareholder, employee or agent did
not constitute gross negligence, or Nonperformance. For purposes of this
Agreement, any act or omission, if done or omitted to be done in reliance upon
the advice of legal counsel or public accountants (the "Professionals") selected
with reasonable care, will be conclusively presumed not to constitute gross
negligence or Nonperformance.
(b) The General Partner shall fully indemnify and hold harmless the
Limited Partners and their Affiliates and their respective partners, officers,
directors, employees and agents to the fullest extent permitted by law from and
against any and all losses, claims, demands, costs, damages, liabilities (joint
or several), expenses of any nature (including attorney's fees and
disbursements), judgments, fines, settlements and other amounts including, but
not limited to, those arising directly or indirectly from or relating to any
civil, criminal, administrative or investigative proceeding, arising out of or
<PAGE> 46
incidental to conduct by the General Partner with respect to the business or
activities of or relating to the Partnership which constituted Nonperformance.
The obligations of the General Partner under this Section 6.14 shall extend only
to its own acts or omissions and in no event shall the General Partner be liable
for the acts or omissions of its Affiliates or any other Person or indirect,
consequential, punitive or exemplary damages.
SECTION 6.15. Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, approval, order, bond, debenture, or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, entities
providing CyberStar Service, and other consultants and advisers selected by it,
and any advice of such Person as to matters which the General Partner believes
to be within such Person's professional experience shall be full and complete
authorization and protection in respect of any action taken or suffered or
omitted by the General Partner hereunder in good faith and in accordance with
such advice. Any such Person receiving confidential information shall be deemed
to be bound by a confidentiality agreement containing substantially the same
terms as Section 15.13.
(c) Any standard of care and duty (including fiduciary duties) implied
by the Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner or any of their respective officers, directors, shareholder,
partners, employees, representatives or agents (each a "Covered Person") to act
under this Agreement or any other agreement contemplated by this Agreement and
to make any decision pursuant to the authority prescribed in this Agreement, so
long as such action is reasonably believed by the Covered Person to be in, or
not inconsistent with, the best interests of the Partnership and to be not
inconsistent with the terms of this Agreement. To the extent that, at law or in
equity, a Covered Person has duties (including fiduciary duties) and liabilities
relating to the Partnership or to the Partners, such Covered Person shall not be
liable to the Partnership or to any Partner for its good faith reliance on this
Agreement.
SECTION 6.16. Conversion to Corporate Form.
(a) In the event that the General Partner shall determine that it is
desirable or helpful for the business of the Partnership to be conducted in a
corporate or other form rather than in a partnership form, the General Partner
may convert the Partnership into corporate form or take such other action as it
<PAGE> 47
may deem advisable in light of such changed conditions, including, without
limitation, dissolving the Partnership; provided, however, that the General
Partner may not convert the Partnership into corporate form without obtaining
the Consent of the Partners and the Approval of the Founding Partners. In
connection with any such conversion of the Partnership into corporate form, the
Partners (other than Delinquent Partners) shall receive, in exchange for their
Units, shares of capital stock of the corporate entity or entities into which
the Partnership has been converted (the "Successor Corporation") that have
substantially the same relative rights and preferences as to dividends and
distributions and substantially the same voting and transfer rights, subject in
each case to any modifications required solely as a result of the conversion to
corporate form (all such rights and preferences being referred to, collectively,
as "Equity Rights"), as are set forth in this Agreement as among the holders of
interests in the Partnership.
(b) Prior to taking any such action to convert the Partnership into
corporate form, the General Partner shall submit to the other Partners the
proposed forms of a certificate or articles or incorporation, by-laws,
shareholders' agreement and any other governing documents proposed to be used to
organize the Successor Corporation (the "Governing Documents"). If Partners (the
"Objecting Partners") holding Units representing at least 50% of the total
number of outstanding Units held by all Partners (other than Delinquent
Partners) provide written notice to the General Partner within 15 days of the
date the proposed forms of Governing Documents are submitted to the Partners
that they have concluded in good faith that, based upon such Governing
Documents, the shares of capital stock of the Successor Corporation proposed to
be issued to them in exchange for such Units do not have the same Equity Rights
as are set forth in this Agreement, the General Partner and the Objecting
Partners shall negotiate in good faith to resolve any differences with respect
thereto. If the General Partner and the Objecting Partners do not resolve such
differences, the General Partner may appoint an investment banking firm of
internationally recognized standing reasonably acceptable to the Objecting
Partners to advise the Partnership as to such dispute, and the conclusion of
such firm shall be binding on the parties, and any modification recommended by
such investment banking firm in the Equity Rights shall be incorporated into the
Governing Documents. Upon such incorporation, the General Partner shall be
deemed to have obtained the Consent of the Partners to convert the Partnership
into corporate form. Nothing contained herein shall be construed to give the
Limited Partners any right to cause the business of the Partnership to be
conducted in corporate form or to limit the right of the General Partner to
elect, at any time, to continue such business as a partnership.
(c) Notwithstanding anything to the contrary in this Agreement, the
General Partner shall have the right, without the approval of any other Partner,
to admit, as a nonmanaging general
<PAGE> 48
partner or a limited partner, a corporation formed for the purpose of acting as
such, provided that such corporation: (i) agrees to invest the net proceeds of
all financings it undertakes in additional interests in, or loans to, the
Partnership; (ii) conducts no business not related to its investment in the
Partnership; (iii) has such governance rights as shall be necessary to comply
with the requirements of the Investment Company Act of 1940; and (iv) agrees to
issue to existing holders of Units a limited right (to the extent that such
issuance will not affect the Partnership tax status under applicable law or
otherwise violate applicable law and provided that the General Partner shall
have received a written legal opinion of counsel in form and substance
satisfactory to it that such issuance will not affect the Partnership's tax
status under applicable law and is otherwise permitted under applicable law) to
exchange such Units for interests in such corporation that have, in the good
faith judgment of the General Partner, substantially the same relative rights
and preferences as to dividends and distributions and substantially the same
voting and transfer rights as the Units being exchanged therefor. In making any
determination pursuant to this Section 6.16, the good faith determination of the
General Partner shall be conclusive.
ARTICLE VII.
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
SECTION 7.1. Limitation of Liability. No Limited Partner shall be
personally liable for any debts, liabilities or obligations of the Partnership,
whether to the Partnership, to the General Partner, or to creditors of the
Partnership, beyond the amount contributed (and to be contributed to the
Partnership pursuant to Article IV or other written agreement with the
Partnership or any other Partner) by such Limited Partner to the capital of the
Partnership and such Limited Partner's share of the accumulated but
undistributed profits of the Partnership and the amount of any distribution
(including the return of any Capital Contribution) made to such Limited Partner
that must be returned to the Partnership pursuant to applicable law. All
material agreements to which the Partnership is a party shall include a
statement to the effect that the Partnership is a limited partnership organized
under the laws of Delaware.
SECTION 7.2. Management of Business. The Limited Partners shall not
take part in the operation, management or control (within the meaning of the
Delaware Act) of the Partnership's business, transact any business in the
Partnership's name or have the power to sign documents for or otherwise bind the
Partnership. No Limited Partner has the right to require the partition of
Partnership property or compel any sale or appraisal of Partnership assets or
sale of a deceased Partner's interest herein.
<PAGE> 49
ARTICLE VIII.
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1. Records and Accounting. The Partnership shall keep or
cause to be kept appropriate books and records with respect to the Partnership's
business, which books shall at all times be kept at the principal office of the
Partnership. Any records maintained by the Partnership in the regular course of
its business, books of account and records of Partnership proceedings, may be
kept on, or be in the form of, punch cards, magnetic tape, photographs,
micrographics or any other information storage device, provided that the records
so kept are convertible into clearly legible written form within a reasonable
period of time. The records and books of account of the Partnership will be
audited as of the end of each Fiscal Year by independent certified public
accountants of recognized international standing selected by the General Partner
(other than the principal auditors of the General Partner).
SECTION 8.2. Fiscal Year. The fiscal year (the "Fiscal Year") of the
Partnership shall be the calendar year, unless otherwise determined by the
General Partner in its sole discretion.
SECTION 8.3. Reports.
(a) As soon as practicable, but in no event later than seventy-five
(75) days after the close of each fiscal year, the Partnership shall deliver to
the Partners: (i) reports containing financial statements of the Partnership for
the fiscal year, presented in accordance with GAAP; including a balance sheet, a
statement of income, a statement of Partners' equity and a statement of changes
in cash flow, such statements to be audited by the firm of independent certified
public accountants selected in accordance with Section 8.1, and (ii) similar
reports prepared in accordance with the terms of this Agreement.
(b) As soon as practicable, but in no event later than thirty (30) days
after the close of each calendar quarter, including the last calendar quarter of
each fiscal year, the Partnership shall deliver to the Partners a quarterly
report containing a balance sheet and statements of income and changes in
financial position for such calendar quarter.
SECTION 8.4. Disclosure to Limited Partners.
(a) The Limited Partners shall have full access to all financial and
other information directly related to the business and affairs of the
Partnership. In particular, the following will be open for examination, by any
Limited Partner or his duly authorized representatives:
<PAGE> 50
(i) books and records pertaining to the Partnership's business
showing all of its assets and liabilities, receipts and disbursements,
realized profits and losses, and all transactions (including all
contracts and commitments) entered into by the Partnership;
(ii) a current list of the full name and last known mailing
address of each Partner set out in alphabetical order, together with a
list showing the Capital Contributions and Capital Account of each
Partner;
(iii) a copy of the Certificate of Limited Partnership and all
amendments to it, together with executed copies of any powers of
attorney pursuant to which the Certificate and any amendments to it
have been executed;
(iv) copies of all the Partnership's U.S. Federal, state,
local and foreign income tax returns and reports, if any; and
(v) copies of this Agreement as it may be amended from time to
time.
(b) The Partnership shall make available, on a reasonable basis, its
financial officers (if any) and auditors to the Limited Partners for
consultation and to respond to questions of the Limited Partners relating to the
financial condition of the Partnership. The Partnership will prepare and mail to
each Limited Partner promptly upon the request of any Limited Partner such
further information concerning the business, affairs and financial conditions of
the Partnership as any Limited Partner may reasonably request.
(c) Notwithstanding the provisions set forth in this Section 8.4 or the
other provisions of this Agreement, the Partnership may keep confidential from
the Limited Partners for a period of time deemed reasonable by the General
Partner information otherwise required to be provided pursuant to this Agreement
(excluding any matters required to be disclosed pursuant to Section 8.3 or
clause (ii) - (v) of Section 8.4(a)) to the extent the General Partner, in good
faith, determines (i) that disclosure is not in the best interests of the
Partnership, (ii) that disclosure could damage the Partnership or its business
or (iii) that the Partnership is required by law or by an agreement with a third
party to keep the information confidential.
SECTION 8.5. Determination of Book Value of Partnership Assets.
(a) Except as set forth below, the Book Value of any Partnership asset
is its adjusted basis for federal income tax purposes.
<PAGE> 51
(b) The initial Book Value of any assets (other than cash) contributed
by a Partner to the Partnership shall be the gross fair market value of such
assets as determined by the General Partner.
(c) The Book Values of all of the Partnership's assets shall be
adjusted by the Partnership to equal their respective gross fair market values
as of the following times: (i) upon the contribution of money or other property
to the Partnership by a new Partner or an existing Partner as consideration for
an interest in the Partnership; (ii) immediately prior to the sale of a
substantial portion of, or all of, the Partnership's assets, the adoption of a
plan of liquidation of the Partnership or a distribution of money or other
property by the Partnership to a withdrawing, retiring or continuing Partner in
consideration for the retirement of all or a portion of such Partner's interest
in the Partnership; and (iii) immediately prior to (A) a conversion of the
Partnership to corporate form pursuant to Section 6.16, (B) the consummation of
the Initial Public Offering or (C) the consummation of any other underwritten
sale of equity securities issued by a Partner formed for such purpose to the
public pursuant to a Registration Statement. The Partnership will promptly
report any such adjustment to the Partners.
(d) If the Book Value of any asset of the Partnership is adjusted
pursuant to the provisions of Section 8.5(c), the amount of such adjustment
shall be taken into account, immediately prior to the event giving rise to such
adjustment, as gain ("Book Up Gain") or loss ("Book Up Loss") from the
disposition of such asset and shall be credited or charged to the Capital
Accounts of the Partners as follows:
(i) first, to the Partners so as to cause, as nearly as
practicable, the Capital Account balances of the Partners to be in
proportion to their respective Percentage Interests; provided that no
allocations of Book Up Gain shall be made to Delinquent Partners; and
(ii) thereafter, to the Partners in proportion to their
respective Percentage Interests; provided that no allocations of Book
Up Gain shall be made to Delinquent Partners.
ARTICLE IX.
TAX MATTERS
SECTION 9.1. Preparation of Tax Returns.
(a) The General Partner shall arrange for the preparation and timely
filing of all returns of Partnership income, gains, deductions, losses and other
items necessary for U.S. federal and state and foreign tax purposes. The General
Partner shall use all reasonable efforts to furnish to the Partners within 90
days
<PAGE> 52
of the close of the taxable year the tax information reasonably required for
U.S. federal, state and foreign income tax reporting purposes. Subject to the
provisions of Section 9.2, the classification, realization and recognition of
income, gain, losses and deductions and other items shall be on the accrual
method of accounting for federal income tax purposes, to the extent permitted by
applicable law. The taxable year of the Partnership shall be the calendar year,
unless otherwise required by U.S. federal income tax laws and the Treasury
Regulations thereunder or unless otherwise determined by the General Partner.
(b) The General Partner will prepare the state and local tax returns
for those Limited Partners who are not otherwise engaged in business in the
United States, or in any state in the United States in which such Limited
Partner is required to file a tax return solely because of its status as a
limited partner of the Partnership.
SECTION 9.2. Tax Elections. Except as otherwise provided herein, the
General Partner shall, in its sole discretion, determine whether to make any
available election, including but not limited to an election under Code Section
709 to amortize organization and start-up expenditures over a 60 month period,
and an election under Code Section 754 to adjust the bases of Partnership
property with respect to the Partnership or with respect to a transferee
Partner. In the event a Section 754 election is made, the General Partner may in
its sole discretion charge transferees for the additional costs incurred in
preparing their tax information under such election.
SECTION 9.3. Tax Controversies. Subject to the provisions hereof, the
General Partner is designated the Tax Matters Partner (as defined in Section
6231 of the Code), and is authorized and required to represent the Partnership
(at the Partnership's expense) in connection with all examinations of the
Partnership's affairs by tax authorities, including resulting administrative and
judicial proceedings, and to expend Partnership funds for professional services
and costs associated therewith. The Partners agree to cooperate with the General
Partner and to do or refrain from doing any or all things reasonably required by
the General Partner to conduct such proceedings, provided that the foregoing
shall not be construed to prevent a Partner from taking steps reasonably
necessary to protect and defend its own interests.
SECTION 9.4. Taxation as a Partnership. No election shall be made by
the Partnership or any Partner for the Partnership to be excluded from the
application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of
the Code or from any similar provisions of any state tax laws, without the
Consent of the Partners.
<PAGE> 53
ARTICLE X.
TRANSFER OF INTERESTS
SECTION 10.1. Transfer.
(a) The term "transfer," when used in this Article X with respect to a
Unit, includes a sale, assignment, gift, pledge, encumbrance, hypothecation,
mortgage, exchange or any other disposition.
(b) No Unit may be transferred, in whole or in part, unless such Unit
is transferred in accordance with the other terms and conditions set forth in
this Article X. Any transfer or purported transfer of any Unit not made in
accordance with this Article X shall be null and void.
(c) Notwithstanding anything contained herein to the contrary, no
transfer of a Unit may be made if such transfer (i) would violate the then
applicable foreign, federal or state securities laws or rules and regulations of
the U.S. Securities and Exchange Commission, state securities commissions, the
Communications Act, or rules and regulations of the FCC and any other U.S. or
foreign government agencies with jurisdiction over such transfer; (ii) would
affect the Partnership's existence or qualification under the Delaware Act;
(iii) would subject the Partnership, any Partner or any of their Affiliates to
any additional regulatory requirements; or (iv) except as contemplated by
Section 6.16, would cause the dissolution of the Partnership for U.S. federal
income tax purposes or cause the Partnership to be classified other than as a
partnership for U.S. federal income tax purposes or cause it to be classified as
a publicly traded partnership for U.S. federal income tax purposes. In the event
a transfer of a Unit is otherwise permitted hereunder, notwithstanding any
provision hereof, no Partner shall transfer all or any portion of such Partner's
Unit unless and until such Partner provides, at least ten (10) Business Days
prior to such proposed transfer, written notice of such proposed transfer and
upon the request of the Partnership, delivers to the Partnership an opinion of
counsel, addressed to the Partnership, reasonably satisfactory to the
Partnership, to the effect: (1) that such Unit has been registered under the
Securities Act and any applicable state securities laws, or that the proposed
transfer of such Unit is exempt from any registration requirements imposed by
such laws and that the proposed transfer does not violate any other applicable
requirements of federal or state securities laws; and (2) that such transfer
will not cause: (A) the dissolution of the Partnership for U.S. federal income
tax purposes, (B) the Partnership to be classified other than as a partnership
for U.S. federal income tax purposes, or (C) the Partnership to be taxable as a
"publicly traded partnership" within the meaning of section 7704 of the Code;
and (3) as to the matters contained in clauses (i)-(iii) of this Section
10.1(c). Such opinion shall not be deemed delivered until the Partnership
<PAGE> 54
confirms to such Partner that such opinion is acceptable, which confirmation
will not be unreasonably withheld.
(d) Notwithstanding anything to the contrary contained herein, a
Partner will not take any action which would constitute or result in the
transfer of control of the Partnership if such transfer would require, under
existing law (including, without limitation, the written rules and regulations
promulgated by the FCC), the prior approval of the FCC, without first obtaining
such approval of the FCC.
SECTION 10.2. Transfer of Units.
(a) If a Partner desires to transfer any Units to any Person other than
a Affiliate (the "Outside Party"), such Partner (the "Offering Partner") shall
give a notice in writing (the "Transfer Notice") to the Partnership and to all
of the Partners, setting forth such desire, the price and the Units to be
transferred. Upon the giving of such Transfer Notice, the Founding Partners
(other than Delinquent Partners) shall have the first option (but not the
obligation) to purchase all or any portion of the Units specified in such
Transfer Notice at the price specified in the Transfer Notice by giving a
written notice (a "First Election Notice") to the Offering Partner and to the
Partnership within thirty (30) days after the date of the Transfer Notice. A
First Election Notice shall state the number of Units, if any, which the
Founding Partner elects to purchase. If the total number of the Units that the
Founding Partners elect to purchase exceeds the number of Units specified in the
Transfer Notice, then the number of Units purchasable pursuant to such Transfer
Notice shall be apportioned among the Founding Partners as follows:
(i) first, to each Founding Partner on a proportional basis
based on the fraction whose numerator shall be the number of Units held
by such Founding Partner and whose denominator shall be the number of
Units held by all Founding Partners that have delivered a First
Election Notice, up to the amount specified in such Founding Partner's
First Election Notice; and
(ii) second, to each Founding Partner that does not, under
Section 10.2(a)(i) above, receive the full amount of Units specified in
such Founding Partner's First Election Notice, on a proportional basis
based on the fraction whose numerator shall be the number of Units held
by such Founding Partner and whose denominator shall be the number of
Units held by all of the Founding Partners that did not, under Section
10.2(a)(i) above, receive the full amount of Units specified in their
First Election Notices.
The failure by a Founding Partner to deliver a First Election Notice within (30)
days after the date of the Transfer Notice
<PAGE> 55
shall operate as a waiver of such Founding Partner's rights under this Section
10.2(a).
(b) If the Founding Partners do not elect to purchase all of the Units
described in the Transfer Notice pursuant to Section 10.2(a), the other Partners
(other than Delinquent Partners) shall thereupon have the second option (but not
the obligation) to purchase all or any portion of the remaining offered Units,
but such second option shall only be exercisable during the forty-five (45) day
period after the date of the Transfer Notice. At any time during such forty-five
(45) day period, such other Partners may elect, by written notice to the
Offering Partner (a "Second Election Notice"), to purchase all or any portion of
the remaining Units. Each Second Election Notice shall state the number of
Units, if any, which such other Partner elects to purchase. If the aggregate
number of Units which such other Partners elect to purchase exceeds the
remaining Percentage Interests, then the remaining Percentage Interests
purchasable pursuant to such Transfer Notice shall be apportioned among the
other Partners as follows:
(i) first, to each such Partner on a proportional basis based
on the fraction whose numerator shall be the number of Units held by
such Partner and whose denominator shall be the number of Units held by
all Partners that have delivered a Second Election Notice, up to the
amount specified in such other Partner's Second Election Notice; and
(ii) second, to each such Partner that does not, under Section
10.2(b)(i) above, receive the full amount of Units specified in such
Partner's Second Election Notice, on a proportional basis based on the
fraction whose numerator shall be the number of Units held by such
Partner and whose denominator shall be the number of Units held by all
of the Partners that did not, under Section 10.2(b)(i) above, receive
the full amount of Units specified in their Second Election Notices.
The failure of the other Partners to exercise such second option within such
forty-five (45) day period shall operate as a waiver of such Partner's rights
under this Section 10.2(b).
(c) If the Founding Partners and the other Partners do not collectively
elect to purchase all of the Units offered in the Transfer Notice, then the
Partnership shall thereupon have the third option (but not the obligation) to
purchase the full remaining amount of the offered Units, but such third option
shall only be exercisable during the sixty (60) day period after the date of the
Transfer Notice. At any time during such sixty (60) day period, the Partnership
may elect, by written notice to the Offering Partner (the "Third Election
Notice"), to purchase the full remaining amount of the offered Units. The
failure of the Partnership to deliver a Third Election Notice within such
<PAGE> 56
sixty (60) day period shall operate as a waiver of the Partnership's rights
under this Section 10.2(c).
(d) If the Transfer Notice required to be given by the Offering Partner
under this Section shall have been duly given, and if all of the offered Units
shall not have been purchased by the Partners and the Partnership pursuant to
the foregoing options, then the Offering Partner, at any time within a period of
one hundred twenty (120) days from the date of the Transfer Notice, may transfer
all, but not less than all, of the Units specified in the Transfer Notice to an
Outside Party at a price not less than 95% of the price specified in such
notice; provided, however, that in the event the Offering Partner has not
transferred all of such Units to an Outside Party within such one hundred twenty
(120) day period, then such Units thereafter shall continue to be subject to all
of the restrictions contained in this Agreement as though no option notices had
ever been given; and provided, further, that a Partner may not deliver more than
one (1) Transfer Notice in any calendar year. If a Partner or the Partnership
elects to purchase Units pursuant to subsections 10.2(a-c), it shall be
obligated to purchase, and the Offering Partner shall be obligated to sell, such
Units. The closing of such purchase and sale shall be held at the principal
executive offices of the Partnership at such time as may be mutually acceptable
to the Offering Partner, the Partnership and each participating Partner.
(e) No Waiver. No failure to exercise any rights under this Section
10.2 shall constitute a waiver of any Person's rights to receive an option
notice with respect to any subsequent proposed transfer to a third party.
(f) Involuntary Transfers of Interest. Following any Involuntary
Transfer of a Partner's Units, such Partner shall promptly notify the
Partnership in writing of the occurrence of such Involuntary Transfer and the
other Partners and the Partnership shall have the same rights under this Section
10.2 with respect to such Units (collectively, the "Transferred Interest") as if
the Involuntary Transfer had been a proposed transfer described in subsections
10.2(a-d) above, except that:
(i) the periods within which such rights must be exercised
shall run from the date notice of the Involuntary Transfer is received
from the Offering Partners;
(ii) such rights shall be exercised by notice to the
involuntary transferee rather than to the Offering Partner; and
(iii) the price per Unit shall be the fair market value of
such Unit, as determined by the Consent of the Partners.
<PAGE> 57
At the closing of any purchase under this Section 10.2(f), the involuntary
transferee shall deliver certificates representing the Transferred Interest
being purchased by the Partners and/or the Partnership duly endorsed for
transfer and accompanied by any requisite transfer taxes, and such Transferred
Interest shall be free and clear of any liens, claims, options, charges,
encumbrances of rights of others arising through the action or inaction of the
involuntary transferee (other than those arising hereunder) and the involuntary
transferee shall so represent and warrant, and further represent and warrant
that he is the beneficial owner of such Transferred Interest. The Partners or
the Partnership, as the case may be, shall deliver at closing, by a certified or
cashier's bank check, payment in full for such Transferred Interest. At such
closing, all of the parties to the transaction shall execute such additional
documents as are otherwise reasonably necessary or appropriate.
(g) In the event that the provision of Section 10.2(f) above shall be
held to be unenforceable with respect to any particular Involuntary Transfer or
if the Partners and the Partnership do not exercise their rights to purchase
such Transferred Interest, then (a) the Partners and the Partnership shall have
a right of first offer as set forth in subsections 10.2(a-d) above if the
involuntary transferee subsequently desires to transfer such Interest, and (b)
the terms and conditions of this Agreement shall apply to the involuntary
transferee who shall agree in writing to be bound hereby as a condition to
transfer.
(h) Permitted Transfers of Units. This Section 10.2 shall not apply to
any transfer by a Partner of all or any portion of its Units to any Affiliate of
such Partner but such assignment shall not release the transferor from its
obligations hereunder. Prior to such transfer, such Affiliate shall affirm in
writing that it shall be subject to the terms and conditions of this Agreement.
SECTION 10.3. Change of Control. (a) If an Ultimate Parent and its
Affiliates shall cease for any reason to own beneficially, directly or
indirectly, at least a majority of the voting power of all outstanding equity
securities of a Partner or any Parent of a Partner other than the Ultimate
Parent, such Partner shall immediately offer the Units held by such Partner to
the other Partners and the Partnership in the same manner as that set forth in
subsections 10.2(a-d) above, except that the price per Unit shall be the fair
market value of such Unit, (i) as determined by agreement between such
transferring Partner and the General Partner, if such transferring Partner is a
Limited Partner, or between such transferring Partner and all of the Founding
Partners, if such transferring Partner is the General Partner, or (ii) absent
such agreement, as determined by a nationally recognized investment banking firm
selected by the General Partner, subject to the reasonable objection of the
transferring partner, in which case the expenses of such
<PAGE> 58
investment banking firm shall be borne by such transferring Partner.
(b) If any Person shall acquire (whether by merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions) beneficial ownership of equity securities of the
Ultimate Parent of a Partner in excess of 50 percent of the voting power of all
outstanding equity securities of such Parent generally entitled to vote for the
election of directors, such Partner shall immediately deliver to the Partnership
a Parent's Guarantee executed by such Person. If such Parent's Guarantee is not
delivered within ten (10) Business Days of the consummation of such acquisition,
the Units held by such Partner shall be offered to the other Partners and the
Partnership pursuant to Section 10.3(a) above.
(c) If, in any three-year period, a majority of the members of the
Board of Directors of a Parent of a Partner, which members were elected during
such three-year period against the recommendation of management of such Parent
or its Board of Directors in office immediately prior to such election (for
purposes of this Section 10.3(c), a member of the Board of Directors whose
initial election occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the U.S. Securities Exchange Act of 1934, as amended) shall be deemed to
have been elected against the recommendation of such Board of Directors), and if
any of the members constituting such majority owns, whether directly or
indirectly, 5% or more of an entity engaged in a Similar Business, or is a
member, partner, shareholder, director, associate, employee, agent or nominee of
any entity that owns, whether directly or indirectly, 5% or more of an entity
engaged in a Similar Business, then the Units held by such Partner shall be
offered to the other Partners and the Partnership pursuant to Section 10.3(a)
above.
ARTICLE XI.
ADMISSION OF SUCCESSOR PARTNERS
SECTION 11.1. Admission of Successor Limited Partner. (a) A transferee
of a Limited Partner's Unit pursuant to Section 10.2 shall not be admitted to
the Partnership as a successor Limited Partner, (i) until the transferee shall
have furnished the Partnership with an agreement, in form reasonably
satisfactory to the General Partner, to be bound by all the terms and conditions
of this Agreement and such other documents or instruments (including, without
limitation, Investor Documents and Parent's Guarantees) as may be required by
the General Partner in order to effect such transferee's admission as a Partner
and (ii) unless such Limited Partner is not a Delinquent Partner. Prior to the
time that any transferee of Units is admitted to the Partnership as a Partner,
it will have only the rights of a transferee under
<PAGE> 59
Delaware law, and shall have no right to require any information or account of
the Partnership transactions constituting Confidential Information or to inspect
the Partnership's books.
(b) Any transferee of a Limited Partner's Unit who meets the
requirements of Section 11.1(a) shall be admitted as a successor Limited
Partner.
SECTION 11.2. Admission of Successor General Partner. The transferee of
or successor to any Unit of the General Partner pursuant to Section 10.2 shall
be admitted to the Partnership as a General Partner without the need to obtain
the consent of the other Partners, effective immediately and upon the receipt of
required (if any) FCC approval pursuant to Section 10.1(d), and shall continue
the business of the Partnership without dissolution. The successor General
Partner shall furnish to the Partnership (a) acceptance in form satisfactory to
counsel to the Partnership of all the terms and conditions of this Agreement and
(b) such other documents or instruments as may be required by such counsel in
order to effect its admission as a General Partner.
SECTION 11.3. Amendment of Agreement and of Certificate of Limited
Partnership. For the admission to the Partnership of any successor Partner, the
Partnership shall take all steps necessary and appropriate to prepare and as
soon as practicable an amendment of this Agreement and to prepare and record or
file as soon as practicable an amendment to the Certificate of Limited
Partnership and may for this purpose exercise the power of attorney granted
pursuant to Section 1.5.
ARTICLE XII.
RIGHT TO BECOME LIMITED PARTNER
SECTION 12.1. Right of the General Partner to Become a Limited Partner.
The General Partner may also become a Limited Partner by either (i) converting
some but not all of its Units to limited Units or (ii) acquiring limited Units
and thereby become entitled to all of the rights of a Limited Partner to the
extent of the limited Unit so converted or acquired, and the Consent of the
Partners need not be obtained. Such event shall not be deemed to reduce any of
the General Partner's liability hereunder and will not prevent the General
Partner from continuing to act as the General Partner. The General Partner's
Capital Contribution referred to in Schedule A as of the Effective Date will be
made in its capacity as a General Partner and such Capital Contribution will not
entitle the General Partner to any rights of a Limited Partner, including those
set forth in Article VII hereof.
SECTION 12.2. Withdrawal of Limited Partner. A Limited Partner who
shall have withdrawn from the Partnership shall have no further rights
hereunder.
<PAGE> 60
ARTICLE XIII.
DISSOLUTION AND LIQUIDATION
SECTION 13.1. Dissolution. The Partnership shall dissolve and its
affairs shall be wound up upon:
(a) December 31, 2050;
(b) the withdrawal of the General Partner, or any other event that
results in its ceasing to be a General Partner such as the removal, bankruptcy
or dissolution of the General Partner unless within 90 days of the General
Partner's ceasing to be a General Partner of the Partnership, Partners holding
50% of those Units held by Limited Partners as of the date of such cessation
agree in writing to continue the business of the Partnership and to the
appointment, effective as of the date on which the General Partner ceases to be
a General Partner of the Partnership, of one or more additional General Partners
if necessary or desired;
(c) any other event that under the Delaware Act would cause its
dissolution; or
(d) at the election of the General Partner, provided that the General
Partner has obtained any Consent of the Partners and/or Approval of the Founding
Partners that is otherwise required herein.
For purposes of this Section 13.1, bankruptcy of the General Partner shall be
deemed to have occurred when (i) it commences in good faith and under
appropriate circumstances a voluntary proceeding or files in good faith and
under appropriate circumstances an answer or other pleading admitting or failing
to contest the material allegations of a petition filed against it in any
involuntary proceeding, which voluntary or involuntary proceeding seeks a
liquidation, reorganization or other relief under any bankruptcy, insolvency or
other similar law now or hereafter in effect, (ii) it is adjudged bankrupt or
insolvent, or has entered against it a final and non-appealable order for relief
under any bankruptcy, insolvency or similar law now or hereafter in effect,
(iii) it executes and delivers a general assignment for the benefit of its
creditors, (iv) it seeks, consents to or acquiesces in the appointment of a
trustee, receiver or liquidator for it or for all or any substantial part of its
properties, or (v) (1) any proceeding of the nature described in clause (i)
above has not been dismissed 120 days after the commencement thereof, (2) the
appointment without its consent or acquiescence of a trustee, receiver or
liquidator appointed pursuant to clause (ii) above has not been vacated or
stayed within 90 days of such appointment, or (3) such appointment is not
vacated within 90 days after the expiration of any such stay.
<PAGE> 61
SECTION 13.2. Winding Up and Liquidation.
(a) Upon dissolution of the Partnership other than pursuant to Section
6.16, the General Partner or, in the event the General Partner has withdrawn
from the Partnership, a liquidator or liquidating committee selected by Consent
of the Partners, shall be responsible for the winding up of the affairs of the
Partnership and the distribution of its assets. The Person or Persons who assume
such responsibility (whether they be the General Partner or not) are referred to
herein as the "Liquidator." In connection with a winding up of the affairs of
the Partnership, the Liquidator shall cause an accounting to be made of the
assets and liabilities of the Partnership. If any liability is contingent or
uncertain in amount, a reserve will be established in such amount as the
Liquidator deems reasonably necessary. Upon satisfaction or other discharge of
such contingency, the amount of the reserve not required, if any, will be
distributed as provided in this Section 13.2.
(b) The Liquidator (if other than the General Partner) shall be
entitled to receive such compensation for its services as may be approved by
Consent of the Partners. The Liquidator shall agree not to resign at any time
without 15 days' prior written notice and (if other than the General Partner)
may be removed at any time, with or without cause, by notice of removal signed
by Consent of the Partners. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be selected by Consent of the Partners. The right to appoint a
successor or substitute Liquidator in the manner provided herein shall be
recurring and continuing for so long as the functions and services of the
Liquidator are authorized to continue under the provisions hereof, and every
reference herein to the Liquidator will be deemed to refer also to any such
successor or substitute Liquidator appointed in the manner herein provided.
Except as expressly provided in this Article XIII, the Liquidator appointed in
the manner provided herein shall have and may exercise, without further
authorization or consent of any of the parties hereto, all of the powers
conferred upon the General Partner under the terms of this Agreement (but
subject to all of the applicable limitations, contractual and otherwise, upon
the exercise of such powers) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding up
and liquidation of the Partnership as provided for herein.
(c) The Liquidator shall sell or otherwise liquidate the assets of the
Partnership; allocate all income, gain, loss and deduction (including any
income, gain, loss or deduction inherent in Partnership assets that are not
sold) among the Capital Accounts of the Partners in accordance with Section 5.1;
and
<PAGE> 62
apply and distribute the proceeds of such liquidation in the following order of
priority, unless otherwise required by mandatory provisions of applicable law:
(i) to the payment of Partnership creditors, including
Partners in respect of loans or guaranteed payments, in order of
priority provided by law;
(ii) to the establishment of reasonable reserves for
contingencies; and
(iii) thereafter to make distributions to the Partners in
accordance with the positive balances in their respective Capital
Accounts (determined after applying the provisions of Articles V and
VIII).
(d) The Liquidator shall be authorized to sell any, all or
substantially all of the assets of the Partnership for deferred payment
obligations, and to hold, collect and otherwise administer any such obligations
or any other deferred payment obligations held or acquired as assets of the
Partnership, regardless of the terms of such obligations.
(e) A reasonable time, including, without limitation, any time required
to collect deferred payment obligations, shall be allowed for the orderly
liquidation of the assets of the Partnership and the discharge of liabilities to
creditors so as to enable the Liquidator to minimize the normal losses attendant
upon the liquidation. The General Partner shall not be personally liable for the
return of the original investment or contributions of the Limited Partners, or
any portion thereof. Any such return shall be made solely from Partnership
assets and in accordance with the express provisions hereof.
(f) If, in the process of collecting any deferred payment obligation
generated by a sale of assets of the Partnership, the Partnership reacquires any
such assets, and if, at such time, there is a General Partner and the same so
determines, the Partnership shall be reconstituted with the Consent of the
Partners upon the terms and conditions hereof.
SECTION 13.3. Cancellation of Certificate of Limited Partnership. Upon
the completion of the distribution provided for in Section 13.2, the Partnership
shall be terminated, and the Liquidator (or the General Partner and the Limited
Partners if necessary) shall cause the cancellation of the Certificate of
Limited Partnership and all qualifications of the Partnership as a foreign
limited partnership in jurisdictions other than the State of Delaware and shall
take such other actions as may be necessary to terminate the Partnership.
SECTION 13.4. Return of Capital. The General Partner shall not be
personally liable for the return of the Capital Contribution of the Limited
Partners, or any portion thereof, it
<PAGE> 63
being expressly understood that any such return shall be made solely from
Partnership assets.
SECTION 13.5. Waiver of Partition. Each Partner hereby waives any
rights to partition of Partnership property.
SECTION 13.6. Deficit Upon Liquidation. Upon liquidation, the Partners
shall not be obligated to the Partnership for any deficit in their Capital
Accounts.
ARTICLE XIV.
AMENDMENT OF PARTNERSHIP AGREEMENT
SECTION 14.1. Amendments to be Adopted Without Consent of the Partners.
The General Partner (pursuant to powers of attorney granted under Section 1.5),
without obtaining the Consent of the Partners, may amend any provision of this
Agreement, and execute, swear to, acknowledge, deliver, publish, file and record
whatever documents may be required in connection therewith, to reflect:
(a) a change in the name of the Partnership or a change in the location
of the principal place of business of the Partnership, in each case approved by
the General Partner;
(b) a change that the General Partner, based upon the opinion of
outside counsel, furnished to all the Partners, has determined to be reasonable
and necessary or advisable (i) to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or (ii) to ensure
that the Partnership will not be treated other than as a partnership for U.S.
federal income tax purposes;
(c) a change (i) that the General Partner, based upon the opinion of
outside counsel, furnished to all the Partners, has determined is necessary or
desirable to satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or state agency
or judicial authority or contained in any federal or state statute, compliance
with any of which the General Partner deems to be in the best interests of the
Partners or the Partnership, or (ii) that is expressly required or expressly
contemplated by this Agreement or is otherwise herein expressly permitted to be
made by the General Partner;
(d) immaterial amendments to correct any mistake or clear omission or
to reflect the surrender of any rights or the assumption of any additional
responsibilities by the General Partner; or
(e) any amendment necessary to give effect to the issuance and sale of
Additional Units permitted by this Agreement or to
<PAGE> 64
give effect to the admission of any Additional Partners pursuant thereto,
including such amendments to Article V hereof as are necessary to give effect to
any allocations of income or loss to the holder of such Additional Units and any
distributions to be made to such holders.
SECTION 14.2. Amendment Procedures. Except as provided in Section 14.1,
all amendments to this Agreement shall be made in accordance with the following
requirements. Subject to Sections 6.2(a)(ii) and 14.1, any proposed amendment
shall be effective only upon the consent of the General Partner and the Consent
of the Partners, provided, that (except as provided in Section 14.1) no
amendment adversely affecting the capital account or other economic rights of
any Partner shall be made without such Partner's consent. Promptly after the
adoption of an amendment to this Agreement as provided hereunder, the
Partnership shall forward a copy of such amendment to each Partner.
ARTICLE XV.
GENERAL PROVISIONS
SECTION 15.1. Addresses and Notices. The address of each Partner for
all purposes shall be the address as set forth on Schedule B attached hereto and
made a part hereof on the date hereof or such other address of which each other
Partner has received written notice. All notices, requests, demands and other
communications required or permitted to be given under this Agreement shall be
sent to the party to whom the notice is to be given, by telex, fax (confirmed by
first class mail, postage prepaid), telegram, Federal Express (or other reliable
delivery service) or first class mail, postage prepaid and properly addressed as
provided in this Agreement (in each case such notice shall be deemed to have
been duly given on the day the notice is first received by that party) or to
such other address or Person as may be designated by a party hereto, by notice
given in accordance with this Section.
SECTION 15.2. Titles and Captions. All article or section titles or
captions in this Agreement are for convenience only. They shall not be deemed
part of this Agreement and in no way define, limit, extend or describe the scope
or intent of any provisions hereof. Except as specifically provided otherwise,
references to "Articles" and "Sections" are to Articles and Sections of this
Agreement.
SECTION 15.3. Pronouns and Plurals. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
SECTION 15.4. Further Action.
<PAGE> 65
(a) The parties hereto shall execute and deliver all documents, provide
all information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
(b) At any time or times, upon the request of the General Partner, the
Partners hereby agree to sign and swear to any certificate required by Delaware
or other applicable law, to sign and swear to any amendment to or cancellation
of any such certificate whenever such amendment or cancellation is required by
or appropriate under law, to sign and swear to or acknowledge similar
certificates or affidavits or certificates of fictitious firm name, trade name
or the like (and any amendments or cancellations thereof) required by or
appropriate under the laws of Delaware or any other jurisdiction in which the
Partnership does or proposes to do business, and cause the filing of any of the
same for record wherever such filing shall be required by law.
SECTION 15.5. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.
SECTION 15.6. Survival of Certain Provisions. Each of the Partners
agrees that the covenants and agreements set forth in Sections 6.7, 6.9, 6.13,
6.14, 6.16(a), 13.2, 15.11 and 15.13 shall survive the dissolution and
termination of the Partnership.
SECTION 15.7. Integration. This Agreement entered into by each Partner
or the assignor of its Units, together with the Investor Documents, constitute
the entire agreement among the parties hereto pertaining to the subject matter
hereof and supersedes all prior agreements and understandings pertaining
thereto.
SECTION 15.8. Creditors. None of the provisions of this Agreement shall
be for the benefit of or enforceable by any creditors of the Partnership (other
than any Indemnities seeking indemnification under Section 6.13).
SECTION 15.9. Waiver. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
SECTION 15.10. Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute one agreement binding on
all the parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart. Each party shall become
bound by this Agreement immediately upon affixing its signature hereto
independently of the signature of any other party.
<PAGE> 66
SECTION 15.11. Dispute Resolution.
(a) The parties hereto shall attempt to resolve by good faith and
diligent negotiation any dispute, controversy or claim between them arising out
of or relating to this Agreement, or the breach, termination or invalidity
thereof. If such negotiations are not concluded within 30 days of delivery by a
party hereto of a request for negotiations, such Party may initiate arbitration
as provided for below.
(b) Arbitration. Any dispute, controversy or claim arising out of or
relating to this Agreement, or the breach, termination or invalidity thereof,
that has not been amicably resolved pursuant to the procedures of Section
15.11(a), shall be exclusively and finally settled by arbitration in accordance
with the Rules of Conciliation and Arbitration of the International Chamber of
Commerce (the "Rules"), as at present in force, by three arbitrators appointed
according to the Rules. The language of the arbitration proceedings shall be
English. The place of arbitration shall be New York, New York, U.S.A.
(c) Resolution of Common Issues. If at any time there is pending an
arbitration under this Section 15.11 and such arbitration involves one or more
issues of law or fact, the resolution of which a Partner (the "First Partner")
desires binding on some or all the other Partners, the First Partner may give
written notice to such other Partners identifying the issue of law or fact, the
resolution of which the First Partner desires to be so binding and inviting each
other Partner to join in such arbitration as provided in this Section 15.11(c).
Each Partner which shall have received such a notice shall have the right (but
shall not be obligated) to become a party to such arbitration for the limited
purpose of the resolution of such issue of law or fact. The arbitrator in such
arbitration may supplement and alter the Rules as may be necessary or
appropriate to accommodate the multi-party nature of the arbitration and to
ensure the just, expeditious, economical and final determination of the dispute.
The award in any such arbitration shall be final and binding as to resolution of
the issues of law or fact decided therein and identified in the notice from the
First Partner given pursuant to this Section 15.11(c), on all of the Partners
who were given notice of such arbitration and an opportunity to participate as
parties therein, whether or not they participated in such arbitration.
(d) Enforcement. Arbitral awards under Section 15.11 shall be final and
binding, and shall be enforceable in any court having jurisdiction.
SECTION 15.12. Governing Law. This agreement shall be construed in
accordance with and governed by the laws of the state of Delaware, without
regard to its principles of conflicts of law.
<PAGE> 67
SECTION 15.13. Confidentiality.
(a) For purposes of this Agreement, "Confidential Information" shall
mean all oral, written and/or tangible technical, financial, business and/or any
other information of whatever kind created by or on behalf of the Partnership or
disclosed by the General Partner, the Partnership or one of their Affiliates (in
any case "Owner") to a receiving party ("Recipient") which is confidential,
proprietary and/or not generally available to the public, including, but not
limited to, information relating, in whole or in part, to present and future
services related to the Partnership's business, business plans and strategies,
marketing ideas and concepts, pricing, volume estimates, financial data, market
testing information, research and development plans and results, specifications,
configurations, designs, plans, drawings, apparatus, sketches, software,
hardware, data, connecting requirements or other technical and business
information. Confidential Information provided by an Owner shall remain the sole
and exclusive property of Owner.
(b) During the term of this Agreement, and until the fifth anniversary
of the termination thereof, Confidential Information:
(i) shall be treated in confidence by Recipient and shall be
used only for purposes of Recipient's performance of its obligations
under this Agreement, or any other written agreement between Owner and
Recipient entered into in connection with the Partnership's business;
(ii) shall not be reproduced or copied in whole or in part,
except as necessary for use as authorized herein; and
(iii) shall be disseminated only to those of its and its
Affiliates' employees, agents and subcontractors who have a need to
know it (and such employees, agents and subcontractors shall be advised
of the obligations assumed herein). Recipient shall ensure by
appropriate procedures that such employees, agents and subcontractors
to whom Confidential Information is disseminated or disclosed treat
such Confidential Information in confidence pursuant to this paragraph.
Such procedures shall include: (A) advising such employees, agents and
subcontractors of the obligations assumed herein, and (B) requiring
such employees, agents and subcontractors to execute a document
agreeing to be bound by all the conditions set forth in this Section
15.13.
(c) Notwithstanding the foregoing, information shall not be deemed
Confidential Information and Recipient shall have no obligation with respect to
any such information which:
(i) is or was in the possession of the Recipient at the time
of disclosure by Owner, and was not previously acquired by the
Recipient directly or indirectly from Owner
<PAGE> 68
or any of its Affiliates under an obligation to keep such information
confidential; or
(ii) is or becomes publicly known, through no negligence or
other wrongful act of Recipient; or
(iii) is received by Recipient from a third party having, to
the best knowledge of the Recipient, a lawful right to disclose,
subject to, as to disclosed information, any restriction as to use,
imposed by such third party; or
(iv) is independently developed by Recipient, as evidenced by
its records.
(d) Upon the termination of this Agreement, written Confidential
Information will be returned to Owner or destroyed immediately upon the request
of Owner, and no copies, extracts or other reproductions shall be retained by
Recipient. All documents, memoranda, notes and other writings whatsoever
prepared by Recipient which contain the Confidential Information shall be
returned to Owner or destroyed at Owner's request. The redelivery or destruction
of such materials shall not relieve Recipient of its obligation of
confidentiality or other obligations hereunder.
(e) If Recipient (or its Affiliate) is required by order of any
competent authority (by oral questions, interrogatories, directions, requests
for information or documents, subpoena, civil investigative demand or similar
process) to disclose any Confidential Information, Recipient will promptly
notify Owner of such order or requirements and shall cooperate with Owner in
seeking appropriate protective arrangements requested by Owner. If, in the
absence of a protective order or the receipt of a waiver hereunder, Recipient
(or any of its Affiliates) is in the written opinion of Recipient's counsel
compelled to disclose the Confidential Information or else stand liable for
contempt or suffer other censure or significant penalty, Recipient (or its
Affiliate) may disclose only so much of the Confidential Information to the
authority compelling disclosure as is required by law. Recipient will exercise
(and will cause its Affiliates to exercise) reasonable efforts to obtain
appropriate protective arrangements or other reliable assurance that
confidential treatment will be accorded to Confidential Information.
(f) The terms and conditions of this Agreement, the Investor Documents
and all exhibits, attachments and amendments hereto and thereto shall be
considered Confidential Information protected under this Section 15.13.
(g) Notwithstanding anything in this Section 15.13 to the contrary, in
the event that any Confidential Information is also subject to a limitation on
disclosure or use contained in another written agreement between Owner and
Recipient which is more restrictive than the limitations contained in this
Section 15.13,
<PAGE> 69
then the limitation in such agreement shall supersede this Section 15.13.
SECTION 15.14. Invalidity of Provisions. (a) If any provision of this
Agreement is or becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby, unless the effect would be to materially
and adversely affect the economic rights of any Partner.
(b) Without vitiating the effectiveness of Section 15.14(a) above, and
without limiting the enforceability of any other provision of this Agreement,
each of the parties to this Agreement agrees that:
(i) if any provision contained in either Section 6.9 or 15.13
shall for any reason be held invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not
affect any other provisions of the respective Section. It is the
intention of the parties that if any of the restrictions or covenants
contained therein is held to be for a length of time which is not
permitted by applicable law, or in any way construed to be too broad or
to any extent invalid, such provision shall not be construed to be
null, void and of no effect, but to the extent such provision would be
valid or enforceable under applicable law, a court of competent
jurisdiction shall construe and interpret or reform the Section to
provide for a covenant having the maximum enforceable time period or
other provisions (not greater than those contained herein) as shall be
valid and enforceable under such applicable law.
(ii) The provisions of Section 6.9 and 15.13 were negotiated
in good faith by the parties hereto, and such provisions are reasonable
and are not more restrictive than necessary to protect the legitimate
interests and objectives of the Partners and the Partnership.
(iii) Each other party hereto would be irreparably harmed by
any breach of either Section 6.9 or 15.13 and that there would be no
adequate remedy at law or in damages to compensate such party for any
such breach; each other party hereto shall be entitled to injunctive
relief requiring specific performance of either Section 6.9 or 15.13,
and each of the parties hereto consents to the entry thereof, and
waives any right to require any other party hereto to post a bond in
order to obtain specific performance.
SECTION 15.15. Number; Gender; Without Limitation; Interpretation of
Certain Defined Terms. Pronouns, wherever used in this Agreement, and of
whatever gender, shall include Persons of every kind and character, and the
singular shall include the plural whenever and as often as may be appropriate.
Any
<PAGE> 70
reference herein to "including" and words of similar import refer to "including
without limitation."
SECTION 15.16. No Right to Partition. The Partners, on behalf of
themselves and their shareholders, partners, members, successors and assigns, if
any, hereby specifically renounce, waive and forfeit all rights, whether arising
under contract or statute or by operation of law, except as otherwise expressly
provided in this Agreement, to seek, bring or maintain any action in any court
of law or equity for partition of the Partnership or any asset of the
Partnership, or any interest which is considered to be Partnership property,
regardless of the manner in which title to such property may be held.
<PAGE> 71
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Agreement as of the date first above written.
"General Partner"
Loral CyberStar, L.L.C.
By: Loral Broadband Holdings, L.P.
as Sole Member
By: Loral CyberStar Ltd.
as General Partner
By: /s/ Eric J. Zahler
-----------------------
Eric J. Zahler
Vice President
"Limited Partners"
Loral Broadband Holdings, L.P.
By: Loral CyberStar Ltd.
as General Partner
By: /s/ Eric J. Zahler
-----------------------
Eric J. Zahler
Vice President
Audelec
By: CyberStar, L.P.
as Attorney-In-Fact for
Audelec
By: Loral CyberStar, L.L.C.
as General Partner
By: Loral Broadband Holdings, L.P.
as Sole Member
By: Loral CyberStar Ltd.
as General Partner
By: /s/ Eric J. Zahler
-----------------------
Eric J. Zahler
Vice President
<PAGE> 1
PURCHASE AND SALE AGREEMENT OF STOCK REPRESENTING THE CAPITAL STOCK OF THE
COMPANY CALLED SATELITES MEXICANOS, S.A. DE C.V. (HEREINAFTER "SATMEX"), ENTERED
INTO BY ONE PARTY, THE FEDERAL GOVERNMENT OF THE UNITED MEXICAN STATES
(HEREINAFTER THE "VENDOR"), THROUGH THE SECRETARIAT OF COMMUNICATIONS AND
TRANSPORT, THROUGH THE UNDER SECRETARY OF COMMUNICATIONS, JAVIER LOZANO ALARCON,
AND BY THE OTHER PARTY CORPORATIVO SATELITES MEXICANOS, S.A. DE C.V. REPRESENTED
HEREIN BY MESSRS LAURO ANDRES GONZALEZ MORENO AND CARLOS RAUL VALENCIA BARRERA,
( HEREINAFTER "BUYER"), WITH THE APPEARANCE OF THE FEDERAL TREASURY (HEREINAFTER
"TESOFE"), THROUGH THE FEDERAL TREASURER, LIC. JONATHAN DAVIS ARZAC; THE
SECRETARIAT OF THE COMPTROLLER'S OFFICE AND ADMINISTRATIVE DEVELOPMENT, THROUGH
EMILIO CARRERA CORTES, DELEGATE COMMISSIONER FOR THE COMMUNICATIONS AND
TRANSPORT SECTOR, AND MR. SERGIO MIGUEL AUTREY MAZA, IN ACCORDANCE WITH THE
FOLLOWING BACKGROUND RECORD, RECITALS AND CLAUSES:
BACKGROUND RECORD
1. On March 2, 1995, the amendment was published in the Official Gazette of
the Federation, to paragraph four of article 28 of the Political
Constitution of the United Mexican States, in order to substitute the
system of exclusive participation by the State in the rendering of
satellite communication service, in order for it to be a priority activity
that allows participation by private parties, and consequently, on June 7
of the same year, the Federal Telecommunications Law was promulgated with
the purpose of establishing among other things, the fundamental regulatory
framework for this activity.
2. By the Accord of the Secretariat of Communications and Transport published
in the Official Gazette of the Federation on February 28, 1996, the
Committee for Restructuring of the Mexican Satellite System was created,
whose object is to define the strategy to be followed concerning general
and specific aspects in the different phases of the restructuring process
carried out by the Secretariat of Communications and Transport
(hereinafter the "SECRETARIAT"), under the terms of the Federal
Telecommunications Law and the other applicable laws, as well as to make
recommendations and proposals.
3. By official letter No. 101,-784, of June 11, 1997, and with the prior,
favorable opinion of the Intersecretarial Commission of Financing Expense,
the Secretariat of the Treasury and Public Credit authorized the temporary
establishment of the majority state controlled company Satelites
Mexicanos, S.A. de C.V. (hereinafter SATMEX), in order to carry out the
restructuring process of the Mexican Satellite System.
<PAGE> 2
4. SATMEX was established via public document No. 51,371 of June 26, 1997,
executed before Lic. Miguel Alessio Robles, notary public 19 of the
Federal District, which was recorded on July 1, 1997 in mercantile folio
226109 of the Public Commerce Registry of the Federal District, SATMEX was
incorporated with a fixed minimum capital stock of $50,000.00 (FIFTY
THOUSAND MEXICAN PESOS 00/100), represented by 5,000 issued shares, of
which 2,550 shares belong to Class I Series "A" and 2,450 shares belong to
Class I Series "B".
5. SATMEX's corporate purpose includes the installation, operation, control
and exploitation of the Mexican satellites system through occupancy and
exploitation of geostationary orbital positions and satellite orbits
assigned to the country, with their respective frequency bands and signal
sending and receiving rights, under the terms of the Federal
Telecommunications Law.
6. The Intersecretarial Commission on Divestiture (hereinafter the "CID"), in
its ordinary session of July 4, 1997, ratified accord 97-XX-1, adopted in
the session of May 28, 1997, whereby it was resolved to call bids on a
control package consisting of 60% of the capital stock shares of SATMEX,
with the option for the winner to acquire an additional 15% of such stock.
7. Based on the Organic Act of the Federation the Federal Law on
Partial-state Controlled Entities and its Regulation, and via official
letter No. 100.-1007 6184 of July 28, 1997, the Secretariat of the
Treasury and Public Credit authorized the alienation of stock
representative of SATMEX, which was published in the Official Gazette of
the Federation on August 6, 1997.
8. On August 1, 1997, publication was made in the Official gazette of the
Federation, of the notice and rules (hereinafter "NOTICE" and "RULES") for
carrying out the public bid whose purpose would be the sale of stock
representing 60% of SATMEX's capital stock (hereinafter "FIRST STOCK
PACKAGE"). The foregoing is in the understanding that the winner could opt
to purchase together with the FIRST STOCK PACKAGE, and under the same
terms and conditions, up to an additional 15% of the capital stock shares
of SATMEX (hereinafter "SECOND STOCK PACKAGE"), at the same per-share
price offered for the FIRST STOCK PACKAGE.
The remaining 40% of the stock or, if such, the percentage of certificates
the Federal Government effectively keeps (hereinafter the THIRD STOCK
PACKAGE), once the purchase option right on the SECOND
<PAGE> 3
STOCK PACKAGE has been exercised, will be kept by the Federal Government
to be sold in a public auction through the stock market, prior
authorization from the National Banking and Securities Commission, and
registration of such stock in the National Securities and Brokers'
Registry.
9. In a session held September 10, 1997, the Board of Trustees of
Telecomunicaciones de Mexico (hereinafter "TELECOMM") granted an
authorization to the VENDOR to sell the Class "I" Series "B" share that
such body holds in the capital stock of SATMEX, to the person(s) who
win(s) the bidding process mentioned in point 8 above, jointly with the
stock that VENDOR sells to BUYER for that reason.
10. On October 17, 1997 the participants in the bidding process
mentioned filed their technical and economic bids and, as a
result of the bidding, on October 27, 1997 the CID, based on the
proposals presented and on the decision criteria established in
the NOTICE and the BASES, resolved to adjudicate the subject
matter of such bid to the BUYER, who was notified of the result
on October 30, 1997, for which purpose the recommendation of the
SECRETARIAT was taken into consideration. In its bid, the BUYER
declared its intention to purchase the shares representing the
FIRST STOCK PACKAGE and 1,500,000 (ONE MILLION FIVE HUNDRED
THOUSAND) shares representing the SECOND STOCK PACKAGE
(hereinafter jointly, the "STOCK" or the "SHARES").
11. Development of the restructuring process of the Mexican
Satellite System has been duly communicated to the Chamber of
Deputies, of the Congress of the Union, by the President of the
Committee for Restructuring of the Mexican Satellite System, in
accordance with article 76, section II, of the Federal
Expenditures Budget for fiscal year 1997. The foregoing, as
established in official letter No. 2.-153, of July 8, 1997,
issued by Lic. Javier Lozano Alarcon, for that effect.
RECITALS
I. VENDOR declares that:
a) It is the legitimate owner of 9,999,999 (NINE MILLION NINE HUNDRED
AND NINETY-NINE THOUSAND NINE HUNDRED AND NINETY-NINE) capital stock
shares of SATMEX, distributed as follows (hereinafter "FEDERAL
GOVERNMENT'S STOCK"):
. 2,550 Class I Series "A" shares
. 2,449 Class I Series "B" shares
. 2,598,450 Class II Series "A" shares
. 2,496,550 Class II Series "B" shares
<PAGE> 4
. 4,900,000 Class II Series "N" shares
All of the FEDERAL GOVERNMENT'S STOCK is subscribed and paid in full and
free from all liens or restriction of any domain, and are deposited in the
TESOFE as established in article 76 of the Federal Treasury Service Law.
These shares are represented in final certificates numbers 1m 2m 4, 5, 6,
and 7 issued by SATMEX.
b) Lic. Javier Lozano Alarcon has sufficient authority to sell the FEDERAL
GOVERNMENT STOCK subject to the terms and conditions of this Contract, as
established in article 6 of the Internal Regulation of the Secretariat of
Communications and Transport, and the sufficient authority to alienate the
share of Class "I", Series "B", owned by TELECOMM (hereinafter the
"TELECOMM SHARE"), subject to the terms and conditions of this contract,
as established in the mandate granted by the Director General of such
decentralized body on October 14, 1997, and that is attached hereto as
Exhibit "I". TELECOMM'S SHARE is represented in final stock certificate
number 3, issued by SATMEX.
c) There is no legal restriction or cause that might generate it, and that
restricts or prevents it from assuming and performing all and each of its
obligations hereunder, and that the procedures established by law for the
sale of the FEDERAL GOVERNMENT'S STOCK as well as TELECOMM'S SHARE have
been fulfilled.
d) On October 15, 1997, SATMEX entered into a purchase and sale contract with
VENDOR with respect to the goods and equipment specified therein, a copy
whereof is added as Exhibit "II" hereto (hereinafter the "GOODS AND
EQUIPMENT PURCHASE AND SALE CONTRACT"). The goods and equipment under the
GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT were in turn acquired by
the VENDOR from TELECOMM through a donation agreement dated October 15,
1997, a copy whereof is added hereto as Exhibit "III" (hereinafter the
"DONATION AGREEMENT").
e) On October 17 and 27, 1997 the stockholders of SATMEX held an ordinary
general stockholders meeting in which the Federal Government subscribed a
capital increase for $,155,086,278.00 (seven thousand one hundred and
fifty-five million and eighty-six thousand two hundred and seventy-eight
Mexican pesos 00/100) and paid it via capitalization of the liability in
its favor and against SATMEX, derived substantially from the GOODS
<PAGE> 5
AND EQUIPMENT PURCHASE AND SALE CONTRACT, from the purchase of rights and
obligations arising from the contracts for purchase and launching of the
Morelos III satellite system and the payment for the grant of the three
concessions that allow it to occupy and exploit the geostationary orbital
positions therein described, together with their C and Ku frequency bands,
and their signal broadcasting and receiving rights, which titles are
attached hereto as Exhibit "IV" (hereinafter called jointly, the
"CONCESSION TITLES").
f) It wishes to transfer to BUYER through this Contract, 2,550 Class I Series
"A" shares, 2,449 Class I Series "B" shares, 2,598,450 Class II Series "A"
shares , and 2,496,550 Class II Series "B" shares, and 2,400,000 Class II
Series "N" shares it owns, as well as TELECOMM'S SHARE (defined in recital
10 above, as the "STOCK" or "SHARES").
h) SATMEX's pro forma financial statements to October 3, 1997, 1997 that are
added hereto as Exhibit "V", ( hereinafter the "FINANCIAL STATEMENTS"),
reasonably present SATMEX's financial situation to that date in keeping
with accounting principles generally accepted in Mexico, applied
consistently, and that between the date of such FINANCIAL STATEMENTS and
the signing of this Contract, there has been no subsequent event, nor is
any cause or reason known that might generate an event that substantially
affects or could adversely affect SATMEX's financial or operation
situation.
Except as established in the FINANCIAL STATEMENTS, that is, SATMEX has no
responsibilities obligations of any nature, except for responsibilities
and obligations reflected or reserved against SATMEX in the FINANCIAL
STATEMENTS.
h) SATMEX's accounting books and corporate books, that is, the Book of
Minutes of the Stockholders Meetings, the book of Board of Directors
sessions, the Stockholders Register, and the Capital Variations book, are
correct and complete and have been kept in keeping with healthy commercial
practices. "SATMEX's minute books contain exact, complete records of all
the meetings held, and of the resolutions adopted by the stockholders and
the members of SATMEX's Board of Directors.
i) On October 24, 1997 the SECRETARIAT granted to SATMEX, based on the last
paragraph of article 7 of the Satellite Communication Regulation and the
Federal Telecommunications Law, the CONCESSION TITLES which continue with
full legal force and value.
<PAGE> 6
j) On October 24,, 1997, based on the Accord published by the Secretariat of
the Comptroller's Office and Administrative Development in the Official
Gazette of the Federation on June 17, 1997, the SECRETARIAT granted to
SATMEX a concession title to use, develop and operate the real property
within the federal public domain that are described in said Accord, for a
term of 40 years counted from the date of the grant, in order for SATMEX
to be able to use such real property in the rendering of the fixed
satellite service that TELECOMM had previously been providing.
k) The personal property that forms SATMEX's patrimony, as well as the real
property it has licensed in its favor, constitute all the properties,
goods and rights with which SATMEX provides the fixed satellite service.
l) There are no purchase options in circulation, stock appreciation rights,
optional certificates, convertible securities or other rights that are
convertible to stock, or that have their value based on SATMEX's common
stock, and there are no contracts related to the issue, sale or transfer
of any capitals market instrument or any other type of SATMEX securities.
m) Neither the signing of this Contract nor the performance hereof contravene
what is established: (i) in the legislation in force in Mexico; (ii) in
SATMEX's bylaws; (iii) in the resolutions adopted by the Stockholders
Meeting and/or SATMEX's administrative body, or (iv) in the contracts or
agreements signed by SATMEX to this date.
n) All the procedures have been completed and the necessary permits and
authorizations obtained for sale of the shares that represent SATMEX's
capital stock.
n) Because they were personal property within the private domain of the
Federation, the Morelos II, Solidaridad 1 and Solidaridad 2 satellites, as
well as the other personal property of SATMEX is not subject to the
divestiture process, under the terms of the official letter
UNAOPSPF/309/BN/1205/96 of October 21, 1996, issued by the Secretariat of
the Comptroller's Office and Administrative Development.
(o) The orbiting satellite life insurance policies in the above subsection are
in force and certified by Seguros comercial America, Division Asemex, and
its reinsurance agent, International Space brokers.
<PAGE> 7
p) Said satellites have not undergone any adverse change since their most
recent test, which was carried out on October 6, 1997.
q) The contracts it has entered into with its users are producing their
effects normally and there is no cause that might invalidate them; a list
of such contracts is added to this contract as Exhibit VI.
r) It informed the buyer of all the information within its reach so that it
could file its tender in the public bidding process mentioned in paragraph
8 of the background chapter of this instrument, based on the analysis and
appraisal that the BUYER did of such information.
s) It has not entered into any legal act that might have adverse effects for
the normal course of SATMEX's operations, from the date it was established
and to the signing date of this instrument; nor does it have litigation in
progress pending decision.
t) On the signing date of this contract, it has contracted the services of
the employees whose names and respective remuneration are detailed in
Exhibit VII of this Contract.
u) On October 15, 1997 it entered into a contract with SATMEX, among others,
whereby it ceded under onerous title, all the rights and obligations that
arise from the contract for purchase of the Morelos III satellite system.
Likewise, on that same date, it entered into another contract whereby it
ceded to SATMEX, under onerous title, all of the rights and obligations
arising from the contract to launch the replacement of the Morelos II
satellite (hereinafter the "ASSIGNMENT CONTRACTS").
v) It is its intention to sell the STOCK to the BUYER, subject to the terms
and conditions established in this Contract.
II. The BUYER declares that:
a) It is a corporation duly organized under the laws of the Mexican
Republic, as established in public document number 19,166 dated
November 12, 1997, executed before lic. Jose Maria Morera Gonzalez,
notary public no. 102 of Mexico City, in the process of registration
in the Public Commerce Registry of the Federal District because of
its recent execution.
b) Its representative herein, Messrs Lauro A. Gonzalez Moreno and
Carlos R. Valencia barrera, have sufficient authority to enter into
this Contract representing it,
<PAGE> 8
as evidenced with the public document number mentioned in the above
recital; such powers have not been modified or revoked in any form.
c) It is fully aware of the scope and terms of the documents concerning
SATMEX, in conformity with the statement contained in the technical
proposal, the CONCESSION TITLES, SATMEX's corporate bylaws, the
FINANCIAL STATEMENTS, and the GOODS AND EQUIPMENT PURCHASE AND SALE
CONTRACT.
d) It learned all the information that was made available to it in
relation to the bid which is the subject matter of the NOTICE and
the RULES, in the information room that was established for such
purpose, and that they were provided through prospectuses, with
answers to the questions raised by the participants in said bid,
interviews with the financial agent, and with different officers
from SATMEX, the SECRETARIAT and TELECOMM.
e) It acts in its own name and for its own account, as was declared in
the proposal that filed by Telefonica Autrey, S.A. de C.V. and Loral
Space and Communications Ltd. in the bid, which they won, and that
it does not act in representation, substitution or otherwise, for
third parties, without having so declared in its proposal, if such.
f) In accordance with point 5.5.6 of the RULES, it declared its
intention to acquire together with the FIRST STOCK PACKAGE, all of
the shares included in the SECOND STOCK PACKAGE (as defined in
Recital I.f) above), under the terms and conditions established in
this Contract.
g) It is its intention to acquire the STOCK from the VENDOR subject to
the terms and conditions established in this Contract.
After stating the foregoing, the parties agree to execute the following:
CLAUSES
ONE. OBJECT. For its own account and for the account of TELECOMM, the VENDOR
herein transfers to the BUYER and the BUYER acquires, the STOCK, which
represents 60% of the capital stock shares of SATMEX and that constitute the
FIRST STOCK PACKAGE, plus an additional 15 % of the capital stock shares of
SATMEX and that represent the SECOND STOCK PACKAGE.
The STOCK is comprised of the following:
Shares the VENDOR sells to the BUYER for its own account:
. 2,550 Class I Series "A" shares
<PAGE> 9
. 2,449 Class I Series "B" shares
. 2,598,450 Class II Series "A" shares
. 2,496,550 Class II Series "B" shares, and
. 2,400,000 Class II Series "N" shares
One Class I Series B share that VENDOR sells for TELECOMM'S account.
The FEDERAL GOVERNMENT'S STOCK is delivered herein to the BUYER, who endorses it
and allocates it in irrevocable management and security trust (hereinafter the
"TRUST"), a cop of which is added hereto as exhibit VIII.
TWO.- PRICE.- The price of the purchase and sale of the STOCK is the total
amount of $5,366,352,206.25 (five thousand three hundred and sixty-six million
three hundred and fifty-two thousand two hundred and six Mexican pesos 25/100),
that is, the amount of $715.5136275 (seven hundred and fifteen pesos
5136275/10000000) Mexican Pesos per share. This price obligates the BUYER to pay
it to the VENDOR, in accordance with Clause Three below, and subject to the
other terms and conditions of this Contract.
THREE.- PRICE PAYMENT DATE. As established in point 8.2 of the RULES, the BUYER
shall pay the price stipulated in Clause Two as follows:
Via payment by the BUYER, of thirty percent (30%) of the contracted price, that
is, the amount of $1,609,905,661.87 (one thousand six hundred and nne million
nine hundred and five thousand six hundred and sixty-one pesos 87/100), which is
paid herein by the BUYER to the VENDOR, this contract serving as full and
sufficient receipt.
The outstanding balance of the contracted price shall be paid at the latest on
December 17, 1997. The payment mentioned in this paragraph must be made together
with the amount corresponding to the ordinary interests that have been generated
under the terms of clause Four, during the corresponding period. If for any
reason the price and ordinary interests are not paid under the terms of the
preceding paragraph, the BUYER shall pay delinquent interests at 1.5 times the
ordinary interest rate established in Clause Four below, notwithstanding the
authority established for the VENDOR in Clause Five hereof.
All payments that the BUYER makes shall be used in first place, to cover
past-due interests, if they exist; in second place, to cover ordinary interests,
and lastly, for payment of the principal amount of the contracted price.
FOUR. INTERESTS. The outstanding balance of the price not covered on the date
this Contract is signed, if such, shall cause ordinary interests at a rate equal
to the average of the 28-day interbank break-even interest rate (TIIE), or the
one that
<PAGE> 10
substitutes it that, during this term, has been published weekly by the Bank of
Mexico in the Official Gazette of the Federation since the signing of this
Contract until it is paid in full. The interests shall be caused on a daily
basis and by days effectively lapsed, calculated on years of 360 days.
FIVE. DELINQUENCY. The parties agree that if BUYER fails to comply with payment
of the price on the dates specified in Clause Three, the VENDOR may rescind this
Contract, in which case, it may claim payment of the liquidated damages referred
to in clause Thirteen of this Contract and point 8.3 of the RULES.
SIX. ADVANCE PAYMENT. The BUYER may pay early, all or part of the outstanding
balance of the price not paid on the signing date of this Contract following
notification to the SECRETARIAT at least five working days in advance of the
payment date and provided all the interests accrued to that date are paid with
it. If the BUYER makes early payment of the balance of the price as established
in this Clause, this fact shall not give BUYER the right to any discount for
early payment. No penalty shall be imposed on BUYER for early payment.
SEVEN. PAYMENT FORM AND PLACE. The price and corresponding interests, if such,
shall be paid by certified or cashier's check, issued to the Federal Treasury at
its offices located at Av. Constituyentes 1001, col. belen de las Flores,
Mexico, D.F., during business days, from 9:00 to 12:00 hours, or through
electronic transfer of funds, to the account of the Federal Treasury the VENDOR
indicates in writing for that purpose. For the first payment, the BUYER may
request that VENDOR apply the amount of the tender maintenance guaranty
indicated in point 2.2 of the NOTICE.
EIGHT. DELIVERY OF STOCK CERTIFICATES AND ENDORSEMENT. Directly or through the
TESOFE, VENDOR shall give the BUYER the certificates that represent the stock
hereunder, with property thereof duly endorsed.
NINE. ALLOCATION TO TRUST.
In order to guarantee payment of the outstanding balance of eh price of this
purchase and sale and of the interests generated, if such, as well as to
guarantee payment of the liquidated damages mentioned in Clause Twelve, the
Buyer shall contribute to the trust (the "TRUST"), established in Banco Invex,
S.A., Institucion de Banca Multiple, Invex Grupo Financiero (the TRUSTEE"), the
stock certificates mentioned in the above clause (or the "TRUST STOCK"), who
shall deliver them only to the BUYER, on the same date when the total amount of
the purchase and sale transaction hereunder is paid. If a Stockholders Meeting
of SATMEX is held, the BUYER shall notify the TRUSTEE in writing at least 5 days
in advance, of how to vote the TRUST STOCK. However, if there is any
nonperformance by the BUYER of the obligations the same assumes under this
Contract or in the RULES; that is notified by the SECRETARIAT to the TRUSTEE,
and regardless of whether the TRUSTEE complies with the aims
<PAGE> 11
established in the trust agreement, the corporate rights on the TRUST STOCK
shall be exercised as indicated by the VENDOR.
The parties agree herein that the expenses and costs arising from the
establishment and maintenance of the trust, including the trustee's fees, up to
the date when all of the TRUST STOCK is issued, shall be covered fully by the
BUYER. The BUYER shall register the above-mentioned trust in SATMEX's
Stockholders Register.
The parties herein agree that until the price of the purchase and sale hereunder
is paid, the stock whereof the certificates are delivered to the BUYER under the
terms of this clause may only be encumbered by the BUYER with prior
authorization from the SECRETARIAT, in the understanding that such authorization
shall only be granted when the credit they guarantee has the main purpose of
paying the outstanding balance of the price mentioned in this Contract and the
respective creditor agrees that the VENDOR shall have preference as first
beneficiary under the terms of the TRUST.
TEN. GRACE PERIOD The parties agree that if the BUYER fails to perform, it shall
have a grace period of 5 working days, counted from the date VENDOR notifies
said BUYER of such situation, to perform in the form and terms herein pacted
except in the case of breach of Clauses Three, Four, Five, and Eight of this
document, in which cases the VENDOR may immediately rescind this Contract.
ELEVEN.- REGISTRATION. BUYER promises that the Stockholders Register shall
indicate expressly which shares have not been paid to VENDOR by BUYER;
therefore, breach of the respective payment obligation may have as an effect
rescission of the purchase and sale contract.
TWELVE. BREACH. LIQUIDATED DAMAGES. If the BUYER breaches the obligations
specified in clauses Three, Four, Five, or Eighteen, or any of its obligations
hereunder in the term required for this, in the terms required for this, if
such, and the VENDOR decides to rescind this Contract, the VENDOR shall notify
the trustee in the TRUST about such breach, and the latter shall notify the
BUYER of the alleged breach within 24 hours after receipt of the notification
from the VENDOR, and in a term of forty-eight (48) hours the BUYER may challenge
the rescission provided it establishes opportune compliance with its
obligations. Otherwise, the VENDOR may terminate and rescind this Contract
immediately without requiring a prior court order. If the BUYER breaches this
Contract or the RULES, BUYER shall pay to VENDOR liquidated damages for the
amount equal to thirty percent (30%) of the total price of the purchase and sale
hereunder.
The parties herein agree that in the case of breach of this Contract or of the
RULES, the VENDOR shall directly apply the value of the partial payment
specified in Clause Three to payment
<PAGE> 12
of the liquidated damages herein covenanted. Therefore, pursuant to article 2311
of the Civil Code for the Federal District in Common Matters and for the entire
Republic in Federal Matters, and in the case of rescission of this Contract, the
payment of the price mentioned above shall be understood returned virtually,
with the BUYER in this case being required to return to VENDOR the stock that
was delivered to them on the business day after the day when they are notified
in writing of rescission of this contract. BUYER herein commits to return the
corresponding stock, free from all lien and limitation of ownership.
THIRTEEN. DESIGNATION OF BOARD MEMBERS, STATUTORY AUDITORS AND TOP MANAGEMENT.
The BUYER shall perform all the acts that are necessary for an Ordinary
Stockholders Meeting of SATMEX to be held on the date this Contract is entered
into, which shall designate a new Board of Directors, surveillance and
administration body, the powers granted shall be revoked and the current board
members, statutory auditors, executives and representatives of SATMEX shall be
released from all liability from the date of such meeting.
THE BUYER may at any time modify SATMEX's bylaws, in the understanding that
while the VENDOR is a stockholder of SATMEX, the articles related to minority
rights indicated therein and that VENDOR is aware of, shall be respected.
Likewise, while all or part of the shares that form the THIRD STOCK PACKAGE are
owned by the VENDOR, the BUYER shall carry out the legal actions within its
reach so that the VENDOR's patrimony is not diminished with respect to the THIRD
STOCK PACKAGE as a result of any financial operation of restructuring, lease, or
other similar operations not approved by the VENDOR whose purpose is to obtain
financing for SATMEX or any other purpose, and whose benefit is transferred to a
third party, whether such actions are performed by the BUYER, by SATMEX or by
any third party. Regardless of the obligation the BUYER assumes under this
paragraph, THE BUYER promises that SATMEX shall validly and personally assume
the obligation contained in this paragraph in a term not to exceed fifteen (15)
days, counted from the date this contract is executed, and to keep this
obligation in SATMEX's bylaws exactly as established on the signing date of this
Contract while the VENDOR keeps total or full ownership of the THIRD STOCK
PACKAGE.
FOURTEEN. PRICE ADJUSTMENT. VENDOR shall adjust the price of the purchase and
sale hereunder only when there is a net difference according to this Clause, in
favor of BUYER that is greater than 3% of the price contracted and that derives
solely from the particulars specified in points 1 and 2 below.
1. Liabilities against SATMEX that are not registered in whole or in part in
the FINANCIAL STATEMENTS, originating from operations prior to the signing
of this contract or derived from acts or events beyond
<PAGE> 13
the normal course of such operations. Said unregistered liabilities shall
be compensated liabilities that have been covered or defrayed in full or
in part and whose payment has not been registered in such FINANCIAL
STATEMENTS.
In the case of the liabilities indicated in the above paragraph, the BUYER
shall only be reimbursed the amount that, if BUYER is required to pay
SATMEX, it has actually paid, and provided later it does not directly or
indirectly have any right of any type or any legal or administrative
recourse to avoid or reduce the corresponding payment. For the effects of
this paragraph, only those liabilities will be considered for which a
claim has been filed under the terms of Clause Fifteen of this Contract.
2. Fixed assets nonexistent in terms of the list and appraisal accompanying
the GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT, without considering
for these effects, the value variations that the indicated assets may
have. These assets shall be compensated, if necessary, by the similar
existing fixed assets in favor of SATMEX, not registered in whole or in
part in relation to the above-indicated assets.
Adjustments derived from fixed assets shall only proceed when the latter
do not exist, and may not affect the quality, state of conservation,
accounting appraisal, accounting policies or any other item that is not
strictly what is indicated in this paragraph, provided such nonexistence
is not challenged or has not been challenged under the GOODS AND EQUIPMENT
PURCHASE AND SALE CONTRACT specified in Recital I, subsection d) of this
Contract.
In the supposition of the nonexistence of fixed assets, the VENDOR shall
have authority at its full discretion to adjust the price under the terms
of this Clause, or replace the nonexistent assets by others of similar
characteristics, conditions and value.
For effects of the adjustment that must be made, if such, in the cause of
nonexistent fixed assets the value established for them in the appraisal
specified in the first paragraph of point 2 of this Clause shall be
considered.
The results obtained in keeping with points 1 and 2 above shall in turn be
compensated against each other in order to obtain the net difference in favor of
the BUYER, if such.
The VENDOR shall cover the amount that is in favor of the BUYER whenever this
exceeds the figure specified in the first paragraph
<PAGE> 14
of this clause, in a term not greater than 10 working days, counted from the
date when the final price adjustment is determined. The parties agree that if
there is any outstanding balance in favor of VENDOR, the corresponding
compensation may be made for the amount of the lesser amount owed.
For effects of the price adjustment, the financial cost that may be generated
shall be calculated at a rate equal to that of 28-day CETES (Federal Treasury
Certificates) applicable during the corresponding period.
Despite the foregoing, the parties agree that loss of the operating satellites
that are part of SATMEX's assets shall not be the object of adjustment for
purposes of this clause, since the risk of their loss is duly insured, to
BUYER's satisfaction, as mentioned in Recital I, o) of this instrument.
FIFTEEN. CLAIM OF LIABILITIES. The parties agree that in the case of price
adjustment derived from liabilities against SATMEX specified in point 1 of the
above clause, they may only be paid when:
a) The BUYER notifies the VENDOR in writing and in certifiable form, through
the SECRETARIAT and within 5 calendar days following notification of the
respective existence of the liability or any claim derived therefrom,
either judicially or extrajudicially, in order for VENDOR to take the
steps they consider opportune, if such.
b) SATMEX shall defend against the respective claims judicially or
extrajudicially, adhering to what VENDOR indicates.
c) The BUYER gives VENDOR or its representative, provided the request is made
opportunely, the necessary information and elements it has available so
that if VENDOR decides to defend itself against the corresponding claims,
it has the necessary means to do so. In this case, SATMEX shall be
required to grant the powers of attorney that are required, to the persons
VENDOR determines, in the understanding that failure to grant such powers
of attorney shall result in the inappropriateness of the corresponding
price adjustments.
d) The liability or the claim derived therefrom does not arise as a direct
consequence of an omission or action attributable to SATMEX from the time
the delivery and reception concludes, or attributable to any BUYER at any
time.
When the claims referred to in the above subsections arise from actions that,
under this contract, VENDOR is responsible for, all
<PAGE> 15
the legal expenses SATMEX makes for defense shall be refunded by VENDOR,
provided they are reasonable, are duly proven and are directly related to the
claims mentioned in the above subsections. The amounts corresponding to the
items mentioned in this paragraph shall be refunded to BUYER by VENDOR in a term
of 20 calendar days, counted from the date when they were determined.
SIXTEEN.- TERM FOR CLAIMS. The BUYER shall have a term of 180 calendar days,
counted from the signing date of this Contract, to adjust the price under the
terms of Clause Fourteen.
Notwithstanding the obligation contained in subsection a) of the above clause,
the price adjustment request shall be filed in a single document.
The appropriateness of any price adjustment shall be determined under the terms
of Clauses Nineteen and Twenty below.
EIGHTEEN. OTHER LIABILITIES. In relation to liabilities derived from fiscal,
financial or labor obligations or from violations of the general Law of
Ecological Balance and Environmental Protection not recorded in the FINANCIAL
STATEMENTS, whose origin is prior to the date of this Contract, the BUYER may
request payment or restitution thereof during a term equal to the term the
legislation currently in force establishes for the prescription or expiration of
the right or action that is the basis of the claim, applying Clause Fifteen
where pertinent for this case.
EIGHTEEN. WARRANTY . The VENDOR gives warranty against hidden defects and quiet
enjoyment.
NINETEEN. PURCHASE AUDIT. The BUYER may do a purchase audit with the aim of
determining the existence of liabilities not registered or the nonexistence of
fixed assets mentioned in points 1 and 2 of clause fourteen above. Said audit,
if such, may begin on the working day after the date this contract is signed and
may in no case exceed the term of 120 calendar days counted from the date of the
total payment of the price established in clause Two.
The audit cost shall be covered by the BUYER.
Upon conclusion of the audit, the auditor shall write up a record, of which a
copy shall be given to each of the parties, in the understanding that the
official opinion shall not obligate the VENDOR in any way.
When unregistered fixed assets appear as a result of the audit, the VENDOR shall
retire them as established in this Contact, or use them for the restitutions or
compensations specified in Clause Fifteen hereof.
<PAGE> 16
TWENTY.- LAWFULNESS OF THE CLAIM. For the effects of point 9.7 of the NOTICE and
the RULES, the parties agree to designate Mancera, S.C. (hereinafter the
"OFFICE") to decide on the lawfulness of the claims derived from unregistered
liabilities or nonexisting assets that BUYER presents, if such, for the purpose
of adjusting the price of this purchase and sale.
If the OFFICE cannot perform its functions or abstains from issuing the
corresponding official opinion, the parties may agree that a new office will be
selected based on the list of offices that is added hereto as Exhibit "IX". The
invitation to such offices shall be made in the same order in which they appear
on said list.
Both parties shall pay the fees, costs and expenses incurred by the OFFICE by
equal parts.
In performing its functions, the OFFICE shall act with full liberty, and may
gather the elements for making judgments that it deems opportune, the parties
being required to provide it with what is required of them for that purpose.
The OFFICE's official opinion shall be final, shall obligate the parties under
its terms and may not be appealed.
What is established in the preceding paragraphs constitutes an arbitral
commitment under the terms of article 1423 of the Commerce Code, the parties
observing what is established for that effect in said Code where not expressly
contained in this Clause.
TWENTY-ONE. RESTRICTION ON CIRCULATION OF STOCK. In the event of any alleged
subscription of stock, in one or a succession of acts, that represents ten
percent or more of the value of SATMEX's capital stock, the parties agree that
SATMEX shall observe the following system:
a) SATMEX shall notify the SECRETARIAT of the interested parties' intention
to subscribe the stock, enclosing with the notice, the information on the
persons interested in purchasing the stock;
b) The SECRETARIAT shall have a term of 30 calendar days counted from
presentation of the notice, to object in writing to the transaction
involved, with justified cause, and
c) After such term without the SECRETARIAT having objected to the
transaction, it shall be understood as approved.
Only operations that the SECRETARIAT has not objected to may be registered in
SATMEX's Stockholders or Partners' Register, notwithstanding the authorizations
required from other authorities under the applicable rules. It shall not be
required
<PAGE> 17
for the notice referred to in the second paragraph of this clause to be
presented when the subscription refers to stock or corporate interests that
represent neutral investment or investment with limited vote on the business
mentioned in article 113 of the General Business Corporation Law, or when
capital increases are involved that are subscribed by the same stockholders,
provided the proportion of the share of each one in the capital stock is not
modified.
If the party interested in subscribing the shares or corporate interests is a
corporation, the notice referred to in this clause shall present the necessary
information for the SECRETARIAT to identify the individuals who have ownership
interests greater than ten percent in the capital of such corporation, unless
acquisitions are involved that are made by administrators of retirement funds or
of investment corporations, through the stock market.
This condition shall be included in the corporate bylaws as well as in the final
or provisional certificates that SATMEX issues.
Notwithstanding what is established in this clause, and for a term of three
years counted from november 17, 1997, in conformity with article 8.7.2 of the
RULES, the stockholders who represent 51% of SATMEX's paid-in capital stock, in
all cases in which they expect to transfer stock, shall obtain the prior
authorization of the SECRETARIAT unless the transfers are between the
stockholders themselves and these do not exceed 5% of SATMEX's paid-in capital
stock.
TWENTY-TWO. PUBLIC OFFER OF THE THIRD PACKAGE. THE BUYER certifies that it is
aware that the VENDOR expects to offer and place in the stock market, the stock
of the THIRD STOCK PACKAGE, and that for this effect, the BUYER commits to make
the necessary resolutions so that together with VENDOR, SATMEX carries out the
procedures and processing necessary to obtain the authorizations from the
National Banking and Securities commission, and if such, from the corresponding
authorities of other countries, as well as recordal of the corresponding stock
in the National Securities and Brokers Registry.
TWENTY-THREE. ASSISTANCE FOR PUBLIC PLACEMENT. So that VENDOR can place the
stock of the THIRD STOCK PACKAGE, the BUYER as from now commits that SATMEX
shall perform all the actions, and make all the accords and resolutions that are
reasonably necessary, and shall provide VENDOR with all the information and
documentation required for such objective, and to have SATMEX not directly or
indirectly take any action or make any decision that might prevent or obstruct
such objective in any form, nor shall they take any step that might directly or
indirectly produce breach of the obligations that derive therefrom for SATMEX.
TWENTY-FOUR.- STOCK PLACEMENT. In the event that SATMEX and its stockholders
wish to place stock of such company in stock
<PAGE> 18
markets, both in Mexico and abroad, each one of the parties agrees to notify the
other of its decision, prior to the placement, so that by mutual agreement, they
establish the bases, terms and conditions thereof that avoid negative or
opposing effects in the stock markets of the stock that is placed.
The stipulations of the above paragraph shall apply for placement in stock
markets of any instrument issued by SATMEX, when they can directly or indirectly
affect the market of the stock issued by SATMEX.
The parties agree that, in the case of placements that are made by mutual
agreement, the expenses involved therein shall be covered in proportion to their
stock holding in the public offer; otherwise, each party shall absorb the
placement costs, with the exception of what is established in the following
paragraph.
The costs involved in registrations and authorizations of the company and of the
corresponding stock, with the competent authorities and stock market
institutions necessary for their placement in such stock market shall be covered
wholly by SATMEX; these costs do not include the fees of the Placing Agent and
his related expenses.
TWENTY-FIVE. SATMEX'S ACCOUNTING AND CORPORATE BOOKS SATMEX'S accounting and
corporate books are herein delivered to the BUYER, who receives them to its
entire agreement, with this document producing the effects of a receipt with
respect to such books.
TWENTY-SIX. BUYER'S DECLARATIONS. BUYER recognizes expressly herein, that both
on the date when its proposal was filed under the terms of the Rules and during
the entire process, and on the date this contract is entered into, the following
warranties are completely true and correct :
a) that during the bidding process referred to in the NOTICE and the RULES,
it always acted in its own name and for its own account.
b) that the source and structure of the resources and financing with which
the STOCK is herein acquired, is the same as that provided to the
SECRETARIAT, under the NOTICE and the RULES.
The parties agree herein that, if any of BUYER's statements established in this
Contract or in its proposal under the terms of the NOTICE and the RULES turns
out to be false or incorrect, this simple fact shall give VENDOR the right to
rescind this Contract without requiring a prior court order; therefore, in such
case it shall be understood that a resolutory condition to which this Contract
is subject, is met. For these effects, the simple written notification from the
VENDOR to the BUYER stating the facts that prove the falseness or imprecision of
BUYERs statements shall suffice. In that case, the BUYER shall also be required
to pay liquidated damages to VENDOR equal to 100% of the
<PAGE> 19
purchase price of the STOCK mentioned in clause Twelve of this Contract. The
resolutory condition mentioned in this clause shall be in effect for 10 years
counted from the date this Contract is entered into.
TWENTY-SEVEN. CLAUSE RELATED TO FOREIGNERS. THE BUYER promises that its partners
or stockholders shall not invoke the protection of any foreign government under
penalty of forfeiting all the goods and rights it has acquired or comes to
acquire hereunder, if it breaches the foregoing.
TWENTY-EIGHT. CONSTRUANCE. In the case of doubt or dispute between the
provisions of this contract and any other provision or contract related to the
bidding process which is the subject matter of the NOTICE and the RULES, the
parties shall in first place, observe the stipulations of this Contract, in
second place what is established in the FINANCIAL STATEMENTS and, in third
place, the CONCESSION TITLES and lastly, the NOTICE and the RULES the pro forma
financial statements that VENDOR delivers for this effect to BUYER, and in third
place, the CONCESSION TITLES and lastly, the NOTICE and the RULES.
TWENTY-NINE. DOMICILES AND NOTIFICATIONS. For all the notices that the parties
wish to or must give each other in relation to this Contract, and for the
effects derived herefrom, the VENDOR an the BUYER specify the following as their
domiciles:
THE VENDOR:
Av. Xola esquina Universidad
Cuerpo "C" 1er Piso
Col. Narvarte
03020 Mexico, D.F.
Attention: Lic. Jorge Silberstein
Coordinador General de la Unidad
de Apoyo al Cambio Estructural
THE BUYER:
Calle Santa Rosa No. 61
Col. Reforma Social
11650 Mexico, D.F.
Attention: Ing. Lauro Gonzalez Moreno and
Lic. Carlos Raul Valencia Barrera
Notifications shall be made by certified mail with request for return receipt,
by fax, or by any other means that can certifiably prove that they have been
received, and shall be confirmed within two days following receipt in order to
produce effects.
THIRTY-. APPLICABLE LEGISLATION. JURISDICTION. For the construance and
performance of this Contract, the parties expressly submit to the laws and
federal courts of Mexico City, Federal District, and waive any other venue that
might correspond to them by reason of their present or future domicile.
<PAGE> 20
This contract is signed in Mexico City, Federal District, on three copies, on
November seventeenth, 1997.
THE VENDOR
(BY ITS OWN RIGHT AND REPRESENTING
TELECOMUNICACIONES DE MEXICO)
(Signed
____________________________________________________
Lic. Javier Lozano Alarcon
Under Secretary of Communications
THE BUYER
(Signed)
Lauro A. Gonzalez Moreno
(Signed)
Carlos R. Valencia Barrera
WITH THE APPEARANCE OF:
(Signed) (Signed)
Lic. Jonathan Davis Arzac Arq. Emilio Carrera Cortes
Federal Treasurer Delegate Commissioner for the
Communications and Transport
Sector
(Signed)
Sergio Autrey Maza
<PAGE> 1
Execution Copy
Firmamento Mexicano, S. de R.L. de C.V.
MEMBERSHIP AGREEMENT
Membership Agreement, dated and effective as of the 17th day of
November, 1997, among Loral SatMex Ltd., a company organized under the laws of
the Islands of Bermuda ("Loral") and Ediciones Enigma, S.A. de C.V., a sociedad
anonima de capital variable organized under the laws of Mexico ("EE" and,
together with Loral, the "Members"), and Firmamento Mexicano, S. de R.L. de
C.V., a sociedad de responsibilidad limitada de capital variable organized under
the laws of Mexico (the "Company"). Certain terms used in this Agreement are
defined in Section 8 hereof.
R E C I T A L S
WHEREAS, the Company has been created with an authorized capital of
P$1,170,050,000, which capital is divided into voting capital represented by
Class A Social Parts and Class B Social Parts (collectively, the "Voting
Capital") and non-voting capital represented by Class N Social Parts (the
"Non-Voting Capital"). The authorized Voting Capital and Non-Voting Capital was
subscribed on November 17, 1997 by Loral and EE in the following amounts and in
exchange for issuance of the following Social Parts:
EE:
1. a Class A Social Part representing invested capital of
P$25,500 and constituting 51% of the total Voting Capital.
2. a Class N Social Part representing invested capital of
P$409,492,000 and constituting 35% of the total Non-Voting
Capital.
Loral:
1. a Class B Social Part representing invested capital of
P$24,500 and constituting 49% of the total Voting Capital.
2. a Class N Social Part representing invested capital of
P$760,508,000 and constituting 65% of the total Non-Voting
Capital.
<PAGE> 2
WHEREAS, the Company owns all but one share of the issued and
outstanding capital stock of Servicios Corporativos Satelitales, S.A. de C.V.
("Satmex Holdings"), which in turn owns all but two shares of the issued and
outstanding capital stock of Corporativo Satelites Mexicanos, S.A. de C.V.
(the "Acquisition Sub"). The Acquisition Sub was formed for the purpose of
making the acquisition of 75% of the equity interest of Satelites Mexicanos,
S.A. de C.V. (the "Acquisition");
WHEREAS, the amounts invested by EE and Loral in the Company have
been used to fund, through the Acquisition Sub, a portion of the purchase price
payable at the first closing of the Acquisition;
WHEREAS, the second closing of the Acquisition will occur on
December 29, 1997 and in connection therewith, Loral and EE may be required
pursuant to the terms of the Financing Documents to make certain Additional
Capital Contributions to the Company; and
WHEREAS, the Members and the Company desire to promote their mutual
interests by agreeing to certain matters relating to the Additional Capital
Contribution, the operations and governance of the Company and the Companies
Entities and the disposition and voting of Social Parts.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows:
1. ADDITIONAL CAPITAL CONTRIBUTION; SOCIAL PART CERTIFICATES
(a) Each of Loral and EE hereby agrees that if an Additional Capital
Contribution is required, then it shall, in accordance with the terms set forth
below, fund 65% and 35%, respectively, of the amount of such Additional Capital
Contribution by increasing the authorized equity capital of the Company in such
amount, which increase will be allocated among Voting Capital and Non-Voting
Capital in the same proportion as the initial funding and which increased
capital will be subscribed by Loral and EE in the same proportions as the
initial funding such that the percentage of Voting Capital and Non-Voting
Capital of each of Loral and EE remains unchanged.
(b) Closing. The closing of any such sales and purchases shall take place
at 9:00 A.M., New York City time, on the date of the second closing of the
Acquisition, at the offices of Sanchez Mejorada Velasco y Valencia, Paseo de la
Reforma 450, Lomas de Chapultepec, 11000 Mexico, D.F., or such other location as
the Members shall mutually select.
(c) Application of Proceeds. The initial capital contribution, as well as
any Additional Capital Contribution was and shall be used to fund the
Acquisition. Such funding was and
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shall be effected by a contribution of the invested capital by the Company to
its Subsidiaries.
(d) Legends. The certificates evidencing the Social Parts subscribed by
the Members, will bear the legend set forth in Section 5(d) and the following
legend reflecting the restrictions on the transfer of such interests contained
in this Agreement:
"The Social Parts evidenced hereby are subject to the terms of that
certain Membership Agreement dated and effective as of November 17, 1997, by and
among the Company and certain Members identified therein, including certain
restrictions on transfer. A copy of this Agreement is available upon request to
the Company."
2. GOVERNANCE
(a) Election of Directors. The Members and the Company shall take all
action within their respective power, including, but not limited to, the voting
of all Voting Capital owned by them to cause the Board of Directors of the
Company to consist of five (5) members or such other odd number as the Members
may from time to time establish (the "Authorized Number"), which shall at all
times throughout the term of this Agreement (except as set forth in Section 4(e)
hereof) be comprised of (i) directors equal to a simple majority of the
Authorized Number and holding a simple majority of the votes entitled to be cast
by directors at any meeting of the Board, each such director to be designated by
EE (each, an "EE Director"), and (ii) the remaining director(s) to be designated
by Loral (each, a "Loral Director"). For so long as EE designates the majority
of directors of the Board of the Company pursuant to the foregoing sentence, EE
shall nominate the Chairman of the Board of the Company and the Members agree
that they shall take all action within their respective power to elect such
nominee. For so long as EE designates the Chairman of the Board of the Company,
Loral shall have the right to nominate the Secretary of the Board (and his
alternate) and the Members agree that they shall take all action within their
respective power to elect such nominee, which Secretary shall not be a member of
the Board for any purpose and shall not count as a Loral Director. The Company
shall cause the Board of Directors of SatMex and any other direct or indirect
subsidiary of the Company to be constituted in an identical manner unless
determined otherwise by the Board of Directors of the Company by a Consensus
Vote provided that the Board of Directors of SatMex shall have such additional
directors (not appointed by either Loral or EE) as may be required pursuant to
Mexican law or the by-laws of SatMex. Each of Loral and EE shall have the
authority to designate alternate directors (each a "Designated Alternate") to
substitute for the Loral Directors or EE Directors, as the case may be, in
accordance with the bylaws of the Company Entities. As of the date hereof, the
Board of each Company
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Entity (as defined below) shall consist of those persons set forth on Schedule I
hereto.
(b) Replacement Directors. Each Loral Director or EE Director is subject
to removal at any time for any reason or for no reason by the Member who
designated him or her. If, at any time, a vacancy is created on the Board of any
Company Entity by reason of the death, removal or resignation of any Loral
Director or EE Director, the Member who designated such director shall, within
five days after the date such vacancy first occurs, take such action as is
reasonably necessary, including the voting of all Voting Capital held by it, to
elect a director or directors designated in accordance with Section 2(a) hereof
to fill such vacancy or vacancies; provided, that during such five day period
following the creation of the vacancy, the Board of such Company Entity shall
not transact any other business except by Consensus Vote. Each Member agrees
that it will vote or execute a written consent with respect to all of its Voting
Capital to effectuate the intent of this Section 2(b).
(c) Quorum; Required Vote. A quorum of any meeting of the Board of any
Company Entity shall require the presence of a majority of the Board, which
shall include at least one Loral Director and one EE Director. No action at any
meeting may be taken by the Board unless a quorum is present and notice therefor
(setting forth all actions to be taken at such meeting) is duly given at least
five business days before the date of the meeting (or unless duly waived by the
directors in accordance with the by-laws). No resolution, action or decision
required or permitted to be taken, adopted or made by the Board of any Company
Entity shall be so taken, adopted or made without a vote of the majority of all
directors present, provided that if the matter being considered is an
Extraordinary Matter, the approval of at least one Loral Director and one EE
Director shall be required (a "Consensus Vote"). Any such resolution, action or
decision may also be taken, adopted or made by unanimous written consent.
(d) Mutual Approvals Required for Certain Action. A Consensus Vote, or if
the matter requires approval by shareholders or members under Mexican law or the
by-laws of the Company Entities, the approval of each Member, shall be required
to approve and authorize any of the following matters with respect to any
Company Entity (each, an "Extraordinary Matter"):
(i) New Line of Business. Engagement by the Company Entities in any
business other than that conducted on the date hereof or as set forth in
the Business Plan and any business directly related to such business, in
each case, as such business or businesses may, from time to time develop,
provided, that such related business or developed business does not
constitute a material change in the nature of the business of the Company
Entities as it is conducted on the date hereof or as set forth in the
Business Plan.
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<PAGE> 5
(ii) Transfer of Material Assets. Sell, lease (as lessor), transfer,
mortgage, assign, pledge, exchange or otherwise dispose of all or
substantially all of the assets of any of the Company Entities.
(iii) Merger or Liquidation. Approve any transaction or merger,
consolidation, amalgamation, recapitalization or other form of business
combination, or any liquidation, winding up or dissolution of any of the
Company Entities or any other transaction in which a Company Entity is not
the surviving entity.
(iv) Voluntary Bankruptcy. Commence a voluntary case under the
applicable Mexican bankruptcy code, as now or hereafter in effect, or any
successor thereto, or any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency, liquidation or similar law under any other jurisdiction or
make a general assignment for the benefit of creditors.
(v) Organizational Documents. Amend in any material manner the
articles of incorporation or by-laws or organizational documents of any of
the Company Entities, except as contemplated in the SatMex Stock Purchase
Agreement.
(vi) Adoption of or Amendments to the Business Plan. Adopt or amend
in any material manner the Business Plan.
(vii) Dividends and Distributions; Redemption and Repurchase;
Dividend Policy. Declare or pay any dividends or distributions (other than
(i) to the Company or (ii) in the case of SatMex, in accordance with the
SatMex Dividend Policy) or repurchase or redeem any equity securities of
any of the Company Entities except as set forth in Section 4(f). Amend in
any manner the SatMex Dividend Policy.
(viii) Affiliated Parties. Enter into or engage in transactions with
entities directly or indirectly, controlling, controlled by or under
common control of either of the Members other than the Permitted
Transactions. For such purposes, "control" shall mean the direct or
indirect possession of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of
Voting Control, by contract or otherwise.
(ix) Significant Decisions. Any Significant Decision.
(x) Budget. The adoption by the Company Entities of a Budget, as
more fully described in Section 2(f).
(xi) Capital Expenditures and Certain Actions. Except as provided in
any Budget approved by a Consensus
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<PAGE> 6
Vote, (i) any individual or series of related expenditures, commitments,
obligations or agreements by any Company Entity in excess of US$1,000,000
or (ii) any commitment, arrangement or agreement outside of the ordinary
course of business of the Company Entities, including without limitation
entering into any joint venture or strategic alliances or partnerships.
(xii) Incurrence or Payment of Indebtedness. Create, incur,
guarantee, assume, refinance or pre-pay indebtedness of any Company
Entities outside of the ordinary course of business except for the
indebtedness contemplated by the Business Plan, the Bridge Note Commitment
Letter, the Facility Commitment Letter, the Interim Facility, the Fixed
Rate Financing and the Government Obligations and any refinancing of any
of the foregoing.
(xiii) Acquisitions. The direct or indirect loan or advance to, any
acquisition of any business, assets, capital stock, equity interest or
other security of, or other investment in, any Person or Persons, in each
case, by any Company Entity, in any transaction or in any series of
related transactions, that involve or could reasonably be valued in excess
of US$1,000,000, except for the transactions contemplated under the SatMex
Stock Purchase Agreement.
(xiv) Issuance of Securities. Approve any issuance of equity
securities or any other security convertible, exercisable or exchangeable
into equity securities of any Company Entity (other than to the Company or
as contemplated in the Business Plan), including any option, warrant, put,
call or other arrangement of any kind to purchase or otherwise receive
from any Company Entity (other than to the Company or as contemplated in
the Business Plan) any such securities outside of the ordinary course of
business, except for (i) the issuance of warrants in connection with the
High Yield Financing or as contemplated in the Bridge Commitment Letter
and (ii) the issuance of securities pursuant to an employee stock option
plan or similar plan adopted pursuant to a Consensus Vote in accordance
with Section 2(d)(xix).
(xv) Appointment, Suspension or Removal of Senior Officers;
Compensation. Except as set forth in Section 2(h), any appointment,
suspension or removal of any person who is, or upon appointment would be,
a senior executive officer of any of the Company Entities and the
determination of the compensation in respect of any such senior executive
officer.
(xvi) Engagement of Accountants. The engagement or dismissal of
independent public accountants, whether in
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connection with an audit of the financial statements of the Company
Entities or otherwise.
(xvii) Accounting and Tax. Establish or modify the accounting or tax
methods, practices, procedures or policies of the Company Entities except
as required by law or generally accepted accounting principles.
(xviii) Litigation and Arbitration. Commence any litigation or
arbitration that pertains to any of the Company Entities or assets of any
of the Company Entities or the settlement or any other material decision
relating to a litigation, arbitration, governmental investigation or other
proceeding, with a potential claim for damages in excess of US$1,000,000.
(xix) Employee Benefit Plans. Adopt, amend or make any grants
pursuant to any employee benefit or stock option plans.
(xx) Transfer of Telecommunications Licenses. Sell, lease (as
lessor), transfer, mortgage, assign, pledge, exchange or otherwise dispose
of the telecommunications licenses of the Company Entities, except as
contemplated under the Facility Commitment Letter.
(xxi) Certain Agreements. The entry into any agreement or
arrangement to do any of the foregoing.
(e) Management and Operating Decisions. The day and day management and
operation of SatMex, including the taking of such actions as may be necessary to
implement the Business Plan, shall be vested in the Chief Executive Officer and
the Chief Operating Officer of SatMex who shall have authority to approve all
decisions related thereto; provided, however, that any decision that would
impact the Operating Cash Flow, as set forth in the Business Plan, by more than
10% or US$10 million (a "Significant Decision") shall be approved by a Consensus
Vote of the Board of Directors as set forth in Section 2(d)(ix) above. The Chief
Operating Officer shall report to the Chief Executive Officer of SatMex and the
Executive Committee of SatMex and shall serve as Chief Executive Officer of
SatMex during any period in which there is a vacancy in the position of Chief
Executive Officer.
(f) Budget Approval. (i) The Members shall consider and, if agreement is
reached, shall adopt and approve at least once each fiscal year, a budget for
the successive fiscal year. If any proposed budget, or any material amendment
thereto, is not approved by a Consensus Vote, then the last budget so approved
by the Members shall be extended as described below (the "Carry-Over Budget"),
until approval is received from by Consensus Vote.
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<PAGE> 8
(ii) The Carry-Over Budget shall provide for (x) adjustments for the
greater of five percent (5%) per annum or the increase in the Consumer
Price Index in effect for the period in question, (y) any additional
increases necessary to meet (A) any payment escalation provisions of any
authorized contractual commitments of the Company Entities, or (B) any
authorized contractual commitments of the Company Entities, in either case
to the extent such contractual commitments shall have been previously
approved by the Members or by a Consensus Vote to the extent required by
the provisions hereof or the provisions of the By-laws or the Membership
Agreement and (z) if any material items set forth in the Budget shall be
denominated in Pesos, a method for adjusting any peso denominated amounts
in the event of a material fluctuation in the Peso-Dollar exchange rate.
(g) Appointment of Officers.
(i) Each Member and the Company hereby agrees to take such action as
may be necessary to appoint as officers to SatMex, effective as of the
date hereof, as follows: (A) as Chief Executive Officer, such individual
as Loral and EE shall mutually agree and who shall be a Mexican national,
(B) as Chief Operating Officer, such individual as may be designated by
Loral, with the approval of EE, which approval shall not be unreasonably
withheld and (C) as all other executive officers, such individuals as
Loral and EE shall mutually agree. Schedule II hereto sets forth the
officers of SatMex as of the date hereof.
(ii) Each Member and the Company hereby agrees to take such action
as may be necessary to appoint as officers to the Company, effective as of
the date hereof, as follows: (i) as President, such individual as may be
designated by EE, with the approval of Loral, which approval shall not be
unreasonably withheld, (ii) as Chief Executive Officer, such individual as
may be designated by Loral, with the approval of EE, which approval shall
not be unreasonably withheld, (iii) as Chief Operating Officer, such
individual as may be designated by Loral, with the approval of EE, which
approval shall not be unreasonably withheld and (iv) as Chief Financial
Officer, such individual as may be designated by EE, with the approval of
Loral, which approval shall not be unreasonably withheld. Schedule II
hereto sets forth the officers of the Company as of the date hereof.
(iii) The officers of all other Company Entities shall be appointed
by their respective Board of Directors, if the members agree that they are
needed.
(h) Removal of Officers. The officers of SatMex shall be removed as
follows: (i) the Chief Executive Officer, by either EE or Loral, (ii) the Chief
Operating Officer, by Loral or by the Executive Committee if removal of such
officer was recommended to
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<PAGE> 9
the Executive Committee by the Chief Executive Officer and such recommendation
was approved by the Executive Committee and (iii) all other executive officers,
by either EE or Loral or by the Executive Committee if removal of such officer
was recommended to the Executive Committee by either the Chief Executive Officer
or Chief Operating Officer and such recommendation was approved by the Executive
Committee. The officers of the Company shall be removed as follows: (i) the
President and Chief Financial Officer, by EE and (ii) the Chief Executive
Officer and Chief Operating Officer, by Loral. Each Member and the Company
hereby agrees to take such action as may be necessary to effect all such removal
and to appoint any successor to fill any vacancy resulting from such removal or
from the death or resignation of any officer in accordance with Section 2(g)
above.
(i) Executive Committee. Each of the Members and the Company agrees to
take such action as shall be necessary to create an Executive Committee of the
Board of Directors of the Company and SatMex, which Executive Committee shall be
composed of one Loral Director and one EE Director. Schedule I hereto sets forth
the members of the Executive Committees as of the date hereof. The Executive
Committees shall be authorized to take action on all matters, including
Extraordinary Matters that may be authorized by the Board of Directors under
this Agreement or otherwise. Each of Loral and EE shall be authorized to
designate an alternate director to substitute for the Loral Director and EE
Director, as the case may be, on each Executive Committee (each an "Executive
Committee Alternate"). Schedule I hereto sets forth the Executive Committee
Alternates as of the date hereof.
(j) Certain Actions of SatMex Board. Each of Loral and EE shall use its
reasonable best efforts to cause the directors of the Board of SatMex designated
by Loral or EE, as the case may be, to vote in favor of any action relating to
SatMex previously approved by the Board of the Company.
(k) By-laws. The Members and the Company shall cause the provisions of
this Section 2 to be included in the by-laws of each of the Company Entities, as
applicable.
3. DEADLOCK
(a) Proposal. If either Loral or EE proposes a capital expenditure (the
"Proposing Member") in excess of US$1 million not provided for in the Business
Plan, but such expenditure is within the existing line of business of the
Company as described in Section 2(d)(i) (the "Proposal"), the Proposing Member
shall send to the other Member written notice of its intent to effect such a
capital expenditure and if within ten Business Days following receipt of such
notice such expenditure is opposed in writing by the other Member (the
"Objection"), the Proposing Member may, notwithstanding the provisions of
Section 2(d)(xi), implement the Proposal, and the other member (the "Opposing
Member") shall vote its Social Parts and otherwise cooperate to
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implement the Proposal, provided that the Opposing Member shall have the option,
exercisable by delivering to the Proposing Member written notice of its intent
to exercise its option under this Section 3(a), within 60 days after the date of
the Objection, to sell to the Proposing Member, and the Proposing Member shall
be required to purchase, all of the Social Parts of the Company held by the
Opposing Member and its Affiliates for Fair Market Value (as defined in Section
3(d)) as of the end of the fiscal quarter immediately preceding the date the
Proposal was made. If the Opposing Member is EE and it elects to exercise its
rights under this Section 3(a), Loral may, in its sole discretion, elect to
assign the right to purchase the Social Parts of the Company owned by EE to a
Qualified Mexican Person at a price negotiated with such buyer, provided that in
no event shall EE receive for its Social Parts less than the Fair Market Value
as of the end of the fiscal quarter immediately preceding the date the Proposal
was made.
(b) EE Action. If EE causes any of the Company Entities to take any
material action not explicitly provided for in the Business Plan and Loral
opposes such action in writing within ten (10) Business Days from the day it
first becomes aware of such material action, then Loral, in its sole discretion,
shall have the option to provide EE with a written notice (the "Opposition
Notice") stating its opposition to the action and the reason it is material and
that the failure to cure such action within twenty days after receipt of the
Opposition Notice shall give rise to its option under this Section 3(b). No such
action shall be deemed material if it would not require a Consensus Vote or if
it does not involve the expenditure or incurrence of obligations in excess of US
$1 million. If EE does not cure such action within twenty days after receipt of
the Opposition Notice, Loral shall have the option, exercisable by delivering to
EE written notice of its intent to exercise its option under this Section 3(b)
within 60 days of the date of the Opposition Notice, to either: (i) sell to EE,
and EE shall be required to purchase, all of the Social Parts of the Company
held by Loral and its Affiliates at a price equal to 120% of the Fair Market
Value of such Social Parts as of the end of the fiscal quarter immediately
preceding the date such action was taken, or (ii) purchase from EE and EE shall
be required to sell, all of the Social Parts of the Company held by EE and its
Affiliates for cash in an amount equal to the Fair Market Value of such Social
Parts as of the end of the fiscal quarter immediately preceding the date such
action was taken, provided that such exercise shall be conditioned upon Loral
identifying a Qualified Mexican Person willing to purchase the Social Parts of
the Company owned by EE and its Affiliates at such Fair Market Value.
(c) Loral Inaction. If Loral fails to approve any material matter which
requires a Loral vote and which is provided for in the Business Plan and EE
approves such a matter and has given Loral written notice (the "Warning Notice")
that such failure to approve the matter gives rise to its option under this
Section
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3(c), then unless Loral grants such approval within twenty (20) days after
receipt of such notice, then EE shall have the option, exercisable by delivering
to Loral written notice of its intent to exercise its option under this Section
3(c) within sixty (60) days of the date of such notice, to either: (i) sell to
Loral, and Loral shall be required to purchase, all of the Social Parts of the
Company held by EE and its Affiliates at a price equal to 120% of the Fair
Market Value of such Social Parts as of the end of the fiscal quarter
immediately preceding the date of the Warning Notice, as (ii) purchase from
Loral and Loral shall be required to sell, all of the Social Parts of the
Company held by Loral and its Affiliates for cash in an amount equal to the Fair
Market Value of such Social Parts as of the end of the fiscal quarter
immediately preceding the date of the Warning Notice. No such action will be
deemed material if it would not require a Consensus Vote or if it does not
involve the expenditure or incurrence of obligations in excess of US $1 million.
(d) Determination of Fair Market Value. The determination of the fair
market value (the "Fair Market Value") of the Social Parts described in Section
3(a) - 3(c) above shall be made in accordance with this Section 3(d). Promptly
upon receipt by a Member of a call or put notice, as the case may be, under
Sections 3(a), 3(b) or 3(c) above, each Member shall promptly appoint as an
appraiser an internationally-recognized investment banking firm (a "recognized
investment banking firm"). Each appraiser shall, within thirty (30) days of
appointment, separately investigate the value of the Social Parts to be
purchased or sold, as the case may be, as of the proposed transfer date and
shall submit a notice of an appraisal of that value to each Member. If the
appraised values of such consideration (the "Earlier Appraisals") vary by less
than ten percent (10%), the average of the two appraisals on a per unit basis
shall be controlling as the fair market value. If the appraised values vary by
more than ten percent (10%), the appraisers, within ten (10) days of the
submission of the last appraisal, shall appoint a third appraiser which shall be
a recognized investment banking firm. The third appraiser shall, within thirty
(30) days of its appointment, appraise the fair market value of the Social Parts
in question as of the proposed transfer date and submit notice of its appraisal
to each Member. The value determined by the third appraiser shall be controlling
as the fair market value of the Social Parts unless the value is greater than
the two Earlier Appraisals, in which case the higher of the two Earlier
Appraisals will control, and unless the value is lower than the two Earlier
Appraisals, in which case the lower of the two Earlier Appraisals will control.
If any Member fails to appoint an appraiser or if one of the two initial
appraisers fails after appointment to submit its appraisal within the required
period, the appraisal submitted by the remaining appraiser shall be controlling.
Each Member shall bear the cost of its respective appointed appraiser. The cost
of the third appraisal shall be shared equally between the Members.
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(e) Closing. Within the later of 30 days after the date on which the fair
market value of the Social Parts is finally determined pursuant to Section 3(d),
the Member selling the Social Parts, whether pursuant to a call or a put option,
as the case may be, shall convey to the purchasing Member all of the Social
Parts then held by it or its Affiliates, free and clear of all liens, claims and
encumbrances, and the purchasing Member shall deliver cash to the selling Member
equal to the appropriate amount in consideration therefor, at a closing to be
held at the offices of the Company or at such other place as shall be agreed to
by the Members.
4. TRANSFER OF STOCK
(a) Resale of Social Parts. No Member shall Transfer any Social Parts
other than in accordance with the provisions of this Section 4. Any Transfer or
purported Transfer made in violation of this Section 4 shall be null and void
and of no effect.
(b) Rights of First Offer.
(i) If a Member proposes to Transfer any of the Social Parts owned
by it other than in a Permitted Transfer, then the Member desiring to make
the Transfer (hereinafter referred to as the "Transferor") must first make
the offer to sell the Social Parts to the other Member (the "Other
Member").
(ii) Offer by Transferor. Copies of the Transferor's offer shall be
given to the Other Member and shall consist of an offer to sell to the
Other Member, for cash, all of the Social Parts then proposed to be
transferred by the Transferor (the "Subject Social Parts") upon customary
terms and conditions, representations, warranties and covenants, at a cash
price designated by the Transferor (the "Stated Price").
(iii) Acceptance of Offer. Within twenty (20) days after the receipt
of the offer described in Section 4(b)(ii), the Other Member may, at its
option, elect to purchase all, but not less than all, of the Subject
Social Parts for the Stated Price on the terms and conditions set forth in
such offer. The Other Member shall exercise such option by giving notice
to the Transferor, in which event the notice required to be given by the
purchasing party (the "Purchaser") shall specify a date for the closing of
the purchase which shall not be more than thirty (30) days after the date
of the giving of such notice. If the Other Member does not accept the
offer by the twentieth day following the date the offer was received, it
shall be deemed to have waived all its rights under this Section 4(b)(iii)
with respect to such offer.
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(iv) Closing of Purchase. The closing of the purchase shall take
place at the office of the Company or such other location as shall be
mutually agreeable and the Stated Price shall be paid at the closing. At
the closing, the Transferor shall cause the Company to deliver to the
Purchaser new certificates evidencing the Subject Social Parts to be
conveyed.
(v) Release from Restriction; Termination of Rights. If the offer to
sell is not accepted by the Other Member, the Transferor shall be free for
six months following the period described in Section 4(b)(iii) above to
solicit offers for the Social Parts, provided that (A) the Transferor
shall not offer or sell the Social Parts at a price that is less than 98%
of the Stated Price, and if the sale to the third party is other than
entirely for cash, the Transferor shall certify to the other Member as to
the cash value of any noncash consideration, (B) such Transfer shall be
made only in strict accordance with the other terms of the offer described
in Section 4(b)(ii) and (C) the transferee agrees, in writing, to be bound
by the provisions of this Agreement. In the event that the Transferor
shall have failed to effect a sale of the Social Parts in compliance with
the requirements of (A), (B) and (C) above in the six month period
provided herein or shall have offered the Social Parts to third parties at
a price that is less than 98% of the Stated Price, the restrictions
provided for herein shall again become effective, and no transfer of
Social Parts may be made thereafter without again offering the same in
accordance with this Section 4(b). Any purported transfer of the Social
Parts which contravenes any of this Section 4(b)(v) shall be deemed null
and void.
(vi) Assignment by Loral. The parties hereto agree that if EE is the
Transferor, Loral shall be free to assign its rights under this Section
4(b) to a Qualified Mexican Person upon written notice to EE of its intent
to do so, which notice shall state the name and address of the Qualified
Mexican Person, and following the date of such notice, the Qualified
Mexican Person shall be treated as the Other Member for all purposes of
this Section 4(b).
(vii) Limitations. The provisions of this Section 4(b) shall not
apply to sales by Tag-Along Holders (as defined below) pursuant to Section
4(c) hereof.
(c) Tag-Along Rights.
(i) In the event any Member intends to Transfer any or all of its
Social Parts (excluding a Permitted Transfer but including Transfers made
to third parties pursuant to Section 4(b)(v)), such Member (the "Selling
Member") shall notify the other Member (the "Tag-Along Holder"), in
writing, of such proposed Transfer, the name of the third
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party and its terms and conditions. Within twenty (20) days of the date
of such notice, the Tag-Along Member shall notify the Selling Member if it
elects to participate in such Transfer. If the Tag-Along Holder fails to
notify the Selling Member within such twenty (20) day period, it shall be
deemed to have waived its rights hereunder. Upon notification by the
Tag-Along Holder of its intent to exercise its rights under this Section
4(c), the Tag-Along Holder shall have the right to sell, at the same price
and on the same terms and conditions as the Selling Member, an amount of
Social Parts equal to the Social Parts the third party actually proposes
to purchase multiplied by a fraction, the numerator of which shall be the
number of Social Parts issued and owned by the Tag-Along Holder and the
denominator of which shall be the aggregate number of Social Parts issued
and owned by the Selling Member and the Tag-Along Holder. The Selling
Member agrees that, in such event, it will reduce the amount of Social
Parts to be sold by it to such third party by a corresponding amount. If,
however, the Selling Member proposes to sell all of its Social Parts and
the third party shall have agreed to purchase all the Social Parts held by
the Selling Member and the Tag-Along Holder, the Tag-Along Holder shall
have the right to sell at the same price and on the same terms and
conditions as the Selling Member all of its Social Parts.
(ii) Notwithstanding anything contained in this Section 4(c), in the
event that all or a portion of the purchase price consists of securities
and the sale of such securities to the Tag-Along Holder would require
either a registration under the Securities Act or the preparation of a
disclosure document pursuant to Regulation D under the Securities Act (or
any successor regulation) or a similar provision of any jurisdiction's
securities law (and such sale would not otherwise have been registered
under the Securities Act), then, at the option of the Selling Member, the
Tag-Along Holder may receive, in lieu of such securities, the fair market
value of such securities in cash, as may be determined (A) in the case of
publicly traded securities, by calculating the average of the reported
closing market prices per share of such securities for the 10 consecutive
trading days ending on the fifth trading day prior to the closing date for
such Transfer, (B) in the case of non-publicly traded securities, as
determined by a nationally recognized investment banking firm appointed by
a Consensus Vote, or (C) in such other manner as may be determined by a
Consensus Vote of the Board of Directors of the Company.
(d) Minimum Holdings. EE hereby agrees that without the prior written
consent of Loral, it shall not Transfer any of its Social Parts, if immediately
following such Transfer, the direct and indirect ownership in the Company then
held by Qualified Mexican Persons is reduced to less than the number of Social
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<PAGE> 15
Parts required to be held by a Qualified Mexican Person under Mexican law.
(e) Amendments to Applicable Mexican Law. Should the applicable Mexican
law be amended to allow Persons not organized under the laws of Mexico to hold a
majority of the voting securities of SatMex and the Company, the parties hereto
shall promptly take action to (i) amend the designation of the Class N Social
Parts to convert them into voting securities and (ii) amend the provisions of
Section 2(a)(i) to provide that the majority of the Board of Directors of the
Company Entities shall be designated by the Person holding a majority of the
Social Parts then outstanding. In addition, if so requested by EE at its option,
Loral shall thereafter negotiate in good faith with EE to exchange all Social
Parts in the Company held by EE and its Affiliates (the "EE Social Parts") for
common stock, par value US$.01 per share, of Loral Space & Communications Ltd.
(the "Loral Common Stock"), based upon an appraisal of the fair market value of
the EE Social Parts in accordance with the provisions of Section 3(d).
(f) Redemption of Social Parts. At the request of either Loral or EE (the
"Requesting Member"), the Company shall sell such number of shares of common
stock (the "SatMex Equivalent Shares") of SatMex held by the Company as shall
correspond to the indirect interest in SatMex represented by the Social Parts
proposed to the Transferred by the Requesting Member. The Company shall promptly
thereafter use the proceeds of such sale to redeem from the Requesting Member
the applicable number of Social Parts requested to be Transferred by the
Requesting Member. Notwithstanding the provisions of this Section 4(f), the sale
of the SatMex Equivalent Shares shall (A) be made in compliance with any
applicable restrictions under the Ley General de Sociedades Mercantiles, or any
other applicable law, and (B) remain subject to the provisions of Section 4(a)
through 4(c) as if they were Social Parts proposed to be Transferred by a
Member.
(g) Sale of Member. A Member, substantially all of the assets of which
shall consist of Social Parts, shall not offer to sell its securities, or permit
its securities to be sold, to another party if such sale would result in a
Change of Control of such Member until and unless such Member shall have first
made a right of first offer with respect to such securities to the other Member
in the same manner as that set forth in Section 4(b) above.
5. CERTAIN COVENANTS OF THE PARTIES
(a) Expenses and Indemnification. Each of Loral and EE agrees to cause the
Company Entities to pay the fees and expenses incurred by the lenders under the
Commitment Letters, and to provide indemnification to the lenders as set forth
therein. In the event that the Company Entities shall be unable for whatever
reason, to provide such expense reimbursement or indemnification,
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<PAGE> 16
then Loral and EE, severally, agree to assume the obligations to pay such
expenses or provide such indemnity, as the case may be, in the following
proportion: Loral 65% and EE 35%.
(b) The Members shall cause SatMex to: (i) enter into a management
services agreement with each of Loral and EE or their respective Affiliates
substantially in the form set forth as Exhibit A hereto (the "Management
Services Agreement"); (ii) enter into a license agreement with Loral or its
Affiliates substantially in the form set forth as Exhibit B hereto (the "IP
Agreement") and (iii) adopt a marketing policy substantially in the form set
forth as Exhibit C hereto (the "Marketing Policy"). The Members hereby agree
that they shall not amend, or cause SatMex to amend, any of the Management
Services Agreement, the IP Agreement or the Marketing Policy without the consent
of Loral and EE.
(c) Tax Considerations. Each of Loral and EE agrees that, at the request
of either Member, it shall execute and deliver any documents necessary for the
Company or any Company Entity to be treated as a partnership to the extent
permitted for United States federal income tax purposes, provided that such
designation shall not adversely effect the other Member or any Company Entity.
(d) Application of (Mexican) General Business Entities Act. Each of Loral,
EE and the Company covenants and agrees, and each party hereto acknowledges that
each other party hereto is entering into this Agreement in reliance on, the
following:
(i) that any and all rights that the parties hereto may have under
Articles 38 and 42 of the General Business Entities Act (or any successor
provisions) are hereby expressly waived;
(ii) that the events of rescission provided for in Article 50 of the
General Business Entities Act (or any successor provisions) shall not be
actionable by the parties hereto and shall not apply to the Company except
as may be expressly provided for in this Agreement or in the by-laws of
the Company; and
(iii) any attempt by any party hereto to exercise or invoke any of
the provisions of Articles 15, 38, 42 or 50 of the General Business
Entities Act (or any successor provisions) other than as expressly
provided for herein or in the by-laws of the Company shall be void and
shall constitute a material breach of this Agreement by such party which
will be actionable by any other party.
The Company covenants and agrees that each certificate evidencing Social
Parts or other instrument issued by the Company which represents or evidences an
interest in Social Parts shall bear a legend to the foregoing effect.
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<PAGE> 17
(e) Loral hereby agrees that, without the prior written consent of EE
after full disclosure of all material facts and circumstances, it will not
knowingly permit any Company Entity to take any action or adopt any policy that
would discriminate unfairly against any Company Entity in favor of Loral or any
of its other Affiliates in any material respect, including, without limitation,
marketing policies applicable to areas in which any Company Entity competes with
Loral or such Affiliate.
6. WARRANTIES AND REPRESENTATIONS OF THE MEMBERS
Each Member severally, represents to the other Member that:
(a) Corporate Existence and Power. Such Member (a) is duly organized and
validly existing under the laws of the jurisdiction of its organization and (b)
has the corporate power and authority to execute, deliver and perform its
obligations under this Agreement. Such Member is duly qualified to do business
as a corporation in each jurisdiction in which the conduct of its business or
the nature of the property owned by it requires such qualification except where
the failure to so qualify would not have a material adverse effect on such
Member.
(b) Authorization. This Agreement constitutes the valid and binding
obligation of such Member, enforceable against such Member in accordance with
its terms, except to the extent that enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws affecting creditors' rights and remedies generally from time
to time in effect. The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of such Member.
(c) No Contravention. The execution, delivery and performance by such
Member of this Agreement and the transactions contemplated hereby (a) do not
contravene the terms of the charter, by-laws or other organizational documents
of such Member, (b) do not violate, conflict with or result in any breach or
contravention of, or the creation of any lien under, any indenture, mortgage,
deed of trust, credit agreement or other agreement to which such Member is party
or to which its properties may be bound and (c) do not violate any provisions of
applicable law.
(d) Governmental Authorization; Third Party Consents. No approval,
consent, exemption, authorization or other action by, or notice to, or filing
with, any governmental authority or any other Person in respect of any
requirement of law or any requirement of contract or otherwise, and no lapse of
a waiting period under any requirement of law, is necessary or required in
connection with the execution, delivery or performance by such Member, or the
enforcement against such Member, of this Agreement, or the transactions
contemplated hereby.
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<PAGE> 18
(e) Investment for Own Account. Such Member is acquiring the Social Parts
purchased hereunder for its own account for investment and not with a view
towards the resale, transfer or distribution thereof, nor with any present
intention of distributing such Social Parts. Except as set forth in this
Agreement, no other Person has any right with respect to or interest in the
Social Parts to be purchased by such Member, nor has the Member agreed to give
any Person any such interest or right in the future.
(f) Offering Exemption. Such Member understands that the Social Parts
being purchased by it hereunder have not been registered under the Securities
Act, nor qualified under any state securities laws, and that they are being
offered and sold pursuant to an exemption from such registration and
qualification based in part upon the representations of the Members contained
herein.
7. INTERPRETATION OF THIS AGREEMENT
(a) Terms Defined. As used in this Agreement, the following terms have the
respective meaning set forth below:
Acquisition: has the meaning set forth in the recitals hereto.
Acquisition Sub: has the meaning set forth in the recitals hereto.
Additional Capital Contribution: shall mean any additional equity
contribution that may be required to be funded by Acquisition Sub as a condition
precedent to the closing of the Credit Agreement or the Bridge Securities
Purchase Agreement.
Affiliate: means any Person or entity, directly or indirectly
controlling, controlled by or under common control with such Person or entity.
Bridge Note Commitment Letter: shall mean that certain commitment
letter, dated as of November 17, 1997, by and between Loral Space &
Communications Ltd. and Telefonica Autrey, S.A. de C.V., on the one hand, and
DLJ Bridge Finance, Inc. and LB I Group Inc., on the other hand, with respect to
the financing of certain bridge securities, in the amount of up to US$270
million.
Bridge Securities Purchase Agreement: shall mean the definitive
securities purchase agreement entered into in connection with the Bridge Note
Commitment Letter.
Business Plan: the business plan of SatMex attached hereto as
Exhibit A.
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<PAGE> 19
Change of Control: shall mean the acquisition of a majority of the
voting stock or analogous equity interest of a Member by a party other than an
Affiliate of such Member.
Closing Date: shall have the meaning set forth in Section 1(c).
Concession Agreements: The Agreements dated October 23, 1997 entered
into between SetMex and the Mexican Government relating to geostationary orbital
positions located at 116.8(Degree)W, 109.2(Degree)W and 113.0(Degree)W.
Concession Subsidiary: shall mean a subsidiary of the Company formed
for the purpose of applying for, and holding, a license from the Mexican
Government to provide satellite transmission services directly to end-users.
Consumer Price Index: shall mean the Bureau of Labor Statistics
Consumer Price Index, Subgroup "Urban Consumers (Revised)" for the United States
as published by the United States Department of Labor.
Commitment Letters: shall mean collectively, the Bridge Note
Commitment Letter and the Facility Commitment Letter.
Company Entities: shall mean the Company, SatMex and their
respective subsidiaries provided that if the Board of Directors of the Company
shall determine by a Consensus Vote under Section 2(a)(i) that the board of
directors of any subsidiary (other than SatMex) need not be identical to that of
the Board of Directors of the Company, then such subsidiary shall not be deemed
to be a Company Entity for purposes of Section 2 (a)-(d).
Consensus Vote: shall have the meaning set forth in Section 2(c).
Credit Agreement: shall mean the definitive credit agreement entered
into in connection with the Facility Commitment Letter.
Earlier Appraisals: shall have the meaning set forth in Section
3(d).
Extraordinary Matter: shall have the meaning set forth in Section
2(d).
Facility Commitment Letter: shall mean that certain commitment
letter, dated as of November 17, 1997, by and between Loral Space &
Communications Ltd. and Telefonica Autrey, S.A. de C.V., on the one hand, and
DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and Donaldson Lufkin &
Jenrette Securities
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<PAGE> 20
Corporation on the other hand, with respect to the financing up to US$500
million of secured credit facilities.
Financing Documents: shall mean collectively, the Bridge Securities
Purchase Agreement and the Credit Agreement and all related documents.
Fixed Rate Financing: shall mean the issuance of notes of a Company
Entity to finance a portion of the purchase price of the SatMex acquisition or
to refinance indebtedness, if any, outstanding in respect of the Bridge Note
Commitment Letter.
Government Obligation: The obligation incurred by SatMex Holdings to
the federal government of the United Mexican States under that certain
Agreement, dated as of December 1997.
Interim Facility: shall mean that Demand Loan Agreement dated as of
November 17, 1997, by and between Corporativo Satellites Mexicanos, S.A. de
C.V., on the one hand, and DLJ Capital Funding, Inc., Lehman Commercial Paper
Inc. and Donaldson Lufkin & Jenrette Securities Corporation, on the other hand,
with respect to the financing up to US$57.5 million of interim credit
facilities.
Member, Members: shall have the meaning set forth in the
introduction.
Permitted Transactions: shall mean collectively, the following: (i)
transactions contemplated under the Management Services Agreement, as amended
from time to time in accordance with the terms hereof, (ii) transactions
contemplated under the IP Agreement, as amended from time to time in accordance
with the terms hereof, (iii) transactions contemplated under the Marketing
Policy, as amended from time to time in accordance with the terms hereof, (iv)
the guarantee by Loral Space & Communications Ltd. of the Interim Credit
Facility, (v) transactions between and among the Company Entities and any of the
Service Subsidiary or the Concession Subsidiary and (vi) transactions between
and among the Company Entities.
Permitted Transfer: a transfer (i) by either Loral or EE of Social
Parts owned by it to any of its Affiliates, (ii) to the Company provided that in
the case of clause (i), the transferee shall agree in writing to comply with all
the provisions of this Agreement and provided further that no such transfer
shall relieve the transferring Member from any liability of such transferring
Member hereunder.
Person: an individual, partnership, joint-stock company,
corporation, trust or unincorporated organization, and a government or agency or
political subdivision thereof.
Proposal: shall have the meaning set forth in Section 3(a).
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<PAGE> 21
Proposing Member: shall have the meaning set forth in Section 3(a).
Purchaser: shall have the meaning set forth in Section 4(b).
Qualified Mexican Person: shall mean a Person that is either a
Mexican national or is organized under the laws of Mexico and satisfies the
requirements of the Federal Telecommunications Law and Foreign Investment Laws
as then in effect.
SatMex: Satelites Mexicanos, S.A. de C.V., a company organized under
the laws of Mexico.
SatMex Holdings: shall have the meaning set forth in the recitals
hereto.
SatMex Dividend Policy: The policy by SatMex to pay annual dividends
in an amount equal to at least 20% of the total amount available for
distribution (after payment of liabilities and establishment of appropriate
reserves as determined by management) but only to the extent such dividends are
permitted under the debt instruments to which the Company Entities are bound and
only to the extent of the balance in SatMex's Cuenta de Fiscal Neta (CUFIN)
account.
SatMex Stock Purchase Agreement: The Stock Purchase Agreement
between the Company and the Mexican government dated as of November 17, 1997,
with respect to the purchase of a 75% interest in SatMex.
Securities Act: the United States Securities Act of 1933, as
amended.
Selling Member: shall have the meaning set forth in Section 4(c).
Service Subsidiary: shall mean a subsidiary of the Company formed
for the purpose of hiring and providing administrative, management, accounting,
legal, operations, maintenance and other ancillary services to SatMex.
Significant Decision: shall have the meaning set forth in Section
2(e).
Social Parts: shall have the meaning set forth in the Recitals.
Stated Price: shall have the meaning set forth in Section 4(b).
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<PAGE> 22
Subject Social Parts: shall have the meaning set forth in Section
4(b).
subsidiary: shall mean in respect of any Person any other Person
which, at the time as of which any determination is being made, such Person or
one or more of its subsidiaries has, directly or indirectly, Voting Control.
Tag-Along Holder: shall have the meaning set forth in Section 4(c).
Transfer: any sale, assignment, pledge, hypothecation, or other
disposition or encumbrance.
Transferor: shall have the meaning set forth in Section 4(b).
Voting Control: shall mean, at any time, (A) the ownership or
control, whether direct or indirect, of outstanding Social Parts of capital
stock of (or equity interests in) a Person, which Social Parts or interest at
such time have by the terms thereof ordinary voting power to elect a majority of
the members of the Board of Directors (or Persons performing similar functions)
of such Person (excluding voting power of the holders of preferred stock arising
upon the occurrence of a contingency) or (B) with respect to any partnership
when (i) the sole general partner or the managing general partner of which is
such Person or a subsidiary of such Person or (ii) the only general partners of
which are such Person or of one or more subsidiaries of such Person (or any
combination thereof).
(b) Directly or Indirectly. Where any provision in this Agreement refers
to action to be taken by any Person, or which such Person is prohibited from
taking, such provision shall be applicable whether such action is taken directly
or indirectly by such Person.
(c) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of Mexico applicable to contracts made and to be
performed entirely within such jurisdiction.
(d) Section Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof.
(e) Arbitration. In the event of any dispute, controversy or claim arising
out of or relating to this Agreement, or to the breach or termination hereof (a
"Dispute"), the parties agree to resolve the same as follows:
(a) The parties to the Dispute shall initially attempt to resolve it
through consultations and negotiations.
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<PAGE> 23
(b) If the Dispute has not been resolved amicably within thirty (30)
days after any party provides notice thereof, unless the parties agree
otherwise, the Dispute shall be resolved by final and binding arbitration
in New York, New York, if EE shall have initiated the proceeding or in
Dallas, Texas, if Loral shall have initiated the proceeding, in each case
in accordance with the Arbitration Rules of the United Nations Commission
on International Trade Law ("UNCITRAL"), as in effect on the date of this
Agreement. The language to be used in the arbitral proceeding shall be
English. The International Chamber of Commerce shall serve as the
appointing authority. The arbitrators shall render a written award stating
the reasons for the decision. Judgment on an arbitral award or decision
may be entered by any court of competent jurisdiction, or application may
be made to such a court for judicial acceptance of the award or decision
and any appropriate order, including enforcement (homologacion).
(c) Each of the parties hereto consents to the submission of any
Dispute for settlement by final and binding arbitration in accordance with
paragraph (b) above. Such consent shall satisfy the requirements for:
(i) A written arbitration agreement between the parties
pursuant to Article I of the Inter-American Convention on
International Commercial Arbitration (Convercion Interamericana
Sobre Arbitaje Comercial Internacional), promulgated in Panama on
January 30, 1975;
(ii) An "agreement in writing" pursuant to Article II of the
United Nations Convention on the Recognition and Enforcement of
Foreign Arbitration Awards, done at New York on June 10, 1958; and
(iii) A written arbitration agreement between the parties
pursuant to Article 1423 of the Mexican Commercial Code (Codigo de
Comercio).
(d) The parties hereby agree to continue to perform their
obligations hereunder while any Dispute is pending.
(e) Each of the parties hereby undertakes to carry out without delay
the provisions of any arbitral award or decision.
8. CONFIDENTIALITY
As to so much of the information and other material furnished under
or in connection with this Agreement (whether furnished before, on or after the
date hereof) as constitutes or contains confidential business, financial or
other information of any of the Company Entities, each Member covenants for
itself and
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<PAGE> 24
its directors, officers and partners that it will use due care to prevent its
officers, directors, partners, employees, counsel, accountants and other
representatives from disclosing such information to Persons other than their
respective authorized employees, counsel, accountants, Members, partners,
limited partners and other authorized representatives; provided, however, that a
Member may disclose or deliver any information or other material disclosed to or
received by it should the Member be advised by its counsel that such disclosure
or delivery is required by law, regulation or judicial or administrative order.
For purposes of this Section 9, "due care" means at least the same level of care
that a Member would use to protect the confidentiality of its own sensitive or
proprietary information, and this obligation shall survive termination of this
Agreement.
9. MISCELLANEOUS
(a) Notices.
(i) All communications under this Agreement shall be in writing and
shall be delivered by hand or mailed by overnight courier or by facsimile:
(A) if to Loral, at Loral SpaceCom Corporation, 600 Third
Avenue, New York, New York 10016, marked for the attention of Eric
J. Zahler, Vice President, General Counsel and Secretary, or at such
other address as Loral may have furnished the Company in writing
(with a copy to Willkie Farr & Gallagher, One Citicorp Center, 153
East 53rd Street, New York, New York 10022 for the attention of
Bruce R. Kraus, Esq. and Sanchez Mejorada Velasco y Valencia, Paseo
de la Reforma 450, Lomas de Chapultepec, 11000 Mexico, D.F. to the
attention of Carlos R. Valencia Barrera, Esq.);
(B) if to EE, at Sierra Santa Rosa No. 61, Lomas de
Chapultepec, Mexico, D.F. 11650, marked for the attention of Lauro
Gonzalez, or at such other address as EE may have furnished the
Company in writing (with a copy to Vinson & Elkins L.L.P., 3700
Trammel Crow Center, Dallas, Texas 75201 for the attention of Tim
Foarde); and
(C) if to the Company, at Eje Central Lagard Cardenas 567 Piso
12, Ala Norte Col. Narvarte, C.P. 03020, Mexico D.F. marked for
attention of General Counsel, or at such other address as it may
have furnished in writing to each of the Members.
(ii) Any notice so addressed shall be deemed to be given: if
delivered by hand, on the date of such delivery; if mailed by courier, on
the third business day following the date of such mailing; and if sent by
facsimile, on the next business day after receipt of confirmation.
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<PAGE> 25
(b) Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (i) consents, waivers and modifications
which may hereafter be executed, (ii) documents received by each Member pursuant
hereto and (iii) financial statements, certificates and other information
previously or hereafter furnished to each Member, may be reproduced by each
Member by a photographic, photostatic, microfilm, microcard, miniature
photographic or other similar process and each Member may destroy any original
document so reproduced. All parties hereto agree and stipulate that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by each Member in the
regular course of business) and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
(c) Injunctive Relief. The Company and the Members hereby declare that it
is impossible to measure in money the damages which will accrue to the parties
hereto by reason of the failure of any party to perform any of its obligations
set forth in this Agreement. Therefore, the Company and the Members agree that
in the event of a breach or threatened breach by any other party of the
provisions of this Agreement, in addition to any remedies at law, they shall,
respectively, without posting any bond, be entitled to obtain equitable relief
in the form of specific performance, a temporary restraining order, a temporary
or permanent injunction or any other equitable remedy which may then be
available, and if any party hereto shall institute any action or proceeding to
enforce the provisions hereof, each of the Company and the Members hereby waives
the claim or defense that the party instituting such action or proceeding has an
adequate remedy at law.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties.
(e) Entire Agreement; Amendment and Waiver. This Agreement constitutes the
entire understanding of the parties hereto relating to the subject matter hereof
and supersedes all prior understandings among such parties, between any of them
and the Company or among any of them. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with) the
written consent of the Company, Loral and EE.
(f) Severability. In the event that any part or parts of this Agreement
shall be held illegal or unenforceable by any court or administrative body of
competent jurisdiction, such determination shall not effect the remaining
provisions of this Agreement which shall remain in full force and effect.
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<PAGE> 26
(g) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
(h) Non-Contravention. Each of the parties hereto agrees that it shall not
take any action that would result in a violation of the Federal
Telecommunications law (by Federal Telecommunicaciones) or the Concession
Agreements.
(i) Further Actions. Each of the parties hereto agrees that it shall
amend, or cause to amend, the by-laws of the Company Entities in such manner as
may be reasonably requested by either Loral or EE so as to effectuate the
provisions of this Agreement.
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<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have executed this Membership
Agreement as of the date first above written.
EDICIONES ENIGMA, S.A. DE C.V.
By:_____/s/_________________________
Name:
Title:
LORAL SATMEX LTD.
By:_____/s/_________________________
Name:
Title:
FIRMAMENTO MEXICANO, S. de R.L. de C.V.
By:_____/s/_________________________
Name:
Title:
By:_____/s/_________________________
Name:
Title:
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<PAGE> 1
Loral Space & Communications Ltd. Telefonica Autrey S.A. de C.V.
600 Third Avenue Sierra Santa Rosa No. 61
New York, New York 10016 Lomas de Chapultepec
Mexico, D.F. 11650
December 29, 1997
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Lehman Inc.
3 World Financial Center
200 Vesey Street
New York, New York 10285
Lehman Commercial Paper, Inc.
as Administrative Agent
(and any successor thereto
under the Credit Agreement)
3 World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Loral Space & Communications Ltd. and Telefonica Autrey, S.A. de
C.V. (being collectively referred to below as the "undersigned") refer to that
certain Credit Agreement, dated the date hereof (the "Credit Agreement"), among
Firmamento Mexicano S. de R.L. de C.V. ("Firmamento"), Servicios Corporativos
Satelitales S.A. de C.V. ("Servicios"), Corporativo Satelites Mexicanos, S.A. de
C.V. ("Corporativo"), Satelites Mexicanos, S.A. de C.V. ("SatMex"), the several
financial institutions or entities from time to time party thereto, as Lenders,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") and Lehman
Brothers Inc., as Arrangers, DLJ Capital Funding, Inc. and Lehman Commercial
Paper Inc.("LCPI"), as Syndication Agents, DLJSC as Documentation Agent and LCPI
as Administrative Agent named therein. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Credit Agreement. The undersigned agree and acknowledge that DLJSC and Lehman
Brothers Inc. and their respective affiliates are relying on the agreements of
the undersigned set forth below and would not enter into the Credit Agreement or
the Securities Purchase Agreement without the agreements of the undersigned set
forth below.
Each of the undersigned hereby jointly and severally agrees with
each of you that, so long as (A) there remain any undrawn commitments or amounts
outstanding under (i) the Credit Agreement, (ii) the Term Loans, or (iii) that
certain Securities
<PAGE> 2
Purchase Agreement, dated the date hereof (the "Securities Purchase Agreement"),
among Firmamento, Servicios, Corporativo, SatMex, SatMex Funding, Inc. and LB I
Group Inc., or (B) there remain outstanding any of (i) the Fixed Rate Notes,
(ii) the Senior Secured Floating Rate Notes, or (iii) the Unsecured Floating
Notes:
(a) Neither of the undersigned will take, or permit Firmamento,
Servicios, or SatMex to take, any action that would accelerate the maturity of
the Government Obligation pursuant to paragraph (b) of Clause Third therein
without the prior written consent of both Donaldson, Lufkin & Jenrette
Securities Corporation and Lehman Brothers Inc.
(b) Each of the undersigned will take such action as may be
necessary to ensure compliance with Clause Fourth of the Government Obligation
at all relevant times thereunder.
Without derogation of the joint and several nature of their
obligations to you under paragraphs (b) and (c) above, Loral Space &
Communications Ltd. and Telefonica Autrey S.A. de C.V., agree to share this
obligation in proportion to their respective economic equity interests in
Firmamento.
-2-
<PAGE> 3
Very truly yours,
LORAL SPACE & COMMUNICATIONS LTD.
By: ________/s/__________________
Name:
Title:
TELEFONICA AUTREY S.A. DE C.V.
By: ________/s/__________________
Name:
Title:
-3-
<PAGE> 4
Agreement entered into by and among the Federal Government of the
Mexican United States, through the Ministry of Communications and Transports
(the "Federal Government"), represented by Lic. Javier Lozano Alarcon,
Subsecretary of such Ministry, Telefonica Autrey, S.A. de C.V. ("Telefonica
Autrey"), and Ediciones Enigma, S.A. de C.V. ("Ediciones"), represented by Mr.
Lauro Andres Gonzalez Moreno, Loral Space & Communications Ltd. ("Loral"), and
Loral Satmex, Ltd. ("LoralSat") represented by Mr. Carlos Raul Valencia Barrera
and Servicios Corporativos Satelitales S.A. de C.V. ("Servicios"), represented
by Mr. Carlos Raul Valencia Barrera and Mr. Lauro Andres Gonzalez Moreno, in
accordance with the following Background, Recitals and Clauses:
Background
I. On August 1, 1997, call and bases for the public bid carried out
to sell certain shares of the capital stock of Satelites Mexicanos, S.A. de C.V.
("SatMex") was published in the Official Gazette of the Federation.
II. On October 27, 1997, the Intersecretarial Commission of
Desincorporation, taking into consideration the proposals submitted, as well as
the decision criteria established in the call and bases referred to background I
above, awarded said public bid to Corporativo Satelites Mexicanos, S.A. de C.V.
(hereinafter referred to as "Corporativo"), a company controlled by Telefonica
Autrey and Loral, through Servicios, which was notified of the result on October
30, 1997.
III. Corporativo decided to acquire shares representing 75% of the
capital stock of SatMex (hereinafter referred to as the "Shares") as was
provided by the mentioned call and bases.
IV. On November 17, 1997, the Federal Government entered into a
purchase and sale agreement related to the Shares with Corporativo (the
"Purchase and Sale Agreement").
V. The last paragraph of Clause Thirteen of the Purchase and Sale
Agreement establishes that, while the Federal Government is owner of shares
representing 25% of the capital stock of SatMex (hereinafter referred to as
"Third Package"), Corporativo covenants to do all necessary legal acts within
its power so that the Federal Government does not suffer any loss or reduction
of the equity value of its shares as a result, among others, of any operation of
restructure financing.
VI. As a result of the merger which Corporativo intends to effect
into SatMex, there could occur the condition contemplated in Clause Thirteen of
the Purchase and Sale Agreement, as consequence of debts incurred by Corporativo
for the purpose of financing the acquisition of the Shares and considering the
assignment of rights referred to in
<PAGE> 5
representation I(b), below, the parties have decided to enter into this
Agreement.
VII. This Agreement has as its purpose to establish terms and
conditions according to which Servicios shall pay to the Federal Government, the
amounts which are derived from performance of the last paragraph of Clause
Thirteen of the Purchase and Sale Agreement.
Recitals
Servicios represents, through its representative, that:
It is an variable capital stock corporation, incorporated under the laws of
the Mexican United States ("Mexico"), as established in public deed No.
19,391, dated December 15, 1997, granted before Mr. Jose Maria Gonzalez,
Notary Public No. 102, of Mexico City, Federal District, the registration of
the first original of which is pending the Public Registry of Commerce and
Property of the Federal District.
It entered into an agreement with Corporativo by which it assumed
Corporativo's obligations contained in the third paragraph of the clause
Thirteen of the Purchase and Sale Agreement.
As the merger of SatMex and Corporativo could have as an effect the
condition contained in the last paragraph of the clause referred to in
subclause (b) above, Servicios recognizes its obligation to pay to the
Federal Government the applicable amount, which will be paid in the terms of
this Agreement.
It does not require consent or authorization from any individual,
corporation or authority for the due execution and performance of this
Agreement and that entering into this Agreement does not contravene any
applicable legal or contractual provision or obligation to which Servicios
is bound.
In its capacity as controlling shareholder of Corporativo, on the date upon
which the merger referred to in background VI above becomes effective, and
before such merger is consummated, the financial statements of Corporativo
will reflect only the liabilities assumed by Corporativo with financial
institutions for the acquisition of the share certificates representing
equity capital of SatMex and its normal operation, and including its working
capital, of $1,170,050,000.00 (one billion one hundred and seventy million
fifty thousand pesos 00/100) M.N., the approximate amount of $120,000,000.00
pesos (one hundred twenty million pesos 00/100) M.N. of retained earnings
pending capitalization and assets constituting share certificates
representing the 75% of the equity capital of SatMex.
-2-
<PAGE> 6
Mr. Carlos Raul Valencia Barrera and Mr. Lauro Andres Gonzalez Moreno have
sufficient authority to represent and bind Servicios to the terms of this
Agreement, as it is established in public deed No. 19,391, dated December
15, 1997 granted before Mr. Jose Maria Morera Gonzalez, Notary Public No.
102 of Mexico City, Federal District, and said facilities have not been
revoked nor amended in any way.
Telefonica Autrey represents, through its representative, that:
It is a variable capital stock corporation, incorporated under the laws of
Mexico, as it is established in public deed No. 236,100, dated December 19,
1988, granted before Mr. Tomas Lozano Molina, Notary Public No. 87, of
Mexico City, Federal District, associated to Mr. Francisco Lozano Noriega,
Notary Public No. 10 of Mexico City, Federal District which first original
was registered in the Public Registry of Property and Commerce of the
Federal District, under mercantile folio No. 115084 dated May 23, 1989.
It does not require consent or authorization from any individual,
corporation or authority, for the due execution and performance of this
Agreement and that entering into this Agreement does not contravene any
applicable legal or contractual provision or obligation to which Telefonica
Autrey is bound.
That Mr. Lauro Andres Gonzalez Moreno has sufficient authority to represent
and bind Telefonica Autrey to the terms of this Agreement, as it is
established in public deed No. 26,714 dated August 14, 1997, granted before
Mr. Jorge Antonio Francoz Garate, Notary Public No. 17 of the Judicial
District of Tlalnepantla, Estado de Mexico, said faculties have not been
revoked nor amended in any way.
In its capacity as controlling shareholder of Ediciones, that the financial
statements of Ediciones will reflect only an equity capital of
$20,000,000.00 (twenty million pesos 00/100) M.N., and assets constituting
an equity interest representing the equity capital of Firmamento, which
together with the equity interest held by Loral, represents 100% of the
subscribed and paid equity capital of Firmamento.
Loral, represents, through its representative, that:
It is a company duly incorporated under the laws of the Bermuda Islands
which legal existence has been proven to the parties.
It does not require consent or authorization from any individual corporation
or authority, for the due execution and performance of this Agreement and
that entering into this Agreement does not contravene any applicable legal
or contractual provision or obligation to which Loral is bound.
-3-
<PAGE> 7
Mr. Carlos Raul Valencia Barrera has sufficient authority to represent and
bind Loral to the terms of this Agreement, as it is established in public
deed No. 18,637, dated August 18, 1997, granted before Mr. Jose Maria Morera
Gonzalez, Notary Public No. 102, of Mexico City, Federal District, said
faculties have not been revoked nor amended in any way.
In its capacity as controlling shareholder of LoralSat, that the financial
statements of Ediciones will reflect only an equity capital of U.S.
$12,000.00 (twelve thousand dollars), legal currency of the United States of
America, and assets constituting an equity interest representing the equity
capital of Firmamento, which together with the equity interest held by
Ediciones, represents 100% of the subscribed and paid equity capital of
Firmamento.
Ediciones represents, through its representative, that:
It is an variable capital stock corporation, incorporated under the laws of
Mexico, as it is established in public deed No. 248,296, dated October 15,
1991, granted before Lic. Tomas Lozano Molina, Notary Public No. 87, of
Mexico City, Federal District, which first original was registered in the
Public Registry of Property and Commerce of the Federal District, under
mercantile folio No. 157207 dated March 23, 1992.
It does not require consent or authorization from any individual,
corporation or authority, for the due execution and performance of this
Agreement and that entering into this Agreement does not contravene any
applicable legal or contractual provision or obligation to which Ediciones
is bound.
That Mr. Lauro Andres Gonzalez Moreno has sufficient authority to represent
and bind Ediciones to the terms of this Agreement, as it is established in
public deed No. __________, dated _________, granted before Lic. Benito
Guerra Silva, Notary Public No. 7 of the Federal District, which is in
process of registration in the Public Registry of Commerce due to its recent
issuance.
That it is holder of an equity interest representing the equity capital of
Firmamento, which together with the equity interest held by LoralSat,
represents 100% of the subscribed and paid equity capital of Firmamento, and
all of which is free and clear of any liens or limits on ownership.
LoralSat, represents, through its representative, that:
It is a company duly incorporated under the laws of the Bermuda Islands
which legal existence has been proven to the parties.
-4-
<PAGE> 8
It does not require consent or authorization from any individual,
corporation or authority, for the due execution and performance of this
Agreement and that entering into this Agreement does not contravene any
applicable legal or contractual provision or obligation to which LoralSat is
bound.
Mr. Carlos Raul Valencia Barrera has sufficient authority to represent and
bind LoralSat to the terms of this Agreement, as it is established in public
deed No. 19,160, dated November 12, 1997, granted before Mr. Jose Maria
Morera, Notary Public No. 102, of Mexico City, Federal District, said
faculties have not been revoked nor amended in any way.
That it is holder of an equity interest representing the equity capital of
Firmamento, which together with the equity interest held by Ediciones,
represents 100% of the subscribed and paid-in equity capital Firmamento.
The Federal Government states through its representative that:
Mr. Javier Lozano Alarcon has sufficient authority to represent and bind the
Federal Government to the terms of this Agreement, said faculties have not
been revoked nor amended.
It does not require consent or authorization from any individual corporation
or authority, for the due execution and performance of this Agreement and
that entering into this Agreement does not contravene any applicable legal
or contractual provision or obligation to which the Federal Government is
bound.
It recognizes and accepts the assignment of obligations that Corporativo has
entered into with Servicios, regarding Corporativo's obligations for the
benefit of the Federal Government, contained in the third paragraph of
Clause Thirteen of the Purchase and Sale Agreement and that Servicios is
compelled to pay to the Federal Government as a consequence of the merger
and pursuant to the terms of Clause Thirteen of the Purchase and Sale
Agreement, the amount of the loss resulting as a consequence of the merger
referred to in representation I(b), which will be paid pursuant to the terms
of this Agreement.
At a meeting held last November 7 of this year, the Committee for the
Restructuring of the Mexican Satelite System resolved to approve the terms
and conditions pursuant to which Autrey, Loral and Corporativo will make the
payment of the agreed price for the acquisition of the share certificates
representing equity capital of Satelites Mexicanos, S.A. de C.V., which
contemplate the execution of this Agreement.
Taking into consideration the above, the parties agree on the following:
-5-
<PAGE> 9
FIRST. Payment of principal. Pursuant to the terms of this Agreement and the
third paragraph of Clause Thirteen of the Purchase and Sale Agreement, Servicios
binds itself to pay the Federal Government the amount of $125,145,821.69 (one
hundred twenty-five million, one hundred forty five thousand eight hundred
twenty one and 69/100 dollars), in the legal currency of the United States of
America, plus the escalation amount accrued according to the following clause,
no later than December 30, 2004 or on the following business day if such day is
a holiday (the "Maturity Date"), at the exchange rate for the performance of
obligations denominated in foreign currency. Except as provided under Clause
Three below, the Federal Government will only have the right to demand the
payment of any amount from Servicios under this Agreement on the Maturity Date.
The parties agree to apply the calculation procedure contained in Exhibit 1 of
this document to determine the amount referred to in the previous paragraph.
On the date on which the amount referred to in the above paragraph is
determined, Servicios will execute a non-negotiable promissory note in favor of
the Federal Government, in the amount determined according to this Clause and
with the term and escalation factors which are established in this agreement, in
the form attached as Exhibit 3 to this document.
SECOND. Escalation. a) Servicios binds itself to pay the Federal Government
exactly on the Maturity Date, a payment for escalation based on the unpaid
principal amount referred to in Clause One of this agreement, as of the date of
this agreement.
The escalation referred to in the previous paragraph will be
calculated using the following formula:
Outstanding Balance times (1.0603)N/365
Where the Outstanding Balance means the amount established in Clause
One above, calculated in dollars, legal currency of the United States of America
and "N" means the actual number of days elapsed.
b) In case of delay, default interest will accrue on the amount of principal and
escalation payment from the day on which the corresponding payment should have
been made and until the day on which total payment of the corresponding amount
is made, at an annual rate of 18.09% over the unpaid balance (eighteen point
zero nine percent), which will be calculated over the actual number of days
effectively elapsed divided by 360.
THIRD. Advanced payments of principal. a) Servicios may make advanced payments
related to all or part of the principal owed to the Federal Government under
this Agreement, without having to pay any discount, premium or penalty, so long
as prior
-6-
<PAGE> 10
irrevocable written notice has been given to the Federal Government with five
(5) working days in advance, and provided that it will have to pay all
escalation amounts accrued up to the date of such advanced payment together with
the advanced payment of the principal.
b) In the event that the Federal Government as owner offers in the public market
the Third Package before the Maturity Date, with the express prior consent of
Autrey and Loral, Servicios shall be bound to prepay the total amount of the
unpaid principal due to the Federal Government under this agreement, without
having to pay any premium or penalty, exactly on the fifth working day following
the date of receipt of the funds resulting from the public offering of the Third
Package, together with the amount of escalation payment accrued up to the date
of payment of said advanced payment. Servicios shall not be obliged to make said
prepayment if Telefonica Autrey and Loral do not give their express consent to
the public offering.
(c) In the event Servicios sells all or part of the SatMex shares
which it currently owns; Firmamento sells all or part of the shares of Servicios
which it currently owns; Ediciones sells all or part of the equity interest in
Firmamento which it currently owns; LoralSat sells all or part of the equity
interest in Firmamento which it currently owns; Telefonica Autrey or Loral sell
all or part of the shares of Ediciones or LoralSat, respectively, which they
currently own, then Servicios will be obligated to prepay to the Federal
Government, of the amount referred to in Clause One above, an amount equal to
the price received by Servicios, Firmamento, Ediciones, LoralSat, Telefonica
Autrey or Loral, as the case may be, for the sale of the applicable shares or
equity interests.
The provisions of this clause will not be applicable in the event
that (i) the shares are transferred as a result of the execution of collateral
agreements granted by the companies referred to in this paragraph as part of the
acquisition of the share certificates representing equity capital in Satmex; or
(ii) the subject sale is made to affiliated companies or subsidiaries of Loral
or Telefonica Autrey or Ediciones or Loral Sat or Firmamento or Servicios,
provided that such affiliates or subsidiaries assume the obligation established
in the prior paragraph.
For purposes of this clause, a company will be deemed an affiliate
or subsidiary if, because of its investment ties or equity relationships, Loral,
Telefonica Autrey, Ediciones, LoralSat, Firmamento or Servicios, together or
separately, have the right to designate the majority of the members of its
management bodies or the capacity to determine the terms in which its
shareholder or partnership resolutions are made.
(d) In the event SatMex, Servicios, Firmamento, Ediciones and
LoralSat declare a dividend in favor of their
-7-
<PAGE> 11
shareholders which is covered with proceeds which come directly from SatMex,
Servicios must prepay to the Federal Government, an amount equal to the amount
of the declared dividend, simultaneously with its payment.
(e) In the event clause 4, paragraph 2, below, is not met in two
consecutive semesters and Servicios does not increase the amount of the
collateral as requested by the Federal Government.
FOURTH. Guarantee. To secure the punctual and complete compliance and payment of
Servicios' obligations under this Agreement, together with all costs, expenses
and other payment obligations incurred by the Federal Government in enforcing
its rights against Servicios, Ediciones and LoralSat shall deposit in a
collateral trust no later than January 15, 1998, all of the shares which they
own and which represent the total equity capital issued by Firmamento,
[TRANSLATOR NOTE: Firmamento is an SRL de CV which doesn't have shares but has
equity interests] who is the holder of all the Servicios' shares less one, who
in turn is, once consummated the conditions established in the merger agreements
of Corporativo into SatMex, holder of seventy-five percent (75%) of the equity
capital of Satmex.
The parties agree that, at all times, the amount of the collateral
must represent, during the first three years following execution of this
Agreement, at least 1 time the balance of the amount established in Clause One,
plus the amount of escalation applicable thereon; and from and after the
commencement of the fourth year, 1.2 times the amount referred to above. For
purposes of this paragraph, to determine such ratio, generally accepted
accounting principles in Mexico, consistently applied, will be used to calculate
the book value of the shares.
Within ten days following the end of each trimester, Servicios will
present to the Federal Government a report issued by an independent public
accountant which acts as external auditor of Firmamento, in which it shall state
that the ratio referred to in the prior paragraph is maintained at least as
provided therein, and for which purpose, the exchange rate to be used will be
that published by the Bank of Mexico in the Official Gazzette of the Federation
for performance obligations denominated in foreign currency on the date of the
issuance of such report.
Until the trust referred to above has been finalized and executed,
Ediciones and LoralSat, no later than 12:00 (noon) on December 30, 1997, will
grant a pledge of the shares of Firmamento which they own and which represent
100% of the subscribed and paid capital of Firmamento.
The parties agree that the collateral granted under this clause may
be substituted for another, satisfactory to the Federal Government, without
prejudice to the right of Servicios
-8-
<PAGE> 12
[sic] to increase the value of the collateral as the same may be necessary in
order to maintain the ratio referred to in the second paragraph of this Clause,
by means of the granting of other collateral, satisfactory to the Federal
Government.
When the collateral agreed to herein exceeds the ratio referred to
in the second paragraph of this clause, Servicios will have the right to reduce
such collateral, and the Federal Government shall be obligated to return or
accept the cancellation, as the case may be, of the excess collateral.
FIFTH. Unless the parties expressly agree otherwise, hereafter any payment which
Servicios must make to the Federal Government pursuant to the provisions in the
last paragraph of Clause Thirteen of the Purchase and Sale Agreement, must be
made in cash.
SIXTH. Assignments. Servicios, Telefonica Autrey and Loral may not assign their
rights or delegate their obligations under this Agreement, unless express
written consent of the Federal Government has been granted to them.
SEVENTH. Notifications. a) For the purposes of this Agreement the parties
indicate as their domiciles to receive notifications, the following:
Federal Government:Av Xola Esq. Av. Universidad
Cuerpo C. ler Piso
Col. Narvarte,
03020, Mexico D.F.
Servicios Corporativos Satelitaltes, S.A. de C.V.
Telefonica Autrey S.A. de C.V. and
Ediciones Enigma, S.A. de C.V.
Sierra Santa Rosa No. 61
Col. Lomas de Chapultepec
11650 Mexico, D.F.
Loral Space & Communications Ltd. and
Loral SatMex, Ltd.
600 Third Avenue
New York, New York 10016
U.S.A.
b) If the parties do not notify the change of their domicile in writing,
notices, notifications and all other judicial or extrajudicial proceedings made
at the above domiciles will be enforceable.
EIGHT. Applicable laws. This agreement shall be governed and construed by the
Mexican laws.
-9-
<PAGE> 13
NINTH. Jurisdiction. For the construction and compliance with this Agreement,
the parties submit themselves to the jurisdiction and competence of the courts
in Mexico City, Federal District, waiving any other jurisdiction and competence
which their present or future domiciles may entitle them to assert.
-10-
<PAGE> 14
TENTH. Amendments and waivers. Any amendment to this agreement will only be
considered valid if it is made in writing and signed by the parties. Any waivers
to rights under this agreement will only be considered valid if said waivers and
in writing and signed by the parties with such rights.
This agreement is signed by the parties on 29 of December, 1997, in Mexico City,
Federal District.
/s/ Javier Lozano Alarcon
--------------------------------------------------------------------
Gobierno Federal de los Estados Unidos Mexicanos
through
Ministry of Communications and Transports
represented by __________________
/s/ Lauro Andres Gonzalez Moreno
--------------------------------------------------------------------
Telefonica Autrey, S.A. de C.V.
represented by
Mr. Lauro Andres Gonzalez Moreno
/s/ Carlos Raul Valencia Barrera
--------------------------------------------------------------------
Loral Space & Communications Ltd.
represented by
Mr. Carlos Raul Valencia Barrera
/s/ Carlos Raul Valencia Barrera
/s/ Lauro A. Gonzalez Moreno
--------------------------------------------------------------------
Servicios Corporativos Satelitales, S.A. de C.V.
represented by
Mr. Carlos R. Valencia Barrera e
Mr. Lauro A. Gonzalez Moreno
-11-
<PAGE> 1
EXHIBIT 12
LORAL SPACE & COMMUNICATIONS LTD
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except ratios)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Earnings:
Income before income taxes, minority interest and equity
in net loss of affiliates............................. $126,982 $16,498
Plus:
Interest expense...................................... 37,871 6,000
Interest component of rent expense(1)................. 4,400
Less capitalized interest................................ 22,641
-------- -------
Earnings available to cover fixed charges.................. $146,612 $22,498
======== =======
Fixed charges(2)........................................... $ 78,568 $ 6,000
======== =======
Ratio of earnings to fixed charges......................... 1.9x 3.7x
======== =======
</TABLE>
- ---------------
(1) The interest component of rent expense is deemed to be approximately 25% of
total rent expense.
(2) Fixed charges include preferred dividends as adjusted for the Company's
effective tax rate.
<PAGE> 1
PAGE 1
Exhibit 21
Loral Space & Communications Ltd.
As of February 27, 1998, active subsidiaries, all 100% owned directly or
indirectly (except as noted below) consist of the following:
<TABLE>
<CAPTION>
<S> <C>
State or Country
of Incorporation
--------------------
Loral Space & Communications Corporation Delaware
Loral General Partner, Inc. Delaware
Loral Holdings, Inc. Delaware
Loral Communications Services, Inc. Delaware
Loral SpaceCom Corporation Delaware
Space Systems/Loral, Inc. Delaware
International Space Technology, Inc.(1) Delaware
Cosmotech(1) Russian Federation
SS/L Export Corporation U.S. Virgin Islands
Mabuhay Space Holdings Limited(2) Bermuda
Loral Travel Services, Inc. Delaware
Globalstar, L.P.(3) Delaware
Globalstar Capital Corporation(3) Delaware
GlobalTel(4) Russian Federation
GlobalTrak Pty(3) Australia
Globalstar Services Company, Inc.(3) Delaware
Globalstar Corporation(3) Delaware
Globalstar Telecommunications Limited(5) Bermuda
LGP (Bermuda) Ltd. Bermuda
Loral Canada Holdings Ltd. Bermuda
Loral CyberStar Ltd. Bermuda
Loral Broadband Holdings, L.P. Delaware
Loral CyberStar L.L.C. Delaware
CyberStar, L.P.(6) Delaware
CyberStar Licensee, L.L.C.(6) Delaware
Loral/DASA Globalstar, L.P.(7) Delaware
Loral/Qualcomm Partnership, L.P.(8) Delaware
LQ Licensee, Inc.(8) Delaware
Loral/Qualcomm Satellite Services, L.P.(9) Delaware
Loral Satellite Corporation Delaware
Loral SatMex Ltd. Bermuda
Firmamento Mexicano S. de R.L. de C.V.(10) Mexico
Servicios Corporativos Satelitales S.A. de C.V.(10) Mexico
Satelites Mexicanos, S.A. de C.V.(11) Mexico
Loral Skynet Ltd. Bermuda
Loral SpaceCom DBS Holdings, Inc. Delaware
R/L DBS Company L.L.C.(12) Delaware
Loral SpaceCom DBS, Inc. Delaware
Continental Satellite Corporation (13) California
</TABLE>
- ----------------------------
(1) Only 44.9% owned directly or indirectly
(2) Only 35% owned directly or indirectly
(3) Only 40.1% owned directly or indirectly
(4) Only 19.6% owned directly or indirectly
(5) Only 17.7% owned directly or indirectly
(6) Only 91.3% owned directly or indirectly
(7) Only 66.7% owned directly or indirectly
(8) Only 51% owned directly or indirectly
(9) Only 73.6% owned directly or indirectly
(10) Only 65% of the economic interest and 49% of the voting interest owned
directly or indirectly
(11) Only 48.8% of the economic interest and 49% of the voting interest owned
directly or indirectly
(12) Only 50% owned directly or indirectly
(13) Only 86% owned directly or indirectly
<PAGE> 1
EXHIBIT 23
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statement Nos.
333-26517 on Form S-3; 333-46401 on Form S-4; and 333-14863 on Form S-8 of Loral
Space & Communications Ltd. (a Bermuda company) of our reports with respect to
the consolidated financial statements of Loral Space & Communications Ltd.,
Space Systems/Loral, Inc., and Globalstar, L.P., and the financial statement
schedule of Loral Space & Communications Ltd., appearing in or incorporated by
reference in this Annual Report on Form 10-K of Loral Space & Communications
Ltd. for the year ended December 31, 1997.
Deloitte & Touche LLP
New York, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
This Schedule contains summary financial information extracted from the
financial statements of Loral Space & Communications Ltd. for the fiscal year
ended December 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 226,547
<SECURITIES> 0
<RECEIVABLES> 468,134
<ALLOWANCES> 0
<INVENTORY> 98,325
<CURRENT-ASSETS> 844,618
<PP&E> 1,018,239
<DEPRECIATION> 91,560
<TOTAL-ASSETS> 3,004,936
<CURRENT-LIABILITIES> 407,993
<BONDS> 0
0
734,221
<COMMON> 2,010
<OTHER-SE> 1,237,014
<TOTAL-LIABILITY-AND-EQUITY> 3,004,936
<SALES> 1,312,591
<TOTAL-REVENUES> 1,441,251
<CGS> 1,299,039
<TOTAL-COSTS> 1,299,039
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,230
<INCOME-PRETAX> 126,982
<INCOME-TAX> 34,871
<INCOME-CONTINUING> 13,689
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,689
<EPS-PRIMARY> 0.06<F1>
<EPS-DILUTED> 0.06
<FN>
<F1>Note: The adoption of SFAS 128 had no effect on reported earnings per
share for the year ended December 31, 1997 or the nine months ended
December 31, 1996.
</FN>
</TABLE>
